As Buy Now Pay Later (BNPL) becomes a mainstream lending product, new models will emerge. The simple BNPL product, pay-in-four, was a non-bank solution that ran outside the payment card rails, but interestingly enough, settled through the branded card network.
In other words, a consumer would receive a small value loan. Typically, the first of four payments would occur at the point of sale, and the remaining three payments would appear as transactions to the customer’s debit (or, in some cases, credit) card account. The payment card became the way to settle the BNPL, with prescheduled, recurring payments through the loan term. That meant that the loan would appear on the BNPL lender’s books, and the merchant would pay a discount fee instead of interchange. In some markets, particularly outside the U.S., the merchant would pay a significantly higher cost. In Australia, the standard credit card interchange rate is 0.80%, and debit is 0.20%, about two-thirds less than the U.S. What is interesting here is that the promise of “no interchange” is a sleight of hand. Instead of interchange, the merchant pays a discount.
Now comes the fun part, if you follow credit or debit cards. When regular payments become due, the fintech automatically processes a payment against the consumer’s credit or debit card account. When the amount settles, the fintech is responsible for paying interchange to the cardholder’s issuing bank. The fintech earned their fee (between 3% and 6%) for the merchant discount and effectively paid the interchange with the discount earnings. The BNPL is still ahead of the game, but now the card issuer enjoys a share of the acquiring cost.
Ironically, if the consumer settled the BNPL transaction to a credit card, they could extend the BNPL term by only paying the minimum due on their credit card account. In Australia, similar to the United States, the minimum due is only 2% of the balance, or a minimum of $25, as Commonwealth Bank of Australia (CommBank) explains.
One of the most significant changes in the BNPL loan structure comes from innovation by financial institutions, as this recent CommBank announcement illustrates with its StepPay product. But, first, operate within the credit card rails. Just about every business on the planet has access to Mastercard and Visa. In CommBank’s case, Mastercard is the preferred brand.
- StepPay is a digital-only buy now, pay later product that can be added to your CommBank app or to the digital wallet on your smart phone, iPad or Android tablet. You can use StepPay to pay in-store, using tap and pay, or online anywhere MasterCard is accepted, up to your credit limit, without needing a physical card. We’ll automatically split your purchases of $100 or more into four equal, fortnightly repayments.
- For purchases under $100, the full amount will come out of your linked CommBank account in one go. This means you can use StepPay for both everyday spending and bigger purchases.
- There are no interest charges, no monthly or annual fees, and you’ll be able to access your repayment schedule anytime in the CommBank app. Late payment fees will apply, but we have limits in place so fees are capped. Fees and charges may apply to your linked CommBank account.
- To use StepPay, you’ll need to be eligible and a current customer, or if you’re a new customer, simply open an eligible CommBank account. For a complete list of eligible linked CommBank repayment accounts, refer to the FAQs section below.
Merchants may find the model less attractive because it operates at bank-grade loan standards. Instead of approving just about every customer, which creates a credit quality nightmare, CommBank must answer regulators such as the Reserve Bank (RBA). The model becomes more efficient because the BNPL fee is out of the picture.
Expect more change. Visa Installments is undoubtedly an option; PayPal’s fee-free option is another. But in any case, it is clear that bankers are back in the picture, and BNPL will soon become a mainstream lending function.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
