Buy Now Pay Later’s Business Models Evolve Beyond Pay in 4

Debit turns into credit as buy now pay later business models continue to evolve.

As the new year dawned, PYMNTS Intelligence detailed that debit was the payment of choice for everyday spending for items such as groceries. Bank earnings indicated that card spend, though slowing, was still intact. And during the latest earnings from the likes of Visa, debit volumes outpaced credit volumes.

Separate data from PYMNTS Intelligence, as estimated in the report titled “Pay Later Revolution: Redefining the Credit Economy,” pay later options have gained wide embrace as 128 million Americans used a pay-later product from at least one alternative credit provider over the last 12 months, and U.S. buy now, pay later (BNPL) transactions total $175 billion.

Widening Embrace

The business models of the providers — Klarna and Affirm and Sezzle among them — have moved beyond the “pay in 4” construct. In recent months, new announcements surrounding flexible credentials and BNPL provider-issued cards have been instrumental in broadening short term credit’s reach.

PYMNTS has found that 46% of Gen Z and 47% of millennials have used BNPL within the past year. More than 40% of consumers that we’ve surveyed have said that if BNPL options were not offered, they simply elect not to make a purchase. The initial appeal of BNPL, a decade ago, may resided with small-dollar transactions and lower-income consumers; now 6 in 10 of all U.S. consumers who use the payment method for convenience make at least $100,000 a year.

The merchant base is broadening as well. In Sezzle’s most recent earnings report, CEO Charlie Youakim said, “We tend to focus more towards enterprise-level merchants now, although we do have a mid-size funnel as well … but it is definitely a focus towards the larger side of the equation.” He also pointed to new verticals, such as grocery, where BNPL adoption has lagged, as areas of recent traction.

BNPL has also been making inroads into B2B, where, for example, Klarna said late last year that it had partnered with Xero to enable the users of Xero’s small business platform to offer their customers a BNPL option. Businesses get paid up front; the buyers pay over time, which in turn improves the cash flow of both parties.

The flexible digital credentials announced in recent months by Visa and the embedded BNPL option announced by Mastercard, in addition to the Affirm Debit Card, all point toward the flexible use of BNPL online and in-store. In the case of the flexible credential, the single-card construct allows users to switch between different payment options across specific transaction sizes. The issuers have the potential to cross-sell other offerings to customers.

The pure plays are not the only ones moving to help transform debit into credit — as reported here, digital wallets used stored debit cards in 55% of grocery transactions, as well as 52% of retail transactions, 62% of restaurant transactions and 46% of travel transactions.

Against that backdrop, banks have been offering installments. JPMorganChase offers its Chase Pay in 4 option, where most Chase debit card purchases between $50 and $400 are eligible to be split into four equal transactions over eight weeks.

Galileo Financial Technologies launched an expansion of its BNPL offering for FinTechs and banks to extend post-purchase installment payment options via their existing debit cards.

In a further nod to the extension beyond “pay in 4,” Affirm’s Debit Card, a Visa card, lets users choose at checkout to pay in full or pay over time. During the company’s most recent earnings call, CEO Max Levchin told analysts, “The totality of Affirm cardholders comes from the existing Affirm base. Every time we sign someone new through a 0% promo, some number of months or quarters from now, that is a prime candidate for card, and that’s a lifetime value booster.”

The company’s investor materials note that gross merchandise value tied to the Affirm Card grew by 115% to $807 million as measured year over year. Active cardholders more than doubled to 1.9 million in the most recent reporting period.