How Card Issuers Can Make BNPL Work
Goldman Buys GreenSky, CFPB Warns on ISAs, Another BAML Overdraft Alternative
Hey all, Jason here.
With the last few days of summer slipping away, you know what that means: pumpkin spice latte season! (Just kidding, that started a month ago.)
If there is one thing I am looking forward to this fall, it’s the return of in-person conferences — starting with Money2020 Europe this week. Hosted in Amsterdam, how could I not attend? If you’re going and want to meet up, give me a shout!
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Revolut, Monzo, Curve, Chase & Capital One Buy Now, Pay Later News
No, it’s not your imagination. Lately, it seems like there is major BNPL-related news nearly every day. In just the last couple weeks, we’ve seen announcements from…
CEO Nikolay Storonsky teased a future BNPL offering in an interview with UK paper the Evening Standard, saying in an interview (emphasis added):
“Simply a button which you switch on and then your card becomes a buy now pay later product. Instead of paying upfront everything, you pay a third and then in two weeks time we charge you a third and then another third.”
At this point, it’s unclear exactly what the terms or the UX of the product would be. Revolut has said the BNPL offering is in early development, and that it plans to begin trialling the offering in European markets next year.
Meanwhile, the UK-only Revolut rival beta launched its own BNPL offering, Monzo Flex.
The feature requires an upfront application that determines a user’s credit limit. Users then have the option of using the Monzo app to convert past purchases over £30 into a no-cost “pay in 4” plan or longer-term plans at 19% APR.
With an upfront application, credit limit, and 19% APR, Monzo’s BNPL feature really starts to resemble that much maligned product it intends to replace, doesn’t it?
The same day Monzo announced its BNPL feature, UK all-in-one card startup Curve revealed its own BNPL offering — also called Flex (imagine the embarrassment!)
The feature lets users “go back in time” by selecting a payment they’ve made up to 12 months ago and converting it into an installment plan, though they’ll need to pay an average of 13% APR for the privilege. Like Monzo Flex, Curve Flex is currently waitlist-only.
On the other side of the pond, Marianne Lake, co-CEO of Chase’s consumer bank and rumored potential successor to Jamie Dimon, dropped hints about America’s largest bank’s plans for its own version of buy now, pay later.
At last week’s Barclays financial services conference, Lake said (emphasis added):
“Customers are increasingly looking for flexibility in how they pay. Do we feel like we need to innovate in the lending space to continue to provide the products and services that our customers want? Yes, we do. We may not be a first mover in buy now, pay later, but we have the full suite of payment lending and commerce capabilities. Over the longer term, I think that's the bigger picture.”
Chase has developed features to try to entice users to tap unused credit lines of cards they already hold: My Chase Loan, which lets users take an installment-style loan at a lower APR against a credit line they already hold; and My Chase Plan, which allows users to select a credit card transaction and convert it into installments after the fact.
Still, compared to the simplicity (and zero cost) of most pay-in-4 offerings, it’s unsurprising Chase’s features haven’t gotten much traction.
Credit card behemoth Capital One is also planning to test BNPL features with merchants it already has relationships with.
At the same Barclays conference, CEO Richard Fairbank said the company will use learnings from the tests to better understand the products and how they can work for both merchants and consumers.
Capital One’s decision to test BNPL-style financing is all the more notable, given the company’s decision late last year to ban BNPL repayments linked to its credit cards.
Challenges and Opportunities for Card Issuers Adding BNPL Features
With the explosive growth — and high valuations — of BNPL-first companies like Klarna and Afterpay, it should be no surprise banks, credit card companies, and fintechs are trying to capture some of that magic.
But offering a BNPL feature linked to an existing debit- or credit-card account comes with challenges. Featured placement at checkout and the high merchant discount rate companies like Klarna charge is contingent on building direct merchant relationships; without those, a card transaction reverts to standard interchange (which, in the UK and EU, can be very low) and interest payments (if offering longer term, interest-bearing financing). The business model, economics, capital requirements, and UX will vary based on the core product/account that is attempting to add BNPL as a feature.
Perhaps most importantly, none of the card-based BNPL features have yet cracked the most important part: a near-seamless user journey. BNPL’s popularity is grounded in being frictionless; much like the experience of paying for an Uber, you barely notice it:
A checkout experience opting in to BNPL is essentially the same as paying without it: name, address, card information, and agree to terms and conditions.
Contrast that to Monzo’s new BNPL feature, which requires applying for approval in advance and opening the app to convert a purchase into BNPL after the fact.
How can card-first products, like debit and credit cards, get as close as possible to the frictionless experience of BNPL leaders (and make the economics work)? Leverage the “AI” and “machine learning” we so often hear about to reduce the cognitive load on users.
By examining transaction data across all of its users, specifically the merchants and purchase amounts, it should be possible to predict the types of transactions users are more or less likely to want to use BNPL for.
Then further personalize this with a specific user’s BNPL usage history — and account transaction history and balance — to selectively present BNPL as an option when the user is most likely to want or need it.
Finally, do this in real-time as a push alert, instead of forcing the user to go into their banking app at some time after the transaction and “converting” it into a payment plan (with users opting in to this feature and the push alerts when they sign up for the account).
How likely is a user to look at a transaction they made a week ago — let alone 12 months ago — and decide to convert it into BNPL?
The BNPL options presented can be customized to the user and transaction, and can include shorter 0% interest “split pay” options (akin to the grace period on a credit card) and longer interest-bearing payment plans.
While in this approach, card issuers are limited to standard card interchange for the transactions, rather than the merchant discount rates as high as 7% for standalone BNPL providers, the data and collections ability from holding the user’s primary spending or credit account should enable better risk management, eliminating fraud and limiting credit losses.
(Ms. Lake, Mr. Storonsky: I’ll be in NYC at CB Insights Future of Fintech Conference in a couple weeks; buy me a coffee, and I’m happy to share more free product ideas!)
Goldman Sachs Buys Home Improvement Lender GreenSky for $2.2 Billion
Goldman Sachs announced last week it will acquire point-of-sale lender GreenSky. Much like Goldman’s Marcus unit, GreenSky offers unsecured personal loans.
While Marcus has focused on digital customer acquisition and lacks any retail footprint, GreenSky’s differentiation in the crowded personal lending market has been its network of service providers and retailers that offer its loans: contractors, HVAC technicians, plumbers, appliance and hardware retailers (including Home Depot), doctors, dentists, plastic surgeons, and so on.
The deal makes sense for Goldman. It positioned Marcus’ personal loans as an option for big ticket home improvement purchases as far back as 2018, but lacked the network of service providers GreenSky painstakingly built.
With GreenSky, Goldman is acquiring a complementary distribution channel for a product it knows well. Coupled with the firm’s large balance sheet, low cost of funds, and strong credit risk management capabilities, Goldman can create more value with GreenSky’s assets than the company could as a standalone non-bank lender.
The price doesn’t hurt either. GreenSky has seen its market cap slip from nearly $5 billion shortly after its IPO in 2018 to less than $1.5 billion before the deal was announced. Goldman will pay about $12 a share to acquire the lender, for a purchase price of approximately $2.2 billion.
GreenSky doesn’t come without some baggage; the lender entered into a consent order with the CFPB this July for issuing loans in consumers’ names without their knowledge. The order resulted in GreenSky refunding or canceling $9 million worth of loans and paying a $2.5 million penalty.
The acquisition itself has a bit of a cloud over it, with allegations of insider trading tied to suspicious options activity in the weeks leading up to the deal’s announcement.
CFPB Warns on Income Share Agreements
Income share agreements (ISAs) aren’t new; former President Bill Clinton had one when he attended Yale — in the 1970s. In an ISA, instead of taking a loan with a defined interest rate and payment schedule, students agree to repay a percent of their income for a fixed period of time; specific parameters of ISA programs can vary widely.
Most commonly used to finance tuition and education-related expenses, ISAs started to receive renewed attention a few years back, primarily from coding bootcamps.
Because the bootcamp programs aren’t part of accredited universities (or, in some cases, even registered as required by state law), students can’t qualify for traditional public or private student loans. With sticker prices reaching $30,000, such courses are out of reach of most students without some type of financing.
Enter the ISA. The previously obscure financing product has become deeply intertwined with tech bootcamps, with numerous programs springing up that rely on them. The structure of ISAs appeals to the oft-repeated Silicon Valley mantra of “aligning incentives,” while enabling bootcamps to make dubious marketing claims such as “pay no tuition until you’re hired.” Some bootcamps have compared ISAs favorably to standard student loans by portraying that the product is “not a loan” or “not debt.”
The rapid growth in ISAs hasn’t gone without notice by regulators. California’s financial regulator recently reached an agreement with ISA servicer Meratas to treat ISAs as student loans for the purpose of the California Student Loan Servicing Act.
And earlier this month, Better Future Forward, an ISA issuer, entered into a consent order with the CFPB stemming from what the CFPB characterized as misrepresenting “its product and failing to comply with federal consumer financial law that governs private student loans.”
In a press release announcing the order, Acting CFPB Director Dave Uejio said (emphasis added):
“The ISA industry has tried to evade oversight by claiming that its products are not loans. But regardless of the name on the label, these products are credit and have to comply with federal consumer protections. The ISA industry cannot pretend that core consumer protection laws do not apply to their products.”
The characterization of ISAs as “loans” that require compliance with federal consumer protections, such as TILA, Reg Z, and the CFPA, may have profound implications on the product category — and the bootcamps that rely on them.
The consent order makes clear the CFPB views ISAs as a type of loan, but what remains unclear is how ISA originators should comply with various regulations; how can you calculate an APR, when a student’s payment amounts and schedule are unknown?
While the CFPB’s case against Better Future Forward was specifically focused on ISAs, one can imagine other novel, increasingly popular, and (currently) lightly regulated debt products could be in for similar scrutiny: ‘no fee’ cash advances from fintechs like Dave and MoneyLion, and, yes, buy now pay later products.
Bank of America Offers Another “Meh” Overdraft Prevention Feature
Bank of America, which collected about $2.4 billion in service fees from its retail customers in 2020, the most of any US bank, is adding another feature to help avoid incurring overdraft fees.
Bank of America has rolled out a number of products in recent years designed to help its customers avoid overdraft fees, including a $4.95 per month SafeBalance Banking account (doesn’t permit overdrafts) and Balance Assist, a small-dollar loan product.
The newest feature, Balance Connect, enables customers to link their checking account with up to 5 other Bank of America accounts to automatically transfer funds when needed to prevent an overdraft — a courtesy for which they will be charged $12.
A $12 transfer fee is certainly lower than the $35 per item overdraft fee customers would otherwise be charged, but it speaks to the bank’s dated mindset of nickel-and-diming its customers, which stands in stark contrast to a growing group of neobanks that emphasize customer-centricity, transparency, and low or no fees.
GrowthHackers Conference: October 25-29
I want to thank the organizers of the GrowthHackers Conference for reaching out to invite me to present at the event. Unfortunately, I can’t participate, as I’ll be attending Money2020 US at the same time, but, if you’re interested in growth marketing, the event is definitely worth checking out!
Other Good Reads This Week
Banking the Poor (Net Interest)
The beguiling promise of decentralised finance (The Economist)
Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later.’ (Wall Street Journal)
OpenSea NFT platform insider trading rumors are true (CNBC)
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