Will Buy Now, Pay Later Replace Credit Cards? A Look at the Latest Lending Disruptor

Credit card issuance has been the main avenue for banks and credit unions to provide a portable, use-anywhere spending option for banking customers for nearly 100 years. Credit cards have become a mainstay for most Americans, with 79% of the population holding at least one major credit card and the average number of credit accounts coming in at around three per individual.

However, Gen Z consumers are proving to be wary of credit cards, perhaps made reluctant by the staggering credit card debt carried by millennials. Only 30% of GenZ-ers have a credit card, and they are also more likely to use cash for small purchases. Fewer than one in five feel like they have a solid grasp on financials, and more than half report worries about not having enough money they need later in life.

Finally, the barriers to traditional credit card use are becoming more difficult to overcome. No-annual-fee credit cards are harder to find, interest rates can be repressive and the damage done to a credit report by missing just one payment can be severe. Tightening qualifying requirements also exclude many younger credit card applicants who may have sparse employment and transactions history. 

Enter Buy Now, Pay Later 

The Buy Now, Pay Later (BNPL) model allows consumers to make a purchase and spread out payments over a short time period, with only a “soft” credit check or no check at all and zero interest on their purchases. The most typical arrangement is “Pay-in-4”, a 25% down payment, with three more payments due at two-week intervals over a six-week period (some companies allow longer time frames to pay off higher-priced items.) 

While BNPL was originally instituted by fintech companies providing the option through various merchants for a fee and assuming the risk on the merchant’s behalf, larger lenders are starting to enter the market and are seeking to expand the model to purchases made anywhere. 

Gen Z and younger millennials currently account for 80% of BNPL spending. Their decision to use the service isn’t normally due to not having access to credit; in fact, 80% have enough credit available on a traditional credit card to make the purchase but opt for the interest-free version. Poor credit scores among BNPL are also less common than might be expected; in most cases, those who don’t have access to traditional credit are simply affected by thin credit files, not negative credit histories.

How Established Fintechs, Banks and Credit Unions Can Cash in on Pay in Four

BNPL has seen explosive growth, with nearly 38% of Americans using the option in July 2020, which rose to almost 56% in March 2021 — a 50% increase in just six months. Among those who have never used BNPL, more than half say they are at least somewhat likely to use it in the coming year. 

As banks see their traditional lending portfolios being chipped away at by fintech disruptors, developing in-house BNPL solutions seems like the obvious answer to remain competitive. 

Being able to provide instant decisioning based on the softer requirements for the average BNPL program is key, and provides a fast path to scaling lending operations.

If good candidates for BNPL can be identified within a bank’s current customer base or among new banking prospects, launching an independent pay-in-four option or similar program could create a new source of merchant-based revenue. BNPL also helps traditional financial institutions retain younger customers by providing a purchasing option they are interested in using and which lends itself to repeat transactions.

Fintechs, banks and credit unions can leverage the power of BNPL only with a robust risk assessment and fraud prevention system that can give them access to a high but trustworthy approval rate. This allows expansion into a new and lucrative market, where risk can be managed with confidence.

Data analytics can support instant credit decisioning for BNPL by drawing from a vast range of information about individuals consumers, allowing better decisions to be made that aren’t tied only to a credit score. GDS Link delivers credit risk management software, data and decisioning with proven underwriting workflows, providing a way forward into the BNPL market. 


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