By Ray Birch
BOSTON—Credit unions need to be on the lookout for the “buy now pay later” boom, not just because it could be eroding member credit transactions, it could be harming the financial wellness of both the CU and the member, one person is cautioning.
“The question is whether the consumer is still using their credit card on the back end as a way to spread out the buy now pay later (BNPL) payments, or are they shifting their payment options to a debit card (or check),” said Ginger Schmeltzer senior analyst at Aite Group. “That is certainly something credit unions need to be thinking about.”
Schmeltzer said if consumers are turning away from credit there not only is the loss of higher credit card interchange but also interest on balances.
BNPL purchases, however, could also lead to net new spend, pointed out Schmeltzer.
“I've spoken to one merchant that uses buy now pay later, and what they're saying at this point is they're seeing new customers from BNPL, or higher-ticket purchases from consumers who never bought these type of goods, and therefore is net new spend,” she said.
Big Numbers
What isn’t up for debate is that consumers are taking advantage of BNPL and doing so in big numbers, reminded Schmeltzer.
In July 2020, The Ascent, a unit of the Motley Fool, surveyed 2,000 Americans about their buy now, pay later (BNPL) habits. The company then followed that survey with another in March 2021, with the results showing an almost 50% growth in BNPL in less than a year.
“It's really grown exponentially this year, but…it was already growing pre-pandemic,” said Schmeltzer.
What likely caused the health-crisis spike in BNPL, suggested Schmeltzer, is consumer uncertainty over what the future might hold.
“Having an alternative credit option, it's quite appealing for a lot of folks,” she said. “People who may have concerns about their job stability during the pandemic, not knowing what will happen, and didn't want to use their credit lines. They wanted to reserve that, and this is a great way to make a purchase that they want or need. It just gives them another choice.”
Ginger Schmeltzer
Rapidly Expanding Platforms
The rapidly expanding number of BNPL platforms, such as Klarna and Afterpay, have their sights set on younger consumers, said Schmeltzer.
“I think they're leaning towards Millennials, with some adoption into GenX,” she said. “Overall, buy now pay later has become a welcome option for a lot of people. These platforms are growing like crazy, with millions of users and a lot of merchants on their platforms.”
Schmeltzer said what is also appealing about the new service is many of the platforms do not do a hard credit pull when a person enrolls.
“If you have a low credit score, and you just don't want to add anything else on, you don't want to have a hard inquiry to make a purchase,” she said.
Schmeltzer said she believes many of the BNPL platforms are targeting people with lower credit scores, and that their future is bright, adding she expects the services to become much more mainstream, such as at the point of sale at a bricks and mortar merchant.
“Outside the U.S. BNPL is much more common, such as in Brazil,” she explained. “You go to a store and buy $50 worth of groceries and the checkout person asks you how many payments you want to make.”
Paying Attention?
But are banks and credit unions paying attention to this payment shift?
“Yes, they are, in a big way,” according to Schmeltzer, who said some banks are beginning to offer their own BNPL options. “But if I were a credit union I’d be focused on having my card be the one on record in these buy now pay later services, to get that payment volume.”
The trendline does raise a significant concern over financial wellness, agreed Schmeltzer, who said the issues are consumers overextending themselves with a new avenue for credit that is easy to get.
“I would encourage any bank or credit union that's doing buy now pay later to also come out with an education program,” said Schmeltzer. “Buy now pay later is a great option for some, but it's still additional spend that people need to be aware of. You want to make sure you're helping these people manage their money.”