Brief Summary
This video explores the increasing popularity of "buy now, pay later" (BNPL) services as an alternative to traditional credit cards. It examines the reasons behind this trend, the concerns of banks and credit card companies, and the potential impact on consumers' credit scores. The video also discusses how credit bureaus are adapting to incorporate BNPL data and the future of consumer credit.
- BNPL is gaining popularity due to its accessibility, convenience, and appeal to younger consumers.
- Banks and credit card companies are wary of BNPL as it reduces their transaction activity and interest revenue.
- The lack of comprehensive reporting of BNPL loans to credit bureaus raises concerns about assessing consumer credit risk.
- Credit bureaus and scoring companies are working to incorporate BNPL data into credit scoring models.
- Traditional banks are launching their own BNPL offerings to compete in the market.
Introduction
The video introduces the growing trend of consumers using "buy now, pay later" (BNPL) services, which allow purchases to be split into short-term, often interest-free, instalments. BNPL is presented as an alternative to traditional credit cards, which some consumers find difficult to adapt to their needs. The rise of BNPL is seen as a disruption to the credit card industry, with companies like Klarna experiencing significant growth. However, concerns are raised about the lack of visibility of BNPL loans in credit profiles and the potential risks for consumers.
Rise of ‘buy now, pay later’
This chapter explains the mechanics of BNPL, where consumers pay a portion of the price upfront and the remainder in instalments. The popularity of BNPL has surged, with a significant increase in loan originations. Consumers are drawn to BNPL due to its accessibility, affordability, and convenience, with higher approval rates compared to traditional credit products. Younger consumers, in particular, are adopting BNPL as an alternative payment method, seeking flexible and controllable financing options. Retailers are also embracing BNPL as it tends to increase sales and allows consumers to make purchases that might not fit into their regular budgets.
Credit card profitability
Banks are wary of BNPL due to the competition it introduces in the lending and deposit space. BNPL reduces credit card transaction activity, which is a major revenue driver for banks. Credit card companies generate the bulk of their revenue from interest payments, and the shift towards BNPL means this interest is paid to third-party providers. The US credit card market is lucrative, with rewards for consumers with good credit scores, but BNPL is designed for those who may not qualify for such benefits. BNPL is seen as a competitive threat to traditional banks, particularly for small-dollar, short-term lending products.
Borrower’s credit history
BNPL loans create a gap in understanding a consumer's financial life because most BNPL loans are not reported to credit bureaus. This lack of reporting means lenders may not have a complete picture of a consumer's debt obligations, potentially leading to more conservative lending practices. Reports indicate that BNPL users tend to have lower credit scores, higher credit card balances, and are more likely to be highly indebted. There are signs that BNPL borrowers are increasingly falling behind on their loan payments. Some argue that current credit scoring models are not well-designed for BNPL loans, and that taking out multiple BNPL loans can negatively impact credit scores, even if repaid responsibly.
What’s next?
The credit bureaus are working to incorporate BNPL data into credit reports to accurately reflect consumer risk. FICO is set to roll out a new credit scoring model that factors in BNPL loans. However, questions remain about whether BNPL companies will provide the necessary customer data. Traditional banks and lenders are launching their own BNPL offerings to compete in the market. The future of consumer credit is seen as a convergence of various industries, with consumers having the ability to choose the payment journey that suits them best. The increasing consumer credit consumption in the US presents an opportunity to offer better and more transparent financial products.
