Afterpay has been beta testing buy now, pay later integration into Cash App Card transactions, with the goal of bringing BNPL loans across the entire  peer-to-peer platform.

Block, formerly Square, has owned both companies since the 2021 acquisition of Afterpay. Launched in 2013, Cash App boasts a customer base of 57 million users, 40% of which use the Cash App Card. These users will soon be able to split their purchases using Afterpay’s pay-in-4 loans, a feature that’s been in-demand in its own right.

“BNPL continues to be a popular payment method among consumers, and vendors and issuers are all trying to grab a share of the spend,” said Ben Danner, Senior Credit and Commerical Analyst at Javelin Strategy & Research. “Afterpay is taking a play right out of the book of the major credit card issuers—offering an installment plan to a linked card. Several major issuers such as Chase have such programs which offer customers the ability to split payments into installments for a fixed monthly fee.” 

Against the Value Proposition

Similar to credit card companies, Afterpay will also charge a “small fee” for BNPL transactions on the Cash App Card, which could signal a trend.

“If BNPL vendors move towards card-linked financing where consumers are expected to pay fixed fees, that fails to align with the initial value proposition of BNPL—a payment method that prides itself on no fees and no interest,” Danner said.

Increasing Demand

BNPL has become so popular among consumers that some experts have raised concerns about the mounting debt from these loans. Some have called it “phantom debt” because BNPL providers like Afterpay and Klarna haven’t been required to report their transactions to the NY Federal Reserve.

These concerns prompted the Consumer Financial Protection Bureau to issue an interpretive rule mandating that BNPL services operate more like credit card companies. BNPL providers will now need to issue statements to both regulators and consumers, and disclose any fees. Many BNPL services have pushed back, asserting that they operate with full transparency and that delinquencies are infrequent.

Although BNPL is undoubtedly due for more regulation, consumer demand for the ability to split purchases at the point of sale continues to grow. This trend suggests that means more companies will follow Block’s lead and incorporate the service into their payments platforms, much like how Apple recently integrated Affirm’s BNPL products into Apple Pay.

“We’re really at the starting point of the execution of this product,” Nick Molnar, CEO and Co-Founder at Afterpay, told Modern Retail. “To provide a customer that’s already using the Cash App Card on a frequent basis the ability now to use that card to pay in four is an incredible opportunity.”

The post Cash App Explores BNPL Integration with Afterpay appeared first on PaymentsJournal.

The New York Federal Reserve receives detailed quarterly reports from the major credit bureaus, allowing it to monitor the state of U.S. credit card debt. Though many Americans are increasingly using buy now, pay later services in lieu of credit cards, BNPL companies are not currently required to report data on their loans.

Around 25% of U.S. consumers used BNPL in the past year, a number that is expected to rise. With both fintech startups and established banks frequently rolling out new “Pay by X” plans, there are growing concerns about the immense and unknown amount of “phantom debt” that is starting to snowball.

According to some experts, that snowball could turn into a delinquency avalanche, potentially adversely affecting the U.S. economy.

“I think the notion of there being a “phantom debt” crisis is legitimate, if a bit overblown,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “We know that BNPL customers tend to be from higher risk segments and data from the Consumer Financial Protection Bureau (CFPB) shows BNPL borrowers tend to be more stressed financially.”

Modern-Day Layaway

The two segments that have adopted BNPL most rapidly are Gen Z and parents of young children, according to a recent report from Nerdwallet. Roughly 40% of Gen Z consumers and 37% of parents used BNPL in the last year. These demographics are also more likely to struggle with loan repayment.

BNPL has often been considered a modern-day layaway, where consumers split big-ticket purchases into smaller installments. However, the report found that 8% of Americans have used buy now, pay later services to pay for everyday items like groceries, raising concerns among experts.

“Around 18% of BNPL borrowers had at least one delinquency in another account, which means they may be some of the first consumers to go delinquent if the economy sours,” Danner said. “However, it’s important to mention that the average BNPL ticket size of $150 is much smaller than the $6,500 average credit card balance. BNPL vendors also have their own guard rails to limit the amount of debt a consumer can take on.”

Credit Card Alternatives

Those limits, coupled with no interest or annual fees, are reasons BNPL lenders have touted their products as superior alternatives to credit cards. However, there is a trade-off, as buy now, pay later customers miss the rewards that credit cards often provide. BNPL services also charge late fees like credit cards.

These products are easier to obtain, since BNPL companies often only do a soft credit check. In contrast, credit card companies conduct hard credit checks and report delinquencies to credit bureaus like Equifax, Experian, and TransUnion. This data is used to create credit scores, which determine a consumer’s creditworthiness.

Since BNPL companies don’t report their users’ loan details and payment history, outstanding loans aren’t considered in credit scores. Initial attempts to factor in BNPL loans have resulted in negatively skewed scores.

That’s one of the reasons the CFPB issued an interpretive rule stating BNPL companies have to conform to the same standards as credit card companies. This means they will have to send monthly billing statements like credit card companies, fully disclose any fees, and handle disputes in the same manner.

Once these changes take effect, BNPL products might not look so different from credit cards after all.

“We are now seeing (BNPL) lenders launch new products in the U.S. market that seem at odds with their initial brand—physical cards,” Danner said. “Both Affirm and Klarna have launched card products to try to attract consumers into their payment ecosystem and to use them for in-store purchases. In many ways these products are attractive for higher volume, small ticket items such as everyday spend items. BNPL has grown to be more than just a financing tool for one-time large purchases.”

Fueling the Mystery

The nascent industry’s rapid growth has fueled the mystery surrounding it. Along with established players like Klarna, Affirm, and Block-owned Afterpay, more startups like Zilch are entering the market.

It’s telling, however, that Apple just moved away from its in-house BNPL service, Apple Pay Later. The tech giant abandoned buy now, pay later in part due to heavy competition. Apple will now offer these services through Affirm and other providers.

All the movement in the industry has created uncertainty, but according to Affirm, any “phantom debt” concerns are unfounded. The company estimated that outstanding debt from these transactions was 0.3% of the $1.1 trillion in credit card balances in 2023 and said delinquencies were extremely rare.

Though this type of debt might not pose an economy-crippling threat, the BNPL sector will continue to draw attention from regulators.

“There is an important lack of visibility when it comes to credit scoring as many of the BNPL products on the market are not reporting to the bureaus,” Danner said. “It can lead to issues such as loan stacking, which has been a hot button topic for regulators. I expect more policy decisions to come, likely using prior regulations from credit card lending, to rein in BNPL.”

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Buy now, pay later upstart Zilch secured $125 million through a debt agreement with Deutsche Bank. Previously, Zilch received credit from Goldman Sachs, but its rapid growth required a credit plan that could match its increasing demands.

Zilch asserted that the deal with Germany’s largest bank will help the company triple its sales in the next few years. The BNPL lender also announced its intention to become a publicly traded company as soon as next year.

The Deutsche Bank deal allows for an additional $190 million in credit if Zilch continues its positive trajectory. The fintech stated that this agreement is the first of many debt deals it plans to ink over the next few months.

Value From Debt

Zilch has generated more than $3.17 billion in gross merchandise value (GMV) since its launch in 2018. The company reported that it can produce $30 in GMV for every $1 of debt raised. By that math, the initial $125 million from the Deutsche Bank deal is expected to deliver $3.75 billion in value.

Following the rapid adoption of its Pay in 6 Weeks plans, Zilch announced the launch of its Pay in 3 Months program earlier this year for purchases over $95.

Carving Out a Niche

Zilch’s product line is one of the reasons it has been able to carve out a niche in an industry where larger companies have faltered. Apple recently announced it was shutting down its BNPL service, Apple Pay Later, partly due to increased competition from companies like Affirm, Klarna, and Zilch.

Another reason Zilch has gained traction is its multiple revenue streams. The fintech earns revenue through both interchange fees and commissions paid by retailers to appear in its app.

The post BNPL Contender Zilch Gets $125 Million Boost appeared first on PaymentsJournal.

Apple will no longer offer Apple Pay Later, its buy now, pay later service launched last fall, which allowed Apple Pay users to split transactions of $1,000 or less into four interest-free payments.

The announcement follows news that Apple will integrate BNPL programs from Affirm and others into Apple Pay in its upcoming fall iOS update. The tech giant made this move away partly due to Apple Pay Later’s limited scope; the BNPL service was only available to U.S. users.

Like a Credit Card

It’s not immediately clear if Apple shut down its BNPL operations because of recent actions by the Consumer Financial Protection Bureau. The CFPB recently issued an interpretive rule stating that BNPL services should be regulated like credit cards. This means providers must issue monthly statements, disclose fees, and handle disputes like a credit card company.

Another reason Apple likely moved away from BNPL is the company was handling all of Apple Pay Later’s financial operations in-house. It was conducting credit checks and loan decisions through a wholly-owned subsidiary.

Ceding Ground

Apple Pay Later put Apple in direct competition with BNPL-first companies like Klarna and Affirm, which offer a much wider array of loans. Apple’s shift away from BNPL is one of the rare times the company has ceded ground in its fintech aspirations.

In its upcoming update, in addition to leveraging BNPL plans from other providers, Apple will also integrate Google Chrome and Windows support into Apple Pay to expand its customer base beyond iPhone users.

Though the issuance of new Apple Pay Later loans will be discontinued immediately, users with open loans will still have access to the program until their loans are paid off.

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Affirm announced its newest buy now, pay later (BNPL) options, giving consumers more flexibility in how they pay for their purchases.

Pay in 2 allows customers to split a purchase into two interest-free payments, while Pay in 30 lets users pay for a purchase, with no interest, within 30 days.

The company says the short-term alternatives were offered partly because 80% of U.S. ecommerce transactions are under $150. The options are also designed to capitalize on the fact that around 30% of non-farm workers get paid on a biweekly or monthly basis. This gives Affirm’s 16.4 million U.S. users another option besides the company’s traditional Pay in 4 model.

“Providing greater choice and flexibility is key to meeting our consumers where they are,” said Vishal Kapoor, Head of Product at Affirm in a prepared statement. “Adding options like Pay in 2 and Pay in 30 allows us to better meet consumers’ individual preferences, enabling them to pay for purchases large or small with more options that works best for their budgets.”

Credit Card Alternative

There have been concerns about the future of buy now, pay later after the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule stating BNPL providers must conform to the same regulations as credit card companies.

This includes providing customers with monthly statements and transparently reporting any interest or fees. The ruling was significant because BNPL companies have touted themselves as an alternative to credit cards.

In response to the rule, Affirm’s leadership noted that they’re “aligned with responsibly extending access to credit as we do not charge late or hidden fees.” What’s more, the company said it urges other BNPL providers “to live up to the industry’s promise to provide consumers with a more flexible and transparent alternative to other payment options.”

An Increasing Footprint

Though the BNPL sector faced some market pressure following the ruling, there aren’t likely to be long-term ramifications. In fact, Affirm just increased its footprint with a recent deal with Sensepass. The Sensepass platform currently integrates with 100 wallets, including Venmo and WeChat Pay.

Affirm’s BNPL products are now offered by more than 292,000 U.S. merchants at the point-of-sale, including Walmart, Amazon, Target, and Dick’s Sporting Goods. In early tests, the company’s Pay in 2 and Pay in 30 options showed increased cart conversions, and will be rolled out to Affirm’s retail partners in the next few months.

The post Affirm’s New BNPL Options Coincide with Payday appeared first on PaymentsJournal.

After a multi-year investigation into the market practices of buy now, pay later (BNPL) lenders, the Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule subjecting the industry to regulations currently governing credit card products. More specifically, the interpretive rule would subject BNPL lenders to subpart B of Regulation Z, a section that involves the requirement of periodic billing statements, disputes, and returns.

Understanding Periodic Billing Statements

Anyone who owns a credit card receives a billing statement not only because the lender wants to remind you to pay, but because it is also a federal requirement. Card issuers are required to provide a statement at least 21 days before a payment due date. Statements are a consumer’s ledger, showing how much they owe, recent transactions, due dates, and interest fees.

With the new ruling, BNPL vendors will be required to provide a periodic statement much in the same way of their credit card counterparts. Statements provide another method of communication with the consumer outside of the app itself and serve as an important reminder of a consumer’s history with a lender.

Disputes and Returns

Major BNPL vendors such as Klarna and Affirm already offer methods for reporting a return and for disputes. Users must first work with the merchant and then go to the lender if the issue remains unresolved. The current process is currently regulated by best business practices—what consumer would use a payment method that doesn’t have a return or dispute process?

Several BNPL firms released statements after the news broke. In a statement, Affirm noted: “We are encouraged that the CFPB is promoting consistent industry standards, many of which already reflect how Affirm operates, to provide greater choice and transparency for consumers. Affirm’s success is aligned with responsibly extending access to credit as we do not charge late or hidden fees. We underwrite every transaction, provide consistent and transparent disclosures, and offer dispute and error resolution assistance. We urge other companies that offer buy now, pay later products to live up to the industry’s promise to provide consumers with a more flexible and transparent alternative to other payment options. We are committed to continuing to engage with the CFPB as we constantly improve the experience and value we deliver to consumers, as well as our practices.”

What’s more, in their recently released statement, Klarna said: “We have long supported and called for bespoke, proportionate BNPL regulation that fits the unique nature of the products, fosters innovation and ensures consumer protection for years. It is baffling that the CFPB fails to acknowledge the fundamental differences between BNPL and credit cards in their guidance and this announcement does nothing to address the $1.15 trillion in credit card debt.”

The new interpretive rule now makes these a federal requirement ensuring consumers have protections like they do when they use their credit cards. Such protections may encourage more usage of BNPL.

Expect More Regulation

We had a sense that more regulations were coming to the BNPL industry, particularly when the CFPB began studying the market practices of BNPL lenders. BNPL billed itself as a challenger product to the traditional credit card market and has been widely successful with that positioning. However, we are now seeing lenders launch new products in the U.S. market that seem at odds with their initial brand — physical cards. Both Affirm and Klarna have launched card products to try to attract consumers into their payment ecosystem and to use them for in-store purchases. In many ways these products are attractive for higher volume, small ticket items such as everyday spend items. BNPL has grown to be more than just a financing tool for one-time large purchases.

As BNPL popularity continues to grow, we expect the product to become more regulated. BNPL lenders already seem prepared to adjust to this current interpretive ruling and are generally already providing the required services. For the future, lenders should look no further than their credit card relatives to see what could be coming next.

The post CFPB Issues New Interpretive Rule for BNPL Lenders appeared first on PaymentsJournal.

Klarna is continuing to incorporate artificial intelligence into various aspects of its business, with recent reports indicating that a majority of its employees are utilizing the technology to enhance productivity, aiming to extend these benefits to its customers.

According to Klarna, 90% of its employees use generative AI on a daily basis, including ChatGPT and the company’s internal virtual assistant, Kiki. In fact, 85% of employees regularly interact with Kiki, asking the virtual assistant 2,000 queries per day.

The high level of adaptive internal communication has boosted productivity, and the company is optimistic about transferring this performance to its customers. Just one month after the January launch of its customer-facing AI Assistant, Klarna reported handling 2.3 million, or about 66%, of the company’s customer service chats.

Personal Financial Assistant

Klarna hopes to leverage AI Assistant to keep BNPL customers on track. The company envisions the app as a “personal financial assistant” capable of providing users with real-time data on their payment schedules and outstanding balances.

While one of the immediate use cases for AI Assistant will be to prevent customers from missing their payments, the app will also be able to settle disputes, issue refunds, and perform invoice reconciliation.

Informed and Steady Stewardship

The company estimates that its virtual assistants can do the work of 700 full-time agents, which may raise concerns regarding AI’s impact on the workforce. Like many tech companies, Klarna laid of 10% of its employees in 2022.

In conjunction with an optimized workforce, Klarna estimates that its AI immersion will save it $40 million this year. It also attributes its switch to profitability in late 2023 to technology. While the fintech has formed notable recent partnerships to keep it at the forefront of the financial industry, Klarna is still betting on AI to be a gamechanger.

Sebastian Siemiatkowski, Co-Founder and CEO of Klarna said in February: “We are incredibly excited about this launch, but it also underscores the profound impact on society that AI will have. We want to reemphasize and encourage society and politicians to consider this carefully and believe a considerate, informed and steady stewardship will be critical to navigate through this transformation of our societies.”

The post Klarna’s AI Immersion Boosts BNPL User Tracking, Employee Productivity appeared first on PaymentsJournal.

Buy now, pay later (BNPL), especially popular with younger users, has seen significant traction. One of the biggest names in the space is Klarna, whose platform allows users to split purchases into installment plans at the point of sale, often with lower fees than credit cards.

Following the news that Klarna inked a massive deal with Uber to make the payments platform available to ride-share customers in the U.S., Germany, and Sweden, the natural assumption might be that Klarna would include BNPL functionality for Uber users.

Instead, Klarna will be offering its Pay Now functionality to Uber customers. With Pay Now, Klarna users can make one-click full payments and earn rewards through the app. This feature boasts a solid base of over 25 million users, with 70% of Gen Z and Millennials having used it.

“We view this as a big win for both Uber and Klarna,” said Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research. “Uber is providing its customers with more ways to pay, and Klarna is getting access to Uber’s 150 million users. Klarna is also expanding its presence as more than just a BNPL app.”

A Global Force

While the Uber deal doesn’t offer traditional BNPL services, users in Sweden and Germany will have the option to consolidate all purchases and pay them off from their salary at the end of the month.

The Uber deal isn’t the only recent development for Klarna. The company recently expanded its platform to support open banking in the UK. This move aims, in part, to cut Visa and Mastercard out of the payments loop for Klarna’s 18 million UK users.

In the U.S., the company launched Klarna Plus, a $7.99-a-month subscription service designed to foster app loyalty. The subscription provides users with discounts on certain brands, increased rewards points, and is designed to jumpstart Klarna’s recurring revenue.

A Soaring Valuation

While the financial details of the Uber deal remain undisclosed, it marks another high-profile partnership for the BNPL giant. If the company maintains its trajectory towards a Q3 IPO, it appears poised to be a significant player in the space. Initial thoughts from analysts suggest the company’s valuation could be in the $20 billion range.

In a prepared statement, Klarna CEO Sebastian Siemiatkowski wrote, “consumers can Pay Now quickly and securely in full, which already accounts for over one-third of Klarna’s global volumes, and more easily manage their finances in one place.”

The post No BNPL in Klarna, Uber Mega-Deal appeared first on PaymentsJournal.

Walmart has introduced buy now, pay later loans through One, its majority-owned fintech startup. The move puts Walmart in competition with a similar offering from Affirm.

Last year, Walmart announced its plan to offer BNPL services for self-checkout customers through Affirm at 4,500 of its U.S. stores. Since 2019, Affirm has been the exclusive provider of installment loans for Walmart customers. 

Currently, Walmart shoppers at select stores have the option to obtain BNPL loans from either provider for purchases starting at around $100, with annual interest rates ranging from 10% to 36%. These loans are applicable on various items such as electronics, jewelry, and power tools, but not groceries, alcohol, and weapons.

The move makes sense from a cost-saving standpoint, analysts say.

“The pitch that BNPL vendors make to merchants is that it attracts new customers and encourages them to spend more,” said Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research. “The partnership with Affirm likely boosted sales for Walmart. But Walmart was having to pay between 2% to 8% processing costs to Affirm. Launching their own platform allows them to save significantly on processing and capture that extra spend from consumers. Affirm helped capture extra spend in the interim.” 

The Growth of One

It’s been a rapid rise for One, stemming from a fintech startup that Walmart launched in January 2021 in collaboration with Ribbit Capital. [RK1] Ribbit, interestingly, was also an investor in Affirm.

At the time, Walmart said that One would “provide users with an all-in-one financial services app to holistically manage their finances in one place.” One rolled out checking accounts for Walmart employees and a handful of online customers in September 2022. Its savings accounts began offering a 5% interest rate, well above the national average, as a strategy to  attract more business. The addition of BNPL to One’s offerings will further drive customers into Walmart’s financial ecosystem, presenting opportunities for cross-selling other products.

CNBC has reported that Affirm will continue to be available as a payment option at Walmart, but One is expected to receive much more promotion at the point-of-sale.

For its part, Affirm is used to coexisting alongside other BNPL lenders, so it is unlikely that the company will leave its partnership with Walmart. It has also begun exploring life beyond retail, offering BNPL loans for elective medical procedures.

The post Walmart Puts Its Own Stamp on BNPL appeared first on PaymentsJournal.

Should buy now, pay later loans impact your credit score? That’s been an important question ever since Apple announced in February that it would begin reporting loans from its Apple Pay Later service to Experian.

Many observers thought that might be a game-changer for the BNPL industry. However, as the New York Times is reporting, there hasn’t been any follow-through. None of the other BNPL services have begun reporting their loans to credit bureaus.

Two years ago, Experian created a Buy Now Pay Later Bureau, where the loans would be included on consumers’ credit reports but not incorporated into the credit-scoring models. According to its site, “the information won’t be factored into existing traditional credit scores at this time but may in the future as new credit scoring models are developed.” FICO and VantageScore, the two methodologies that produce credit scores, were expected to adjust their models as they saw fit, but that has not happened yet.

Uncharted Territory

The BNPL industry is still grappling with the communication issues behind that reporting, and as Danner pointed out, this isn’t helpful for consumers. 

“The marketing strategy behind BNPL vendors has always been averse to the traditional credit scoring mode,” said Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research. “They position themselves as challengers to the credit card, which allows them access to a wider audience that may not qualify for other unsecured lending products. If other vendors begin to follow Apple, the bureaus will need to develop separate BNPL scoring products to address high-volume, short-term loans.”

The credit scoring industry is mature enough to have accommodated many of the complications around credit card borrowing. If debts were incurred on multiple credit cards, the scoring bureaus have access to that data, so they can account for the entirety of the borrowing.

Lack of Communication

The BNPL industry is still grappling with the communication issues behind that reporting, and as Danner pointed out, this isn’t helpful for consumers. 

“It has been a real problem because consumers are taking out loans from different BNPL vendors, which in the industry is known as ‘loan stacking,’” said Danner. “There is no centralized credit data to prevent them from doing so, and they get into trouble.

“If I have an account with Affirm, they will only let me reasonably take out a loan or two before I hit their own internal limits,” he said. “They have their own lending and risk models. However, if I have accounts with both Affirm and Klarna, I can max out my Affirm and max out my Klarna. There is no talking in between vendors.” 

The post Credit Bureaus Still Can’t Figure out BNPL appeared first on PaymentsJournal.