Banks struggling with buy now, pay later challenge ‘see writing on the wall’, Zip strategist says

As shoppers get smarter and buy now, pay later soars in popularity, banks are struggling to reinvent themselves, a key executive says.

Banks will continue to struggle to keep credit card customers as the booming buy now, pay later sector offers smarter shoppers attractive alternatives, a Zip Co executive says while shrugging off looming competition from PayPal’s entry into Australia.

The death of credit cards has been flagged for many years as consumers shun high interest charges, a trend that has accelerated rapidly with the staggeringly fast rise of BNPL, especially during the COVID-19 pandemic.

Figures from the Reserve Bank on Monday showed that over the year to January, the number of credit card accounts in circulation in Australia fell by about one million and the amount owed plunged by $7.38bn.

“Customers are getting smarter and understanding what the costs of maintaining balances on those cards are,” Zip chief strategy officer Tommy Mermelshtayn told NCA NewsWire on Friday.

He said it remained to be seen whether banks, many of which were introducing BNPL-style instalment arrangements, would be able to adapt.

Keenly aware of the BNPL competition, Commonwealth Bank has introduced no interest credit cards.

“At the same time, there is a customer set that likes their frequent flyer points, that finds utility in that offering so I don’t see them (credit cards) disappearing tomorrow.

“But I do see – if I were going to choose a horse and where there would be more growth – it would be more innovative, customer-focused solutions.

“And also customers’ behaviour and attitudes are changing. They’re looking to tie specific purchases to specific repayment plans. I don’t think credit cards do that extremely well.

“They will continue to be challenged. They will struggle to reinvent themselves.

“That’s why you do see lots of bank partnerships happening ... they see the writing on the wall.”

Mr Mermelshtayn said BNPL had benefited from the surge in online shopping, particularly fashion and marketplaces, but adoption and marketing by bricks-and-mortar retailers had been slower.

“That’s because it’s harder to control the customer journey, training in-store staff around the product and what they mean if customers have questions about it,” he said.

“Integrating with point-of-sale has been more difficult, which is one of the reasons we’ve gone with a principal membership with Visa to make it a lot easier to deliver the in-store buy now, pay later experience.

“Offline is still really, really early days and untapped.”

US payments giant PayPal announced this week it was about to break into BNPL in Australia, rolling out its “Pay in 4” product in early June.

PayPal, co-founded by billionaire Elon Musk, is expected to give Australia’s BNPL players a run for their money. Picture: Eric Piermont/AFP

Given PayPal already has more than nine million existing customers in Australia, it is expected to take market share off Zip and its larger rival Afterpay.

But Mr Mermelshtayn said the entry just helped validate the BNPL model.

“They understand that this is a future they need to participate in ... it will probably help bring some of the retailers that haven’t participated on.

“I don’t think necessarily PayPal has cracked in-store. Online is critically important, but in terms of retail spend, the lion’s share still happens offline.

“With vaccines, hopefully, we’ll see a resurgence in bricks-and-mortar retail, and we want to work with our retailers to get more traffic in-store.”

He said Zip was fundamentally different than some of its competitors in Australia with an account-based product.

“I think that will do well for us as we continue to differentiate,” Mr Mermelshtayn said.

“PayPal has been great as a payments business that lives at check-out, but what we’re really good at – and some of our peers are as well – is really partnering with our retailers in understanding their customers, driving campaigns with them ... promoting their offers within our app and to our audience.

BNPL adoption by bricks-and-mortar retailers has been slower than online. Picture: Sam Wundke

“We don’t take competition lightly, we do think it is still a very large market that has a lot of ways to grow.

“We would expect to see more competition from banks and start-ups. We welcome choice.”

Tim Dwyer, chief of sector disrupter Limepay – which gives retailers their own branded BNPL platform – says “heavy leakage of customer data” is common in many BNPL solutions.

Mr Mermelshtayn disagreed.

“We’re very conscious of consumer data rights and the privacy regime here in Australia – we don’t share data with merchants but we are happy to share insights and partner with them to drive new customers to them, in particular because we have an audience they’re looking to target,” he said.

“We do lots of surveys as well, lots of segmentation.”

Mr Mermelshtayn also said BNPL – which the federal government is allowing to self-regulate with a code of practice for the time being – was not a path to a debt spiral, with the service stopped once a customer missed a payment.

“Less than one in 100 are late in any given month compared to credit cards, which see four or fives times that number,” he said.

But RateCity research director Sally Tindall has her reservations about the sector.

RateCity’s Sally Tindall says some shoppers are getting into trouble with BNPL.

“It’s not just late fees getting people into trouble. One of the biggest issues is that some people end up overspending using these platforms leaving them with not enough money to pay for essentials,” she said.

“The repayments on these platforms typically come out automatically and can therefore blow a hole in people’s budgets.

“We believe all buy now, pay later providers should assess a customers’ ability to repay not just the debt they’re signing up to but all existing debts they might have.”

The sector is becoming increasingly crowded, particularly with the recent release of Commonwealth Bank and National Australia Bank’s no interest credit cards, which comprise about 30 per cent of their new credit card applications.

While the appetite for BNPL is still growing in Australia, “it’s hard to see all of these platforms sticking around”, Ms Tindall said.