Many people use credit cards to pay for purchases they need right away. These cards are convenient but can have negative consequences down the road. Buy Now Pay Later help you spend money now on items you want, but it’s hard to pay off your card in full every month. Over time, this habit can seriously damage your financial health.

Buy Now Pay Later offer a way for people to spend more money now without delaying gratification. Most of these cards are issued by credit card companies and have fixed introductory rates. After that, monthly fees kick in and the rate increases. Some credit cards also charge an additional fee for overseas purchases- further driving up the rate. However, these cards can be useful if used correctly.

Even though it’s enticing, early credit card spending doesn’t help you develop sound money management skills. The monthly payment of your credit card balance is challenging due to the high interest rates on credit cards. Aside from that, late fees and penalties can mount up. Your amount is kept low enough by consistent payments so that fees won’t put you in financial disaster. Prior to using credit sensibly, it’s critical to comprehend how it functions.

It’s important to understand how credit works before using it responsibly. 

Building a good financial history is a lot easier when you use your cards responsibly. Doing so shows lenders that you’re a trustworthy customer- which helps you build a solid credit history with future cards and loans. Plus, paying your monthly bills helps you build a history of responsible spending. Obstructing this path can make it much more difficult to manage your finances well in the future.

Buy Now Pay Later are great for immediate spending, but can negatively affect your long-term finances. Avoiding debt and saving regularly will keep you financially secure in the future. Furthermore, building a good financial history is much easier when you use your cards responsibly. Anyone can learn how to manage their finances well with the right mental approach.

Having re-shaped both #fintech and #ecommerce in the past decade, can Buy-Now-Pay-Later challenge card payments? Let’s take a look.

#BNPL owes its success to its double appeal to consumers and merchants. For consumers it’s convenience through a streamlined, low-friction, integrated check-out experience, whereas for merchants it’s boosting conversion rates and average order value.

As a result, what started as a niche offering is now a multibillion industry worth globally about $US157 billion (source: WorldPay) with the pandemic having clearly boosted the industry dynamics beyond expectation.

But can Buy now pay later really challenge credit cards?

Let’s start from the basics: both credit cards and BNPL are unsecured consumer credit, however there is a big difference in terms of risk underwriting: whereas the risk assessment for credit cards takes place ahead of the purchase and is based on hard, income-sided facts, BNPL manages credit risk by accessing alternative #data sources in real-time that enable instant approve/decline decisioning.

Depending on market dynamics BNPL can be card-based or not, which can be a significant adoption driver for consumers with no access to credit cards, like young generations (who happen to be the model’s most active customers).

Despite its fast ascend, BNPL accounts today (source: WorldPay) for only 3% of the global e-commerce #payments market compared with 21% for credit cards and 13% for debit cards. On the POS side the numbers are even less favorable with BNPL at 1% vs 24% for credit cards and 23% for debit cards.

However, seen from a future perspective BNPL is best positioned to benefit from the declining use of cash globally: it is expected to grow significantly both on the e-commerce and on the POS side, reaching 5% and 2% of global spend respectively. In markets like the Nordics it has already reached double-digit e-commerce market share figures (in Sweden, Klarna’s home market, BNPL has a 25% market share).

One of its strongest disadvantages compared to credit cards is its inability to offer credit-card like rewards like return points, miles or cash backs.

Having recently peaked, today BNPL faces two serious challenges: 1) increasing commoditization driven by competition with pricing and margins coming under pressure 2) a negative macro environment without precedent, which has seen valuations of key BNPL players around the globe collapsing amidst mounting losses combined with increased regulatory scrutiny.

Going forward BNPL will do manage to overcome these challenges and thrive. For certain geographies, markets and segments it will even take up some of the credit card business but it will not become a credit-card replacement. It will rather evolve from a stand-alone offering into a mass-customization tool that can find its way to wider ecosystems as a credible alternative in an increasingly multi-polar payments #infrastructure.

buy now pay later
Graphic sources: EY and Prove/Medici

What I’m missing are the BNPL funding methods (how does the end customer pay the BNPL provider) and remittance methods (how is the merchant paid)? Would not be surprised that in most cases this is by (virtual) card, for both scenarios. BNPL is therefore another ‘wrapper’ based on card rails.

Here is a short answer – It depends on the provider / model. Some players are card-based but the main ones integrate directly with merchants. For integrated merchants the merchant is paid by bank transfer (BACS / faster payments). Consumer to BNPL provider is either card or account to account if you have a connected account. Definitely not a wrapper for card rails, which gives 2 benefits. cost is obviously one but also the consumer gets much richer data on the product they have bought.


4 thoughts on “Credit Cards vs Buy Now Pay Later

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