The BNPL model, as we know it, is in a temporary state. Indeed, the pricing model will change when interest rates start to rise. Investors will undoubtedly begin to watch sky-high credit loss rates, but perhaps not as much as regulators. And, monoline credit business, there are too many failures along the way to expect one-trick-ponies to survive competition.
However, one of the best things about BNPL for the credit industry is how it woke up banks to merchants’ importance. Instead of enabling consumers to pay anywhere, the current BNPL puts the merchant at the center point.
The model will change in the short term. American Express, Citi, and Chase, all top U.S. issuers, have a post-paid model. Now, in Australia, the market that ignited BNPL lending, comes a new bank model. Many features make good, practical sense.
The Sydney Morning Herald reports on Commonwealth Banks business model, designed to meet Afterpay directly in the market.
- The Commonwealth Bank is looking to turn up the heat on market darling Afterpay, with the launch of the bank’s buy now, pay later (BNPL) service likely to squeeze the margins enjoyed by the current crop of BNPL operators
- The banking giant on Wednesday said it was joining the rush into the BNPL from the middle of this year, with a digital product allowing customers to make purchases between $100 and $1000, and repay the money in four interest-free fortnightly instalments.
And, BNPL Lenders react.
- In a sign of the pressure the bank’s move could put on margins of BNPL operators such as Afterpay and Zip Co, CBA said it would not charge any extra fees to merchants beyond standard merchant fees of slightly more than 1 per cent of a transaction’s value. In comparison, CBA said retailers on average paid about 4 per cent for BNPL services.
- Amid an ongoing debate about whether BNPL should be regulated as credit, CBA also said it would perform credit checks on all of the customers before allowing them to take out the product.
- While other lenders are closely watching the sector, with Westpac forging a partnership with Afterpay last year, CBA said it was the first BNPL offering from a major Australian bank.
But, it will not be the last bank. U.S. and EU banks, take note.
Commonwealth’s model makes sense. And it should satisfy many credit policy staff. News Australia says:
- CommBank BNPL will be a broader product offering allowing the bank’s customers to split payments between $100 and $1000 into four installments for online or physical transactions.
- The service is available for CBA credit or debit cardholders and will run through the MasterCard payments network.
- Missed payments will incur a $10 late fee and will be capped at $120.
If that was not enough bad news for the highly funded fintechs, consider PayPal, PayPal is also entering the Australian BNPL market, according to DynamicBusiness. As mentioned here, I did a PayPal Pay-in-4 transaction, and it was an excellent user experience. PayPal brings a wide range of payment services; it will not face the monoline business issue many fintechs face.
- Called PayPal Pay in 4, the new payment system will be offered to consumers as an option at checkout in the PayPal wallet. Customers will be able to split eligible purchases from $50 to $1,500 over four equal, interest-free installments. Repayments will be automatically drawn every two weeks, with no fees charged for on-time payments.
- Late fees will be applied for late or missed payments. There will be a late payment fee of $10 for purchases under $125, charged one time with a cap at $10. For purchases over $125, there will be a $10 late payment fee for every missed payment, capped at three – $30.
Fintechs, make hay while the sun shines. You inspired banks across the globe. Now, get ready for some stiff competition!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group