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Can The BNPL Market Topple the Credit Card Market?

The worlds of credit cards and buy now, pay later (BNPL) have been on collision course over the last 12 months, with respective providers increasingly offering similar services in a tit-for-tat battle as they chase the same customers.

The ballooning BNPL market in recent years (the expression to ‘Klarna it’ is now commonplace) has not gone unnoticed by credit card firms and payment processing firms, prompting the likes of MasterCard and PayPal to launch their own BNPL offerings.

Meanwhile, BNPL firms are looking to muscle in on credit card firms’ space by launching eye-catching credit card-type rewards schemes.

While the BNPL market is still dwarfed by the credit card market (in the UK, BNPL lending is around 10 per cent of credit cards), the BNPL market is on a tear with analytics firm GlobalData predicting the BNPL market will top $1trillion by 2030, as the likes of Apple and other big tech firms integrate it into their ecosystems.

Could BNPL topple the credit card market?

Some are even suggesting that the BNPL market could eventually topple the credit card market, helped by the younger generation’s mania for BNPL (particularly its frictionless set-up process) and shunning credit cards.

While time will be the judge of that, there is no doubt BNPL is proving a strong challenger to the credit card giants.

Ryan Garner, expert associate partner, Bain & Company’s fintech practice in London, said: “There will always be a need for credit cards and they are not going away anytime soon. But in categories like clothing and in the younger age groups BNPL has already challenged the dominance of credit cards.”

BNPL muscle in on credit card territory

US BNPL firm Affirm is one of the latest BNPL players to offer its customers a rewards package, to take on credit cards’ popular points programmes. Affirm Rewards is a slightly different rewards model to typical credit card programme, with customers earning points when they make repayments to the platform.

The accrued points can then be applied toward a discount on any future Affirm BNPL loan made at a participating retailer. This is different to credit card programmes that tend to incentivise high spending with travel and other type rewards.

Max Levchin, Affirm CEO and co-founder, who also co-founded PayPal, told Fast Company: “It’s a fairly powerful incentive for people to want to make smart financial decisions for themselves and reward them in a similar way as credit cards do, but without the pressure of, you know, ‘go spend more money because then you’ll get a free flight.’”

Other BNPL players are also mining this area, with Afterpay offering a scheme that rewards users for making repayments on time while Klarna has a similar scheme that rewards customers for using BNPL.

Rewarding customers for spending during cost of living crisis?

But questions have been raised about whether BNPL firms (and credit card firms) should be rewarding customers for getting into debt, amid a cost-of-living crisis in UK and Europe.

Garner says BNPL providers should be ‘tightening’ their risk profiling during the current cost of living crisis while messaging should be adapted to help customers make the right decision on whether the use of a credit financial decision at the time.

But Dave Brear, group CEO, 11:FS, the financial consultancy, says the move by Affirm is a wise one, helping it create loyalty and stickiness.

Brear says: “I see it as encouraging people to use debt or credit in a positive way. It’s not the job of the credit provider to tell people how to live their lives but to educate them on the financial instruments that are available to them.”

Chris Dinga, payment analyst at GlobalData, says if rewards schemes encourage customers to pay on time it can be beneficial to the customer. He says: “For consumers who are able to make their repayments on time, BNPL services can provide them access to loans at cheaper cost than credit cards.”

The overlapping of credit card and BNPL features

BNPL has been around for some time, but it has now been repackaged in a digital guise and as the market has skyrocketed across Europe, BNPL providers have hoovered up potential credit card customers.

Examples of the overlapping of services include Klarna, a vocal critic of the credit card industry, embedding its BNPL offering into a physical Visa card and UK credit card firm Tymit targeting potential BNPL users by offering three months interest-free on any purchase.

Liz Edwards, editor-in-chief of the personal finance comparison site, finder.com, said: “BNPL has certainly taken some potential credit card customers, as well as creating a new market for itself. Ultimately BNPL and credit cards are fighting over the same credit-newcomers, so they are starting to overlap on features as a result.”

Brear says for the average non-financially savvy customer, the difference between BNPL and credit card firms is now “marginal”.

But Garner says BNPL firms embedded into the user experience of an e-commerce store “are still differentiated from credit cards in the ability to improve discovery, compare products and find the best deals before they reach checkout”.

Can credit cards make a success of BNPL?

While the current BNPL market is not profitable – the likes of Klarna and AfterPay are unprofitable – the big credit card firms and payments firms are unlikely to need to make a profit from their BNPL offerings,
potentially putting them in a stronger position than pureplay BNPL firms.

Dinga says: ‘They provide the solution to tie in consumers into their ecosystem and maintain their market share. Apple’s new BNPL solution is following this approach.”

Brear, meanwhile, says that credit card and payment firms can make a success of offering BNPL services, saying for PayPal it would be a “very small step”. “They were embedding finance before it became a thing so they already have the trust and the customer base in order for it to be successful”.

Furthermore, amid looming regulation of the BNPL, it is credit card firms offering BNPL services that could well be best placed to deal with the changes.

Edwards says “Companies that already offer regulated credit – like credit cards – are potentially at an advantage when it comes to getting their house in order to comply with new FCA rules on BNPL which could entail getting FCA approval, doing stricter affordability checks and dealing with complaints to the Financial Ombudsman.”

Who will win out?

But do experts think that the credit card market can ever be dethroned by BNPL? GlobalData is predicting that by 2026 in the UK, the credit card market size will reach $87billion in value of transactions while BNPL is expected to reach $47billion.

Brear says it’s unlikely that BNPL will topple credit cards for the moment: “Credit cards are very much a product while BNPL is still a feature in its maturity. You have millions of people using credit cards in their back pockets for a payment buffer, they have the perception of protection which is not at the same level of trust as BNPL. The adoption rate is significantly different at this stage and the gap lies in customer perception.”

Dinga agrees, saying: “I think the credit card market will maintain its position as main loan providers for consumers but the BNPL market will continue to grow and become more mainstream.”

Edwards cites regulation as being a potential roadblock to BNPL’s progress.

She says: “BNPL could become quite a different beast after regulation – with more friction in the sign-up process – so we may see a shift in attitudes then. The question will be whether consumers finally come to view it as credit.”

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