How buy-now-pay-later success is changing the way consumers approach credit

ME Bank’s recent decision to stop investing in its new credit card platform amid industry disruption is reflection on how the traditional market is feeling the impact from the rise and rise of buy-now-pay-later.

The BNPL movement continues to grow with no end in the foreseeable future.

Incumbent players in the financial industry are beginning to invest in their own services to compete with the likes of AfterPay and Zip money.

Following Visa’s announcement that they will introduce their own Buy Now Pay Later offering in July, CBA have partnered with the Klarna, a major player in the BNPL field in Europe.

As consumers increasingly adopt Buy Now Pay Later services, and more enter the market, providers of traditional credit products are feeling the strain.

ME chief executive, Jamie McPhee, recently commented on how BNPL services have caused disruption in the market, in particular for credit cards.

In an interview with the Australian Financial Review, McPhee addressed the direct effect of these new services on the bank, with ME changing plans to invest credit cards.

"What we won't do is fall into the trap of continuing to invest in a project that doesn't make sense any more… “It’s a fundamental economic shift,” McPhee said.

“All I am doing is looking at the trend and the trend is debit cards up, credit cards down and buy now, pay later up. I am just extrapolating.”

“I don’t think my daughters will ever own a credit card. They will have a debit card and a buy now, pay later account,” McPhee said.

According to RFi Group research, almost 1 in 3 Australians have now used a BNPL service.

Millennials are leading this, with almost half having used a BNPL service and almost 90 per cent aware of BNPL.

RFi Group data also supports McPhee’s observation of a decline in credit card usage, with the proportion of consumers who use a credit card in a typical month declining while debit card usage has increased over time.

RFi Group research also suggests that BNPL users do not perceive these services as being credit products.

The early adopters of these services are less likely than average to have a credit card or previous experience with debt products.

Interestingly, these consumers also display an aversion towards credit, with consumers who have used a BNPL service less likely to be comfortable with credit than consumers who hold traditional lending products.

Furthermore, when we look at why consumers use BNPL, we can see that a key driver is helping me to budget.

The fact that BNPL services like Afterpay are interest free is less of a driver.

However, this does raise the question of what the impact of these services will be on products like low rate credit cards in the future and what consumers will expect from rates.

With the BNPL space becoming increasingly crowded, it will be interesting to see how these services will differentiate themselves.

Will widespread availability of BNPL services change consumer perceptions on credit?

And will there will be new entrants into the alternate finance space which capitalize on those consumers who would prefer to avoid credit.

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