Thread by @AlexH_Johnson

This article by @kevinwack on how the card networks and issuers are responding to the rise of BNPL is really interesting.

I think it perfectly encapsulates how traditional players misunderstand the opportunity.

Thread...
americanbanker.com/news/why-visa-…

Visa and Mastercard are easy. They just want to keep transactions on their networks.

They will build/buy/partner to get technology that can enable BNPL on their networks. Which is what MasterCard did with Vyze and what Visa is doing with ChargeAfter.

As @kevinwack accurately notes, it's issuers that will lose out in this arrangement because a decline in credit card volume creates a decline in interest revenue.

So, issuers like Citi, AmEx, and JPMC are creating installment lending features within their existing cards.

Credit cards with installment lending built in are kinda like those roller shoes that were popular for a bit in the late 90s.

Mildly appealing in the abstract, but not very useful in the real world.

Unless you're this guy:

The big problem with the approach issuers are taking is that consumers don't choose BNPL because they have an inherent preference for installment lending.

They are choosing BNPL because it is more convenient *when* it is embedded in online merchants' checkout process.

The online part is really important.

BNPL has really taken off in e-commerce because it's easy to pull apart the online checkout process and embed a lending option.

It's not nearly as easy to embed lending to the same level in a physical POS environment.

This puts banks at an even bigger competitive disadvantage because:

- BNPL companies have been busy snapping up all the big e-commerce partners.
- e-commerce is exploding while brick and mortar crumbles.
- Banks' existing retail CC partnerships aren't that useful.

To clarify that last point, retail CC issuers mostly work with big-box store retailers that don't do anything innovative in e-commerce or in embedded lending.

This is why Goldman Sachs sees an opportunity to do something more innovative with GM.

wsj.com/articles/goldm…

One last point from the @AmerBanker article, which I disagree with:

"credit card-issuing banks are not well positioned to make rapid credit decisions like their new competitors do, in part because of how their data is structured and how their risk policies work."

It's very easy for large issuers to make rapid credit decisions. They do it every day when they issue credit cards.

They have have real-time credit decision engines that can be configured to support this lending type, at massive scale, fairly easily.

And banks' risk policies *could* support BNPL. There's nothing in the structure of BNPL data models that would be problematic.

The question is whether banks want to compete with BNPL providers that are fueling their growth through subprime lending.
pymnts.com/earnings/2020/…

IMO, there are a few companies operating on the periphery of BNPL who could really shake things up if/when they get into the game.

In both cases, these companies would be able to vault past banks and current BNPL providers through their control over the point of sale.

Square already has a massive POS business, focused on small businesses.

They also have a booming consumer finance business through the Cash App.

They currently lend to SMEs. They are reportedly testing a consumer lending feature.

Bringing all of them together seems obvious.

Also seems obvious that Apple, through its Mobeewave acquisition, will create a similar payments ecosystem. (h/t: @noyesclt)

blog.starpointllp.com/?p=4882

Apple has already introduced Apple Card Monthly installments for certain purchases. Wouldn't be a stretch to expand it.

This brings us all the way back to banks.

They are not well positioned to compete with existing BNPL providers. The networks aren't going to save them. They certainly would have no chance against an Apple or Square.

They need a different strategy.

fintechtakes.substack.com/p/what-embedde…