Find Out, Credit Card Companies Face the Buy Now, Pay Later Competition

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Capital One Financial, based in McLean, Va., Perhaps Discover’s most direct competitor, plans to roll out a buy now, pay later – or BNPL – service by year-end with “a select set of traders, “said a spokesperson. The program will be a pilot, but CEO Richard Fairbank has made it clear that he sees BNPL as a threat to Capital One’s core credit card business and wants to be a part of the action.

Check out CEO Roger Hochschild says he doesn’t see the phenomenon further harm the business of his company. Indeed, the figures confirm it. Credit card loan balances resumed year-over-year growth in the third quarter after the pandemic reduced consumer borrowing. Loans increased 1% to $ 70.3 billion.

“At the moment, I would say we don’t see any noticeable impact on revolving installment loans and I think we’re in a good position to respond if that happens,” Hochschild told analysts on October 20.

Increasingly, retailers are offering customers the option of making point-of-sale agreements where they can refund a purchase in installments, mostly without charge or interest. The method is particularly popular online.

Merchants are paying finance providers like San Francisco-based Affirm, the largest to date in the burgeoning field, to support transactions. Affirm has partnerships with Walmart, Target, Peloton and a host of other major retailers. At the end of August, he unveiled a new partnership with the largest of them, Amazon.

Barely a 10-year-old company, Affirm’s market value of $ 42.4 billion already exceeds Discover’s $ 33.6 billion. Its share price has climbed 212% this year. Discover is up 27%, 4 points better than the growth of the S&P 500.

Product purchases on Affirm’s platform net of returns in the fiscal year ended June 30 reached $ 8.3 billion, down from $ 4.6 billion the year before. (Sales volume on the Discover Card in the year ending June 30 was $ 161 billion.)

Juniper Research, based in Great Britain, planned for june BNPL will account for 24% of global online retail purchases, up from 9% in 2021.

Affirm CEO Max Levchin, a graduate of the University of Illinois, bluntly sets out his company’s strategy, calling it the “great unbundling” of credit cards.

“It’s very gratifying to actually see all of these competitive announcements (of new entrants into BNPL) as we say them because quite frankly it suggests these people are saying, ‘Hey, wait a sec. This whole idea of ​​unbundling the credit card is real, and I have to react and do something, ”Levchin, 46, said Sept. 28 at the company’s annual investor forum.

The question for Discover, Capital One and other major credit card issuers is whether older consumers who have used cards so far will turn to BNPL and whether merchants will continue to pay up to 6%. to Affirm and other vendors to provide the service.

“Right now, most of the growth comes from debit card users,” Capital One’s Fairbank told analysts on September 13. new financial relationships with the large number of consumers and traders.

Discover plunges his toes into the waters of the BNPL, in partnership with Minneapolis supplier Sezzle, a rival of Affirm, to use Discover’s payment network to provide financing to consumers. But Discover does not intend to fund the purchases itself.

In an email to Crain’s, Hochschild signals that he wants to see how the market evolves. “While we have yet to see BNPL impact our lending and volumes, we believe as the market and economy matures there may be opportunities,” he said. -he declares. “We are very excited about our partnership with Sezzle in our payments segment, which leverages our network assets to provide connectivity to merchants. ”

Perhaps the biggest threat to Discover than missing out on a booming segment of its industry is the potential to eat away at the way it makes money now. Unlike competing card issuers like JPMorgan Chase and Citibank, which focus more on affluent consumers who use their cards generously but pay off their balances in full each month, Discover woos those who borrow regularly from their cards and relies on their interest payments. .

If merchants continue to pay Affirm and other providers enough to offer free installment payments, why would consumers pay Discover or any other card issuer interest for the same? Discover’s interest charge on its card averaged 12.5% ​​in the third quarter, according to its financial information.

Hochschild is indeed betting that BNPL’s economy will change so that consumers will have to pay something for the service. “You are starting to see some pressure from merchants who are unwilling to pay higher rates than they pay by card,” he told analysts on Oct. 20.

Even so, there are advantages to knowing exactly how long it will take to pay off a product purchase than maintaining a credit card balance for a longer and uncertain period.

Discover turned the card industry upside down when Sears Roebuck introduced the card in 1986 with the original idea of ​​refunding users a percentage point when they purchased items with the card. It didn’t take long for the rest of the industry to join in; now the richest rewards programs come from Chase and Citi.

Buy now, pay later looks like an even bigger upheaval. How long can Hochschild wait?

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