Despite a recent uptick in COVID-induced lock-downs – Australia, Germany, and now South Africa with the Omicron variant – the U.S. continues to trend towards unwinding many of the constraints that restricted economic activity since the onset of the pandemic. A direct result has been a ‘normalization’ of commerce for US consumers relating to their preferred mode of purchasing goods and services – online v. brick-and-mortar – and their overall level of discretionary spending and consumption given the sun-setting of various state and federal fiscal stimuli, including the expiration of various ‘safety net’ programs like rent and mortgage forgiveness and unemployment benefits. Against this backdrop, Christmas 2021 is setting up to be the first Christmas since 2019 to give us a true read on one particular dimension of this normalizing economic activity: the changing consumer credit preference between traditional credit cards and the burgeoning buy-now-pay-later (BNPL) option. As such, this year’s holiday shopping season, aka the ‘Christmas Crucible of 2021’, ought to provide revealing insights into the Credit War between traditional credit card payments and BNPL.
Quarterly KPI data from the card networks – MasterCard, Visa, and American Express – ought to provide clarity on consumer spending trends, including gross payments volume (GPV) and the breakdown between credit card and ACH/debit. Data from the card issuers – Capital One, Chase – ought to provide quality insight into discretionary spending across product/service segments. And gross payment volume data from the BNPL providers – Affirm, Paypal –, cross referenced against that of the both the card networks and issuers, should provide visibility into what I believe to be the most significant data point of all: whether the Credit War is internecine in nature, where both traditional credit card providers and BNPL players are bloodying each other in a zero-sum competition for market share, or hopefully, through greater choice in payment options, and with products that appeal to different demographics of consumers, these two, distinctly different payment options are ‘growing the pie’ of overall consumer spending and merchant adoption.
Though it will be a few months yet, before we get the first data from the holiday shopping season, I’m going on record in predicting that the data will indicate an expansion of discretionary spending, consumption and attendant gross payment volume. I believe what’s going to play-out on the consumer side will be similar to that which played-out on the merchant side when Square jumped into the SMB point-of-sale and payments space.
Prior to Square’s entrance to the merchant acquiring space, the economic benefit to traditional merchant acquirers for boarding small businesses was ‘iffy’ – small merchants processing small tickets racked-up marginal transactional revenue. On top of that, small merchants, by their nature, proved not to be the most technologically sophisticated operators, and often required more time and resources for customer support; in many cases, small merchants on traditional acquiring schemes wound up costing providers money.
Because traditional acquiring-scheme transaction costs and fees didn’t accord with the low payments volume of small merchants, Square’s payment facilitation (payfac) model and flat-fee pricing made it a better solution. The more economical and technologically friendly solution from Square, in turn, led to greater small merchant adoption of Square’s acquiring solutions, and allowed traditional merchant acquirers to focus on larger, more profitable merchants with greater complexity in on-boarding.
There’s a similar dynamic at work in the Credit War between traditional credit card issuers, with traditional consumer financial products, and the buy-now-pay-later firms, with their alt-lending, micro-loan schemes. In the same way that Square has come to serve more ‘down-stream’, small merchants, so does BNPL serve more down-stream consumers who have difficulty securing traditional revolving credit facilities. For many of these consumers, the BNPL product offers a means to purchase products on credit that they simply wouldn’t be able to do otherwise. Albeit a different form of credit – one-off underwriting where instant approval at the point of sale is based on size of purchase, length of repayment schedule, and other non-traditional underwriting data points.
The takeaway here (IMO) is BNPL is increasing the purchasing power for a heretofore segment of credit seekers, who for various reasons, would not be able to purchase the same goods and services through traditional credit facilities.
Wellesley Hills Financial – Fintech Investment Bank – Financial Technology & Software
My take…
I suspect this year’s Christmas Crucible will show that in the grand scheme of consumer credit use, highlighted by the current Credit War between traditional issuers of revolving lines, and the new buy-now-pay-later entrants, GPV will increase, proving the two credit options to be net additive to overall consumer spending.
Just as Square has expanded acquiring on the merchant side, BNPL will expand spending on the consumer side.
But the 2021 Christmas Crucible will be the first of many battles in the Credit War. There will be consequences to the greater adoption and usage of BNPL – there will also be greater credit losses. This is exactly what Klarna is seeing now in their year-to-date reporting:
“credit losses also rose considerably, totaling 2.9 billion krona year-to-date, higher than the 1.6 billion krona reported for the same period last year.”
But also, keep an eye on the macro. It seems likely that the Fed will be increasing interest rates in 2022. More expensive money along with higher risk premiums attributable to increased losses could affect the BNPL providers more than the traditional card issuers who have more diversified business models.
