Does Buy Now, Pay Later Threaten Credit Card Issuers?

Capital One recently announced that it would ban the use of its credit cards to fund buy-now-pay-later transactions. According to a Capital One spokesperson, BNPL purchases “can be risky for customers and the banks that serve them.”

In this article, I will examine Capital One’s claim.

How It Works

Buy now, pay later allows approved customers — online or in-store — to defer the payment for goods and services. BNPL providers pay the merchant in full immediately, minus a service fee. The customer pays the BNPL provider in agreed-upon installments charged to the customer’s credit card.

BNPL is an easier, more transparent way for many consumers to consummate a purchase. Credit cards are plagued by hidden fees, compounding interest, and poorly-explained penalties. BNPL is different because fees, rates, and payment schedules are displayed clearly and explained in simple, customer-friendly terms. Importantly, there are no interest charges for the customer.

For the merchant, accepting BNPL is similar to credit cards. Merchants pay a fee to the BNPL provider of 4 to 8 percent, typically. The provider settles directly with the merchant. The merchant receives the proceeds of the sale regardless of the number of payments made by the customer.

BNPL fees (4 to 8 percent) are much higher than credit cards. However, unlike credit cards, the BNPL provider — not the merchant — carries the risk of fraud and chargebacks. In other words, when it completes a BNPL sale, the merchant can be certain that it will receive the payment even if the transaction is fraudulent.

BNPL Too Risky?

BNPL is apparently too risky for Capital One. Let’s analyze.

Capital One has roughly 62 million credit card accounts under its control — among the largest in the U.S. As an issuer, Capital One earns revenue by charging merchants an interchange fee and by charging consumers interest and fees on their credit card debt.

Issuers assume the risk of cardholders not paying the balance. Buy now, pay later increases that risk because issuers cannot profit from interest and late fees. (Issuers also face competitive pressure, such as low-free debit cards, reloadable wallets, gift cards, and crypto-currencies.)

Capital One’s statement that BNPL “can be risky for customers and the banks that serve them” is true in a sense. Certainly BNPL is an easy way for consumers to assume debt quickly. All excessive personal debt — credit card, BNPL, home mortgage — is dangerous. However, there’s little difference to consumers between credit cards and BNPL other than the former accrues interest and fees on unpaid balances.

What’s unspoken in Capital One’s announcement is that it collects only interchange fees from merchants when consumers make BNPL purchases. But when consumers take on credit card debt directly, Capital One also collects interest and late fees.

Protecting Profits

In short, Capital One makes less money from BNPL than from direct credit card purchases. By barring its credit cards from funding BNPL transactions, Capital One is protecting profits.