Buy Now Pay Later and Credit Cards are Slugging it Out – But Who Will Win in the UK?

Credit card companies are seeing Buy Now Pay Later (BNPL) businesses (Klarna, Laybuy, Clearpay, etc.) take huge bites out of their market share. If the credit cards ever held out hopes that BNPL was a short-lived fad, that notion is rapidly fading.

BNPL popularity is growing exponentially, and unless credit card companies act, this fight is going to take its toll.

In this article we’ll look at why BNPL has captured so much consumer attention away from credit cards, why we’re likely to see winners and losers on both sides, and what both credit card companies and BNPL companies need to do if they want to secure their long-term future.

There WILL be losers in this fight, but only if the lenders involved fail to notice which way the wind is blowing.

Spoiler alert… it’s blowing in the consumer’s direction…

Buy Now Pay Later is a brilliant, winning formula

Somewhere in an R&D room is a faded post-it bearing the words: What if credit cards but with less hassle?

That is why BNPL works, that is why consumers like it, and that’s why a new BNPL provider pops into existence, it seems, on a daily basis.

BNPL companies understand consumers, and their model is almost entirely built around giving them what they want.

Yes, the interest free element is a factor, but consumers could use credit card balance transfers to achieve the same end result. What really attracts them is that BNPL achieves the same outcome faster, easier and without lengthy application processes or phone calls.

You could, for example, be in a position where you’re about to pay for an expensive item on your credit card, and then suddenly be unsure about whether your credit card limit will cover it. At that point you can either call your credit card company and ask, locate your credit card app on your phone, or simply select one of the BNPL options at checkout and be offered up to 3 months to pay, without any interest or charges.

Ultimately BNPL is winning because it recognises that consumers value anything that saves them even a few seconds of time and hassle.

If this sounds like an exaggeration, you’ve failed to spot just how busy and harassed the average person feels on a day-to-day basis. We’re literally at a point in civilisation where people will walk into a Tesco Express, and then immediately walk out again if they see a queue for the checkouts.

The modern consumer hates ANYTHING that requires even a minimal waiting time. If your product or service removes even a little bit of that friction, you’re instantly ahead of the competition.

And that’s just for starters…

BNPL can snap up consumers without requiring them to go through a lengthy application process, carry out a credit check, or wait several days for a card to arrive. 

They’re unrestrained by frontbook business models or legacy (read, “creaking”) technology, allowing them to adjust and innovate at speeds that credit companies can’t come close to matching.

And the real cherry on top of the cake…?

The retailers are actively promoting and encouraging consumers to use BNPL products instead of credit cards because consumers typically spend more if they’re using the former.

But Buy Now Pay Later is eating its own tail

On the basis of that argument, it looks like BNPL has already won the battle. But it’s not that simple. 

We’ve yet to reach peak BNPL but we’re probably too far away from it. And that’s when BNPL is going to start running into problems.

For starters, the runaway success of BNPL is attracting more and more players, and creating the classic problem of an oversaturated market. At the time of writing, JD Sports is offering no fewer than seven different BNPL providers. Good news for the consumer who wants plenty of choice, but bad news for the BNPL companies who, instead of competing with credit cards, are now competing with each other.

This also sends the flow of power back in the direction of the vendor who can choose which BNPL companies they engage with and even which ones they put at the top of the list of choices they offer the consumer. This gives them leverage to negotiate better deals from the BNPL companies, eating into their profits.

It also won’t be long before the FCA moves to regulate the BNPL industry. It’s anyone’s guess what form this will take but it’s almost certain that there will be a hit to BNPL supplier profits (and subsequently their share prices).

Last but not least, the BNPL industry is young and doesn’t have the depth of resources that the credit card companies can bring to bear. While BNPL companies are battling among themselves, the credit cards can be patient, watch the story unfold and then fight back.

Credit Cards have the resources to compete

And fight back they must.

Credit card companies might have the financial clout to be judicious with their response. But taking no action is to risk obsolescence.

Fortunately for the credit cards they have the money to spend on innovation, and they have a number of resources that BNPL don’t.

First and foremost, the credit card companies, by virtue of those lengthy credit checks, application processes, and long histories have a deeper customer relationship than the BNPLs enjoy. This puts them in a prime position to compete directly with the BNPLs by creating competing products.

By building on their existing infrastructure, credit card companies are well-placed to innovate and offer consumers a service that is more closely tailored to their existing preferences. They can even do this by charging the consumer, rather than the vendor, opening up wider opportunities.

This might sound counterintuitive (why would consumers choose an option with a fee, when BNPLs offer the same with no fee?) but it again comes back to the consumers’ burning need for speed and minimal friction.

Zilch, for example, is a virtual Mastercard that can be used in any store or online to enjoy a BNPL-style service. If you use a vendor that has a relationship with Zilch, you pay no fee. Everywhere else you pay a flat £2.50 per transaction.

Unlike the BNPLs, you will occasionally pay a fee. But unlike the BNPLs, you can use the service at any store that accepts credit card payments.

The consumer gets the speed and simplicity they’re looking for but with – and this is critical – PREDICTABLE fees.

Even though the fee isn’t zero, the predictability compares highly favourably with credit cards, whose fees are notoriously hard for the consumer to calculate on the fly (unless they’re in the group who pays off their credit card every month, in which case they’re not really the target market for this portion of the industry).

This is where credit cards really have the edge. Not only do they have the financial resources to create new, innovative products, the size of their customer base puts them in a position to do deals with the largest retailers. Barclaycard’s arrangement with Amazon, for instance, is a prime example of a credit card’s ability to lock down the most lucrative opportunities.

But Credit Cards must act now

Credit card companies may have the financial freedom to be patient and strategic, but we’re edging past the point where a wait-and-see policy is risky for all but the largest firms. BNPL have innovated themselves into an enviable position, but many of the credit cards are innovating right back.

In short, everyone is innovating. Which means if you’re not, you run the risk of being shunted to the back of the pack.

Credit card companies have the data and the resources to create products that compete with, or even completely outflank, the BNPLs. If they wait so long that they fall into obscurity they only have themselves to blame.

BNPL and Credit Cards can both survive if…

In the long-run, we expect to see casualties on both the BNPL and credit card sides. But players in both camps can survive if they innovate with an understanding of what consumers want from their credit services.

However, in our view, the overall winners in both camps are going to be the lenders who use analytics and smart data to gain a deeper understanding of their customers.

Minimal friction and zero (or close to zero) costs are great for winning over consumers in the short-term. But for long-term survival, and indeed growth, there needs to be a three-fold cord that includes consumer satisfaction AND profitability AND the ability to show that you’re lending responsibly and meeting regulations.

The credit cards and the BNPLs that are going to lead the market over the coming years are the ones that master these three areas. And we believe it will be the lenders that are most effective at developing smart, AI-driven management of their customer data.

Whether you’re on the credit card side of the fence, the BNPL side, or somewhere in the middle, GDS Link has the software and the experience to assist with your product innovation and your ability to engineer maximum benefit from your customer data.

If you’re interested to learn more on the subject of challenger credit cards and what they can do to secure their space in what looks like a soon to be BNPL dominated market, join GDS Link at AltFi‘s upcoming Festival of Finance on April 27-28, 2022.

Register here for free:

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