April 2021

Taking all the Credit:

Success for Buy Now,
Pay Later is in the Cards
 Installments go back a long way. The basic
concept was known in its heyday as layaway or
lay-by. Stores laid products aside for consumers
until they paid off the balance due. Over time,
credit cards largely ended the practice in many
countries by letting retailers take payments in full
and consumers take purchases home immediately.

Financial technology companies (fintechs)

offering Buy Now, Pay Later (BNPL) are now
bringing installments back.

BNPL has many benefits. Consumers enjoy

favorable and clear repayment terms, the feeling
of using their own money rather than borrowing,
and easy signup and use. Retailers appreciate
higher consumer spend and the additional
The perspectives of issuers marketing provided by BNPL partners. And issuing
and fintechs on BNPL are quite banks (issuers) benefit from consumers currently
using debit cards for BNPL repayments and the
different. They shouldn’t be. more manageable debt associated with repaying
individual transactions rather than open credit
lines.

But BNPL isn’t yet a win-win partnership

between issuers and fintechs. Issuers don’t
benefit when BNPL fintechs take control of the
customer relationship. They’re also aware that
account-to-account payments are poised to
displace repayments on debit cards. Meanwhile,
fintechs are competing down their margins in an
increasingly commoditized BNPL sector.

The perspectives of issuers and fintechs on BNPL

are quite different. They shouldn’t be. This report
addresses the contention between issuers and
fintechs by considering their perspectives in the
context of BNPL’s recent growth.

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 2
The Emergence and Significance of BNPL
One might assume that credit cards delivered
a near fatal blow to layaway globally. Yet,
installments thrive when credit is restricted. In
some countries, card-based installments flourish;
acquiring banks agree en masse to advance funds
to retailers and then collect from consumers’ issuing
banks over an agreed timeline.

Elsewhere, fintechs capitalized on an opportunity

to offer installments as a simple payment option
under the moniker of BNPL. Covid-19 hastened
uptake by pushing more consumers online Covid-19 hastened uptake
and driving an economic downturn that made
consumers focus on cash flow management.
by pushing more consumers
online and driving an economic
Typically, BNPL fintechs establish arrangements downturn that made consumers
with individual retailers. These fintechs settle
transactions with retailers through automated focus on cash flow management.
clearing house (ACH) batch payments and charge
the retailers a fee to offset the cost of funds for an
interest-free installment offer to the consumer.

Still, cards aren’t left out; they’re just relocated

to the backend. Repayments to the BNPL fintech
are overwhelmingly made with debit cards, which
are preferred to credit cards since the BNPL value
proposition is an alternative to credit (see figure 1).

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 3
The Emergence and Significance of BNPL
The success of the BNPL model is taking it proprietary research. Elsewhere across Asia, 68%
mainstream. For example, almost one in three of consumers ages 20–30 would consider paying
Australians use BNPL, according to the Australian with installments.2 The sector is expected to
Securities & Investments Commission,1 and the process US$800 billion globally by 2023, with the
Australian BNPL market is expected to grow 31% US as its largest market.3
over the next five years, according to Mastercard

Payment

Consumer Agreement Fintech Agreement Retailer

Repayment
Issuer Acquirer

Figure 1: A Typical BNPL Model

1
“Buy Now Pay Later: An Industry Update.” Australian Securities & Investment Commission (Report 672), November 2020.
2
Research commissioned by Mastercard in Australia, mainland China, Hong Kong, India, Singapore and Thailand.
3
Deutsche Bank cited in “Pay Later, Not Never—Exclusive Interview with Mastercard” (The Paypers, January 20, 2021) and “BNPL
Trending in Fintech” (Payments, Processors, and IT Services, October 4, 2020).

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 4
The Fintech Perspective

Fintechs offering BNPL make money by Consolidation will allow for further reductions in
negotiating agreements with retailers. The service fees by bringing separate BNPL networks
retailers pay higher service fees to the fintechs to together to create economies of scale. But the
bring extra revenue. And the fintechs operate as absence of the open loop acceptance enjoyed
affiliate marketers to bring new consumers and by cards on payment networks—as opposed to
increase average order value. It’s a compelling multiple closed loop connections with individual
proposition for retailers when 43% of Asian retailers—remains a challenge.
consumers across all ages would be willing
to increase their spend by 15% if paying with The fintechs aren’t oblivious to their own
installments.4 plight. A virtual card number generated for a
specific purchase can allow consumers to use
The problem is that BNPL relies on the negotiation BNPL wherever card payments are accepted.
of individual relationships with retailers. This It’s a start. But an open-loop approach is not
quickly devolves into a landgrab based on who can always sustainable without closed-loop funding
sign up the most retailers, and consumers end up arrangements negotiated with individual retailers
frustrated having to use different BNPL providers (see figure 2).
at different retailers. Ultimately, fintechs end
up chasing margins as they reduce service fees The approach amounts to a flanking strategy
in a quest to capture the most retailers. As they so that retailers accepting open-loop BNPL via
exhaust opportunities at home, it’s little wonder cards will come to see the value in negotiating
that the fintechs are aggressively expanding arrangements with fintechs. Really, it’s just
worldwide into untapped markets and industry a more sophisticated—and riskier—form of
verticals. landgrab.

Ultimately, fintechs end up chasing

margins as they reduce service fees in
a quest to capture the most retailers.

4
Research commissioned by Mastercard in Australia, mainland China, Hong Kong, India, Singapore and Thailand.

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 5
The Fintech Perspective

Payment
Issuer Acquirer

Consumer Agreement Fintech Agreement Retailer

Repayment

Issuer Acquirer

Figure 2: A BNPL Model on a Card Network

The Issuer Perspective

The benefits to issuers of having BNPL facilitates real-time payments through payment
repayments made on debit cards is offset by initiation services—will allow fintechs to more
the concern that mainstream use of BNPL could efficiently adjudicate credit risk through account
extend debit purchasing power in a way that information services.
cannibalizes credit card usage.
Still, issuers aren’t simply sitting in a house of
An additional consideration is the growth of cards. Fintechs may be faster in responding
faster payments and real-time payments. to consumer demands, but issuers are trusted
These will allow fintechs to promote account- brands with existing consumer relationships.
to-account transfers for repayments instead of Issuers can also benefit from the higher fees that
debit cards. Issuers can benefit from account-to- fintechs have shown retailers to be willing to pay
account transfers in other ways, but it requires in exchange for the right value proposition. And in
a reprioritization of revenue sources. In addition, some respects, the issuers are better positioned
open banking—which in many regions further than the fintechs to offer that value. In the US,

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 6
The Issuer Perspective

three-quarters of consumers would prefer to pay

with installments on their existing cards.5 In Asia,
72% of consumers would consider using their
existing banks for installments, compared with
53% being willing to opt for fintechs.6

Issuers already offer a form of installments via

card payments. But the ability to choose to pay
with installments pre-sale and post-sale doesn’t
compare with the point-of-sale BNPL approach.
BNPL enables consumers to justify a relatively
small purchase at the time of transaction; it isn’t
about planning a significant purchase in advance
or refinancing it after the fact. And although
The ability to choose to pay with
pre-sale and post-sale installments are open loop installments pre-sale and post-sale
because they don’t rely on individual agreements doesn’t compare with the point-of-
with retailers, most expect consumers to pay
for the service. This undermines the value of an
sale BNPL approach.
interest-free installment.

A better comparison comes from many issuers

in Southeast Asia. They often already have
agreements in place with retailers to offer
installments at the point of sale through card
payments. The issuers then collect additional
funds at specified dates from retailers to cover
the cost of offering installments. Their approach
is similar to how fintechs offer BNPL; their
problems around securing individual retailer
agreements are similar too.

5
“Mastercard Expands Installments Through Global Partnerships, Empowers More Consumers to Choose When to Pay with Pre-Sale,
Point of Sale and Post-Sale Payment Options.” Mastercard, September 2020.
6
Research commissioned by Mastercard in Australia, mainland China, Hong Kong, India, Singapore and Thailand.

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 7
Playing the Cards Differently: Network Installments

There’s nothing preventing issuers worldwide the point of sale using their existing payment
from taking a cue from their Southeast Asian cards or bank accounts. There’s no need to sign
counterparts and competing with fintechs in a up for a new service and no impact on existing
BNPL landgrab. It would represent the typical authorization, clearing or settlement processes.
jockeying between banks and fintechs as brand
recognition and existing customer relationships Retailers and manufacturers have the flexibility
square off against agile technology and customer to opt in to pay the cost of funds for specific
responsiveness. But price competition benefits transactions in exchange for an offer of interest-
no one. free installments from issuers or fintechs. Gone
are the days of retailers haggling with multiple
Enter network installments. It brings fintechs BNPL providers over variable discount rates and
and issuers together by combining installment affiliate marketing services (see figure 3).
economics with open-loop scale.

The model runs on existing payment networks

and includes cross-border transactions. It provides Network installments brings fintechs
a single access point, so fintechs and issuers
can profitably offer interest-free installments— and issuers together by combining
without a direct retailer agreement—while installment economics with open-
increasing their acceptance footprint. Consumers loop scale.
can pay by installments instore or online at

Open-loop payment

Issuer Retailer’s
(fintech/traditional) existing
acquirer
Optional agreement
Agreement

Consumer Payment network Any

(via existing acquirer) retailer

Figure 3: A Network Installments Model

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 8
Playing the Cards Differently: Network Installments

In the end, interest-free installments will become When deftly combined with digital-first and data-
ubiquitous and commoditized. The advantage of first strategies, network installments allow any
offering them via network installments is that BNPL provider—whether a fintech turned issuer or
fintechs and issuers don’t need to waste time and a traditional issuer—to offer compelling interest-
resources to painstakingly build the ecosystem free installments to consumers at any retailer,
from the ground up. Instead, they can focus on anywhere.
what really matters: the consumer.

Differentiation will come from go-to-market

strategies that deliver superior consumer
experiences. Success will depend on:
• a distinct value proposition rooted in external
insights and digital-first principles
• access to the right data, expertise and
technology to boost consumer acquisition and
engagement
• the application of journey analytics to
consumer segments to enhance experiences
and improve satisfaction levels

Taking all the Credit: Success for Buy Now, Pay Later is in the Cards 9
At Mastercard, we work with fintechs and More Resources
issuers worldwide by powering an inclusive
digital economy across our multi-rail payment “Findustrial Revolution: Growing a Fintech”
network and harnessing the analytical insights
from our real-time, anonymized and aggregated “A Small Business Triangle: Instant, Open,
transaction data. Intelligent”

Contact one of our experts to learn how “Sailing Against the Wind: How Businesses in
Mastercard can help unlock the potential of BNPL Asia are Navigating Covid-19”
for fintechs, issuers, retailers and consumers in a
digital economy that works for everyone:

Donovan Yong
Vice President, Product Management,
Data & Services
[email protected]

Matt Cavin
Vice President, Product Management,
International Markets
[email protected]

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