Buy Now, Pay Later did not originate in Australia. Depending on whom you ask, BNPL originated with Klarna in the Nordic region or with Household Finance and Synchrony decades ago. But the recent trend in zero-interest credit cards indeed points to the land down under as the source for this innovation.
As Mercator mentioned in December 2019, BNPL is a good option, but the model in its current state will not last long. This year alone, the market has seen excellent developments by Mastercard and Visa, a market entry by PayPal (which services more than 400 million global consumers), banking alternatives, and the acquisition of Afterpay by Square.
Amongst all that action was the Australian Stock Market (ASX) beginning to shy away from what appeared to be a credit card alternative as the field of 12 BNPL firms lost 23.7% in market capitalization between April and May 2021. The purge has gotten even worse these days, but that is another story for another day.
Today’s big deal is the emergence of zero-interest credit cards. These are not the promotional cards with hidden fees that the N.Y. Times criticized in 2015. Instead, the cards we refer to are engineered for consumer efficiency, carry the brand marks of Mastercard and Visa, and operate in the digital and physical environment. The issuers are the four top Australian banks: ANZ, CommBank, NAB, and Westpac. PaymentsJournal covered this trend in August 2021, but the product is blossoming and worth a look.
U.S. credit card issuers who now toil with diminishing loan portfolios and revenue stress will find an opportunity with zero-interest cards. From a risk perspective, the option is prime. These low-line credit cards provide a pathway to take in lower-grade but bank quality risk and graduate the customers to other banking services and higher line cards as payment histories prove creditworthiness.
Yahoo Finance recaps several programs in their Australian report today.
Westpac has joined Commonwealth Bank (CBA) and NAB in launching its zero-interest credit card aimed towards millennials and Gen-Z customers.
The card, like the others, has zero interest on purchases but instead charges a monthly fee if the card has been used.
In a profile on the Westpac Flex Card, Yahoo summarizes:
Credit limit: $1,000
Monthly fee: $10 owed only if the customer has not paid the amount due for the previous month on time.
Customers will be able to apply for the card via the Westpac banking app or online. If their application is approved, a digital card will be issued and ready to use within minutes via their banking app or mobile wallet.
This card’s verification code (CVC) will automatically change every 24 hours in terms of security.
These cards may not be for you or me. I like the feeling of carrying an Amex, Citi Rewards MC, Discover it Card, and Chase Sapphire, with combined credit limits >$100,000 that I will never use, but we are not that market. The target for the zero-interest card is younger, less established, and with fewer options. And in the U.S. market, I’d SWAG it at about 40-50 million potential consumers. So, think Millennials and Gen-Z as the target segment.
Call me old school, but if you hit that market and are only 10% successful, you can build a $4 billion loan book in the short term and grow the segment into a feeder group with deposit and loan products. Simple math suggests more than $12 billion in spending. That is enough of a market to excite your 2022 MBOs if you are measured on loan growth.
And the product will not be a flash in the pan; it will be a game-changer for the credit card industry.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group