The invasion of 156,000 Allied Forces on the beaches at Normandy on June 6, 1944 is regarded by historians as the big turning point of World War II. The invasion that day was the result of years of meticulous planning and a strategy, Operation Bodyguard, that used deception to throw the enemy off track.
In addition to the textbook method of using double agents to leak and spread false stories, great effort went into developing plans for two landing sites that Allied military commanders had no intention of ever using for the invasion. The goal was to make these plans, and the communications about them, seem so convincing that German troops would mobilize to defend these fake sites. They did, and the rest, as they say, is history.
Ancient Chinese general and military strategist Sun Tzu wrote that all war is based on deception, the thesis of his famous monograph, “The Art of War.” The higher principle, he writes, is to pursue the enemy without ever fighting.
It’s a strategic principle that we could see play out over the next decade as buy now, pay later (BNPL) players, in particular, gain more traction with consumers and merchants — and use that momentum to shift consumers who link the app to their debit cards today to link directly to their bank account tomorrow.
Over time, as payments gateways enable real-time payments connectivity to merchants, as these players grow their own merchant networks and as consumers build more trust in these players, the shift away from debit cards and card rails as the alias to a new real-time payment option seems imminently doable — if not a likely outcome.
Deploying such a strategy will also be made much easier and more effective as transactions continue their acceleration online, even when consumers shop in a physical store. And when BNPL providers use incentives that come from new platform economics to persuade consumers to flip.
That will make BNPL players more of a threat to card networks as well as the banks, as the consumer bases they collectively aggregate — including PayPal, with its embedded Pay Later options — become a force too big to ignore.
That’s despite the critical role that the card networks play in enabling these platforms today.
Card rails and the ecosystem that powers virtual card issuing are how these pureplay providers got off the ground and ignited their platforms in a secure, trusted and compliant way. Absent that, it’s likely that these guys would probably be stuck in the mud, maybe nowhere, but certainly not wielding the traction or the lofty tens of billions of dollar valuations they enjoy today.
But I am suggesting that there is a different means to the same end now as these players and their investors see an opportunity to recast how they turn the cash in the checking accounts of their customers into a robust payment, credit and transacting platform linked directly to them over time.
One that also doesn’t carry the POS integration baggage that crushed the aspirations of payments startups in the physical card world not that long ago.
One in which real-time information about the consumer’s ability to repay makes credit decisioning faster, more accurate and more risk-responsible and the core of a different credit ecosystem.
One that also provides payments choice: buy now and pay now, later or much later, streamlined and made possible within their ecosystem at the merchants they enable.
This future also doesn’t entirely replace the consumer’s use of credit, but certainly could put a big dent into the interest income that banks get today on revolving credit balances — and the interchange fee revenues that banks collect on credit and debit transactions, respectively (and the merchant fees for Amex and Discover).
The Right Now of Buy Now, Pay Later
There’s a bunch of data flying around about how many consumers have ever used a buy now, pay later option. In a report to be released by PYMNTS later this month of 2,237 consumers conducted in early November of 2021, we find that 20% of the adult population in the U.S. — some 50 million consumers — have used a BNPL option to make at least one purchase over the last 12 months. Most of that activity happened online. A small but growing portion of consumers have used BNPL, both on and offline.
It’s a remarkable acceleration in usage and adoption, and in less than two years. In May of 2020, when PYMNTS released its first study on BNPL usage in late March of 2020, we saw usage hovering at around 9%.
Consumers like using the product for the predictability of paying off their purchases in equal payments over a specified period of time. They also like the closure associated with buying X for $350 and paying off X four to six weeks later. They especially like the guardrails that they feel BNPL solutions offer against overspending.
PYMNTS research also sees an interesting bifurcation in who uses buy now, pay later products. Higher-income consumers with credit cards use it as an alternative to tying up their credit lines by breaking up payments for bigger-ticket purchases. Millennials say they use it as an alternative to the credit cards they also have in their wallets, without fear of overspending or racking up revolving balances. Millennials, bridge millennials and Gen X consumers with a credit blemish — but with the income and capacity to repay — use it to establish and rebuild their credit. For many of those consumers, it is the only way they are able to make a purchase where the payments are spread out over time.
PYMNTS research also shows that nearly two-thirds of consumers who have used BNPL over the last 12 months have or say they will increase their usage of it; 70% of non-users say they plan to try it over the next year. Repeat usage is a major growth driver in the sector, implying that clients are happy with their experience and building trust with their BNPL providers.
Merchants like it for the obvious reason: Consumers want to use it, and they see the potential for incremental sales by adding it at checkout. If anything, PYMNTS research shows that more merchants are interested in adding it as a checkout option than those who say they’d rather not. That’s despite merchants paying more than the cost of traditional interchange to make it available to their customers. Just like credit cards in the early days, no one merchant wants to be the competitive disadvantage that all their rivals sell against.
Buy now, pay later is also crossing the chasm to include bigger-ticket purchases beyond electronics and home furnishings — travel, major appliances, jewelry, even antiques and artwork on marketplaces like 1st Dibs and items — and services like home remodeling, emergency appliance repairs and automobile repairs. The common thread across all of these categories and the players that offer BNPL options is the use of real-time data, and a variety of data sources to underwrite the risk and to set the time and interest rate parameters for repayment.
Setting the Stage for Change
Over the last two years, we’ve seen BNPL providers expand the options for how consumers can enable a pay later experience. Branded plastic and virtual cards that run over card rails, giving consumers the opportunity to turn any payment into an installment payment (subject to approval and spending limits on and offline). In addition to its Pay in 4 product, Klarna also offers a 30-day invoice option for consumers to buy online and have goods delivered, and to pay for only what they want to keep. PayPal’s Pay Later option inside of its app is available to any merchant that accepts PayPal and any consumer with a PayPal account. Sezzle’s BNPL platform helps consumers rebuild their credit. AfterPay was an early pioneer of in-store BNPL.
Affirm’s new cash-back Pay Now product rewards consumers for paying in full at the point of transaction, with the 5% cash back deposited into a stored value account to be used later at any of their merchants. Affirm’s Debit+ card gives consumers 24 hours to decide how they want to pay for their purchases: now, later or much later, depending on the purchase amount. Debit+ consumers are given a spending limit based on the available balances in their checking account — up to a max of $15,000 as of now. The Debit+ product links directly to the consumer’s checking account.
Speaking of checking accounts, preliminary PYMNTS data shows that 42% of U.S. consumers have a bank account linked to a digital wallet, including many consumers who have long had their bank accounts linked to their PayPal wallets. Not that many years ago, the latter was a point of angst among card networks and issuers. Shortly after Dan Schulman took over as PayPal CEO in 2014, PayPal rolled out a new user interface to more easily enable payment choice, a strategy that has fueled its own growth over the last seven years.
But as they say, that was then and this is now. Times have changed: More players can do this, so the share of online transactions that are or could be direct to bank account is increasing across wallets and apps, while at the same time more transactions move online, including cloud-based at the store.
Here’s a for instance.
Suppose that Amazon, with its exclusive BNPL arrangement with Affirm, decides to offer its 150 million-plus U.S. Prime customers better cash back and other goodies than they have now with their Amazon Prime credit card if they link their bank account to Affirm/Amazon. Maybe not so far-fetched when considering that a large portion of Prime members and Amazon Prime cardholders probably pay off their balance at the end of the month, and might find an interest-free Pay in 4 option attractive.
Or that Walmart, never a big fan of paying interchange fees, does the same for Walmart+ customers in an effort to boost the value of that membership and improve its payment economics.
Or that Afterpay, soon to be officially part of Bloc, does the same across its merchant, consumer and Square Cash networks.
Or that any other merchant with any other BNPL affiliation does some version of the same thing. Or BNPL players use the relationships they’ve built with their consumer and merchant networks to create a personalized payments and credit network powered by real time rails and direct bank account connections.
Now suddenly, across all of these players, there’s a pool of roughly hundreds of millions of consumers, many of whom have transacted with a BNPL provider — and have built trust and an ongoing relationship with them and the merchants they shop — who are now prospects for switching their current funding source to direct to bank account.
Those hundreds of millions of consumers will only swell, as more transactions are done or staged online, more categories move to a BNPL option and BNPL players innovate their platform and offerings.
You can imagine consumers opting into a single payments and credit platform that offers a dynamic, real-time credit line pegged to what is available to spend and repay — giving its customers all the advantages of a credit line, with a predictable payment plan and without the fear of overspending.
As BNPL providers expand their offers to include pay now, later and much later, how consumers opt to pay will be invisible to the merchant – one platform, one fee, multiple ways for the consumer to settle the transaction.
All of this is pure speculation on my part, and far from a slam dunk.
First, a consumer’s bank account credentials are among the most precious assets they have, and linking retail payment apps directly to them is a tough sell.
Second, BNPL players run the risk that merchants will turn on the business and economic model they offer, just as they have with card networks and interchange fees.
Third, banks and card networks aren’t just sitting around watching all of this unfold.
Many issuers already offer split payments post-transaction, and PYMNTS data shows that consumers like and use that option. Mastercard and Visa are enabling installment payment options at the point of sale for their issuers, and are creating new business models to enable issuers and neobanks with buy now, pay later ambitions to offer BNPL over their rails to complement their existing services.
Issuers are also betting that consumers will feel more comfortable transacting with a bank they know and trust, and a credit line they know they can use without reapplying every time they want to buy something. With the cards consumers now have, they get a BNPL option at any merchant at any time using those cards.
How this unfolds over the next few years will come down to a few things:
Trust. This hinges on who the consumer trusts to enable purchases tied to a specific payment plan — and in the case of the direct link to their bank account, who the consumer trusts as the intermediary to facilitate that transaction. Consumers trust their bank. So far, though, lots of consumers have trusted the new pureplay BNPL players enough to sign up and use them, and use them again.
The expansion of open banking and real-time payments for retail transactions. It’s taken a decade for RTP to get off the ground in the U.S., and the use cases today are far afield from retail payment transactions. But enabling RTP payments between consumers and merchants has been a vision for at least as long, for FinTechs and banks alike. One possibility is that banks also get in on the RTP direct-to-bank-account bandwagon, and use it to enable their BNPL transactions, too.
The acceleration of online transactions, including cloud-based, in-store POS transactions. When online transactions were at 5%, retailers and issuers shrugged. At 15%, no one is shrugging anymore. It’s entirely possible that by the end of this decade, 25% or more of transactions could move online in some way, creating even more of a tailwind for all BNPL providers. This just seems inevitable now, as the digital transformation creates the connected economy.
The banks and networks have a fighting chance to win the battle over consumer payments by following the pure-plays, maybe buying them, partnering with enablers that can fast track their BNPL plans and convincing consumers that revolving credit and cards have a place in their credit portfolio.
But fight they will have to.