Credit cards seek a role in preventing buy now/pay later defaults

credit cards seek a role in preventing buy now pay later defaults

Sumary of Credit cards seek a role in preventing buy now/pay later defaults:

  • New research from Mercator Advisory Group spotlights a small but expanding number of losses in the BNPL sector pointing to risks that could become more significant in the post-pandemic environment, creating fresh opportunities for traditional card issuers..
  • BNPL lenders’ risks are blunted by their focus on smaller loan amounts repaid in installments over about two months, but there is still potential for substantial losses to pile up when write-offs occur on a broad scale, said Brian Riley, Mercator’s director of credit advisory service..
  • “Short-term contracts mean there won’t be a massive crash if losses in the installment loan sector suddenly mount, but eventually there will be a bunch of accounts sent out to third-party collection agencies,”.
  • This trend undermines the perceived control merchants retain in BNPL transactions, despite paying installment lenders a higher financing fee of 3% to 6% versus credit card interchange of 1% to 4%..
  • “The BNPL interest-free offering might work when rates are suppressed, but increases will disrupt the model,”.
  • If installment loan losses begin to spike, credit card spending—which declined during the pandemic as consumers pulled back on discretionary e-commerce purchases to protect their credit lines—could rally, Riley suggested..
  • Credit card issuers looking to pick up any slack in the BNPL boom should prepare by educating consumers on how to adapt a payment card to an existing BNPL loan, or refinance recent BNPL purchases with a credit card, Riley said..
  • American Express and Citi already have staked out their positions by offering post-purchase BNPL options that tack on an installment repayment plan to individual purchases..
  • Other mainstream issuers may follow, though Capital One last year said it plans to eschew installment loans due to borrower and underwriting risk concerns..
  • New York-based Splitit is one provider already using a hybrid model that targets BNPL buyers with minimal risk..
  • Splitit BNPL service ties purchases directly to a traditional credit card and the company is making changes to further streamline its instant loan approvals and refine its merchant mix for the post-pandemic economy..
  • Splitit instant financing tool puts a hold on a consumer credit card for the total cost of the purchase, and buyers choose the number of payments they want to make over terms ranging from three months to two years, with no interest due as long as payments are made on time….

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