Square’s New Deal proves Dimon’s right to question Wall Street’s role

BNPL – This is the latest set of letters to dominate Wall Street. But what does that mean? And why are consumers praising it?

Like the old reserve plan, now called point-of-sale loans, BNPL (or “buy now and pay later”) allows buyers to split their purchases into installments without interest or fees. .. You can also use a debit card to make expensive items affordable. Lenders typically partner with retailers such as Macy’s, Wal-Mart, and Peloton to provide their services.

However, in the United States, BNPL, which grew 215% year-on-year in the first two months of 2021, can no longer be used on high-end items such as Peloton furniture and bikes. Small online products are becoming more and more popular and are quickly adopted by merchants and payment companies. In fact, a wave of big companies are suddenly able to fund everything from video game consoles to hair care products on a small monthly payment.

According to a survey released earlier this year by Ascent, more than half of American consumers use the “buy now, pay later” service. The vast majority of those surveyed used it to avoid paying credit card interest or to buy something that was “off budget”.

Last year, companies in this field facilitated more than $ 20 billion in transactions in the United States, according to management consultant Oliver Wyman. The number is expected to increase. By 2025, consumers will spend an estimated $ 680 billion globally using POS payments on their e-commerce channels, according to research by Kaleido Intelligence.

As a result, payment players from PayPal to American Express and FinTech are rushing to launch their own versions of BNPL products for low-cost online items costing hundreds of dollars.

Square on Sunday announced plans to buy Australian fintech company Afterpay. This allows customers to pay in four interest-free installments and pay if they miss an automatic payment. Its 16 million customers will eventually be able to manage payments directly via the Square Cash application. The transaction is expected to close in the first quarter of 2022.

In an interview with CNBC’s “Square on the Street” on Monday, Square’s chief financial officer Amrita Ahuja said the acquisition would dampen consumer interest in “transparent buying opportunities” and provide a new avenue. He said he saw an opportunity to create a “powerful e-commerce platform”. For a trader to serve a customer.

Affirm, a two-time CNBC Disruptor 50 company, is one of the well-known public providers offering the opportunity to fundraise for goods with a small monthly payment. Klarna, Mastercard, Fiserv, Citi, and JP Morgan Chase all offer similar loan products. Bloomberg announced last month that Apple was planning to partner with Goldman Sachs to launch payouts.

“I’m pretty sure this is a huge test for the whole category,” Affirm co-founder and CEO Max Levchin said Monday afternoon upon acquiring the CNBC’s afterpay Closing Bell. Talk about. “Recently on a handful of news shows people will hear that the credit card industry is about to catch up and say, ‘Oh, that’s just a feature’… the world is changing and credit cards are losing. In this deal, that would be, it’s a huge test of what’s going on. “

Last year, Affirm partnered with Shopify to bring online customers a free, interest-free payment program.

Some conclude that BNPL’s appeal is transgenerational. According to a survey by consumer data company Cardify.ai, Gen Z and under Millennials account for over 80% of BNPL transactions.

“Their strengths are young adults, especially those who want to buy something now and don’t necessarily have the money,” said Ted Rothman, analyst at CreditCards.com. “These people are often looking for debt and may not have a ready-made alternative, such as a credit card.”

Yet BNPL loans are not without financial risk. Two-thirds of those who took the loan said it would have forced them to spend more money, and this was found in a Lending Tree survey of 1,040 Americans. Almost half said they would not buy without financing options.

While young people in particular are the driving force behind recruitment, according to McKinsey & Co. in 2020, “a significant number of baby boom generations depend on certain fintech accounts, and digital tools are generally reserved for young people. It is incompatible with perception. “Business survey. Consulting firms have found that FinTech is “catching up with traditional banks in terms of customer confidence.”

The growth of e-commerce has also helped some institutional investors, such as Citizens Bank, which recently expanded its line of cashier loans. Last year, Macy’s, the largest department store operator in the United States, signed an agreement to invest in Swedish payment group Klarna. Under this agreement, Macy’s customers can pay online.

A regulated bank, Klarna prides itself on being an industry the company sees as harmful to consumers as an alternative to credit cards. Ranked fifth on the CNBC Disruptor 50 list last year, the company makes money by receiving commissions from traders every time a customer completes a trade. Merchants who use the service often see an increase in sales as a result.

“There are other players who are perhaps a little more worried about maintaining their margins,” Klarna co-founder and CEO Sebastian Siemiatkoswski told CNBC’s TechCheck Monday morning.

“We’re close to the size of PayPal, so that’s not necessarily something that worries me,” Siemiatkowski added.

Even JPMorgan Chase CEO Jamie Dimon identified FinTech as one of the “huge competitive threats” to banks in an annual letter to shareholders released earlier this year. Registered. “From loans to payment systems to investments, they’ve done a great job developing products that are easy to use, intuitive, fast and smart. “

He said that was part of the reason why “banks are playing a smaller and smaller role in the financial system.”

– CNBC’s Kate Rooney contributed to this report.