Is BNPL Truly Revolutionizing Traditional Lending, or Just Another Form of Credit? (What Issuers Need to Know)

Jun 2, 2024

The recent regulatory changes in the US, spearheaded by the Consumer Financial Protection Bureau (CFPB), have brought the Buy Now, Pay Later (BNPL) market under stricter scrutiny, aligning it more closely with credit card standards. The CFPB’s new rule requires that BNPL providers follow similar guidelines to those governing credit card companies, including more rigorous disclosure requirements and stronger consumer protections. The goal of this regulatory shift is to address concerns about transparency, hidden fees, and the potential for consumer debt accumulation.

These changes come at a time when the BNPL market is witnessing exponential growth, and rapidly becoming a significant player in consumer finance. Juniper Research expects the number of global BNPL users to reach 900 million by 2027. Fortune Business Insights estimates that the global BNPL market will grow from $37.19 billion in 2024 to $167.58 billion by 2032. Considering BNPL’s expanding position in modern spending habits and preferences, as well as the changing regulatory landscape,  this blog aims to analyze its impact on traditional lending.

 

Comparing Consumer Spending: BNPL vs. Credit Cards

BNPL services are designed to appeal to consumers who prefer flexibility and simplicity in their financial transactions. Unlike credit cards, which often involve complex interest structures and revolving credit, BNPL offers a straightforward, short-term installment plan with no or low interest.

A CFPB report indicates that Americans pay approximately $120 billion per year in credit card interest and fees. In contrast, BNPL is a no-interest product. Borrowers who miss BNPL payments may face penalties, but those fees are relatively low in absolute terms and do not compound like credit card interest. In this way, BNPL can be a low-cost alternative to other credit products. This model is especially enticing to younger consumers who are wary of traditional credit card debt.

According to a report by PYMNTS.com, data shows that five times more consumers used credit cards than BNPL to make a purchase. However, the study notes that the average BNPL purchase was 70% higher than the average credit card purchase.  So, while it’s true that credit cards still dominate the market, BNPL is an accessible form of credit not only to younger consumers but also valuable to those who choose BNPL for the ability to make larger purchases easier to afford via a series of interest-free payments.

 

Source: PYMNTS.com

 

Data from Motley Fool highlights that 27% of BNPL users think that BNPL services could eventually replace their credit cards and would like for that to happen. 41% trust BNPL providers more than credit card providers. This shift in consumer preference poses a challenge for card issuers, as they must find ways to adapt their offerings to retain market share.

 

BNPL Players Venturing into Issuing Credit Cards

Interestingly, BNPL providers are expanding their services to include credit card issuance, further blurring the lines between traditional credit products and BNPL. Companies like Klarna, Affirm, and Afterpay are launching their own credit cards, leveraging their existing customer base and user-friendly interfaces. For card issuers, this represents both a competitive threat and an opportunity for collaboration. By partnering with BNPL providers, traditional lenders can offer hybrid products that combine the best of both worlds, catering to a broader range of consumer needs.

 

Strategic Implications for Card Issuers

For heads of card products, understanding the strategic implications of BNPL’s rise is crucial. Traditional lenders must innovate to stay relevant, potentially incorporating BNPL-like features into their offerings. This could involve developing flexible payment plans, transparent fee structures, and leveraging technology to enhance user experience. According to the US Federal Reserve, credit card utilization holds 21% of the market. If US banks integrate BNPL into their credit cards, they can raise customers’ credit limits from $656 billion to $1.27 trillion by 2025. It’s already being attempted. In 2022, Spanish bank Santander launched its BNPL application called Zinnia for the European market.

It’s an area of vast opportunity for card issuers. For those looking to jump, staying on top of regulatory changes is essential, as the BNPL market faces increasing scrutiny from financial authorities.

 

Regulatory Challenges and Opportunities

The regulatory landscape for BNPL is evolving, with many governments and financial regulators beginning to scrutinize the sector more closely. The CFPB in the US, the Consumer Credit Directive in the EU and the Financial Conduct Authority (FCA) in the UK have already taken concrete steps to subject BNPL services to existing credit laws. These upcoming regulations will require BNPL providers to proactively adjust and adapt.

For card issuers, navigating these regulatory changes requires a proactive approach to compliance and risk management. However, it also offers the chance to set industry standards and lead the way in responsible lending practices.

 

The Takeaway

BNPL is more than just another form of credit; it represents a transformative force in consumer finance. For card issuers, the rise of BNPL demands a strategic response that balances innovation with risk management. It is imperative that purchase transactions be approved so that cardholders do not have to resort to BNPL. Kipp offers exactly this kind of innovation to card issuers. Kipp bridges the gap between card issuers and merchants, increasing transaction approvals and driving revenue and loyalty. Kipp’s platform enables issuers to make smarter authorization decisions by connecting them with merchants who share pivotal data in real-time. For credit-related declines, issuers can collect additional revenue from merchants willing to pay a premium to avoid a decline. By staying agile and forward-thinking, heads of card products can navigate this new era of consumer finance and ensure their offerings remain competitive and relevant.