At the same time as banks and fintechs cram into the buy-now / pay-later loan market, one in three U.S. consumers is falling behind on at least one loan installment payment, research shows.

About half of U.S. consumers have tried a BNPL loan, and of those, 34 percent have fallen behind on one or more of their installment payments, according to a Qualtrics survey in August of 1,044 consumers on behalf of Credit Karma.

But late payment rates that would set off the alarm bells for traditional credit card issuers are not yet confusing BNPL lenders as the default rate on installment loans was slightly higher, at 38%, in December. 2020, according to a similar study conducted by Credit Karma. at the end of last year.

The potential losses of BNPL lenders on overdue accounts can be mitigated by the fact that the installment loans are short term and the income comes from fees paid by merchants, and these loans generate a large volume.

The market share figures for the rapidly evolving BNPL market are grim, but Marqeta, which provides virtual card issuance services for BNPL fintechs including Affirm, Afterpay, Klarna, Sezzle and Zip, said its revenues related to this service had increased by 350% in the second quarter of 2021 over the same period a year earlier.

Credit cards are enjoying healthy daily use, but Fitch Ratings said last month that U.S. credit card customers track their monthly payments and always shy away from revolving balances. Blue-chip credit card write-offs fell to 2.42% on average for the period ending June 30, 2021, the lowest quarterly average since Fitch Ratings began tracking performance in 1991.

The overall performance of the credit card portfolio was little changed in August, according to Keefe, Bruyette & Woods.

The divide in how consumers handle BNPL loan payments versus credit cards suggests that at the moment, interest-free loans paid off in a few installments are strongly appealing to consumers facing economic uncertainty as the pandemic continues, said Daniela Hawkins, senior consultant at Capco.

Banks can no longer afford to ignore the trend. Many traditional credit card lenders who have remained on the sidelines of the BNPL movement in recent years are suddenly explore installment loans.

“Originally, BNPL products tended to be more acceptable to people living paycheck to paycheck, but as the concept spreads to luxury goods, electronics, beauty and hospitality, banks recognize that’s something they need to explore, ”Hawkins said.

Although banks have been relatively slow to formalize their BNPL offerings, as the market evolves many have recognized that this product is here to stay and they are shaping their own variations, she said.

Now that a critical mass of merchants has made room for point-of-sale installment loans, it will be up to consumers to choose between a growing array of financing options from banks and a phalanx of new entrants – and lenders. to adapt to these choices as well as the demands of traders and regulators.

Banks invite themselves

Capital One Financial is the latest credit card issuer to join the fray, announcing plans to test BNPL loans days after Synchrony Financial noted it plans to offer its retail credit card partners a BNPL option from October. US Bancorp has also said it plans to offer BNPL loans, while JPMorgan Chase may extend installment loans to non-clients.

Consolidation of the sector is underway. Square a OK to pay $ 29 billion for giant BNPL Afterpay, and Amazon announced a partnership with Affirm, whose BNPL services helped spike sales of Peloton exercise bikes during the pandemic.

The challenge for all participants in the BNPL arena will be making products that are profitable and engage in an increasingly crowded sea of ​​options, Hawkins said.

“Merchants are happy to pay an origination fee directly to the BNPL lender if it helps them generate more sales, but it can be a delicate balance for lenders,” she said.

BNPL providers can offset risks by keeping installment loan repayment terms short and blocking other loans when borrowers miss payments, Hawkins said. But the addition of fees and interest rates in the event of buyer default could cause U.S. regulators to step back, who have yet to formalize BNPL’s rules.

“We are already seeing an increase in review of BNPL programs as consumers push the limits on the number of BNPL programs they can enroll in,” she said.

Global competitors are hiding

Foreign companies that have established a strong BNPL business in their own country are considering expansion in the United States

Scalapay, an Italy-based BNPL lender with offices in Australia and the UK, raised $ 155 million in venture capital this month that it plans to use to expand into the US in the months to come. The latest round, led by Tiger Global, brings the company’s total funding to over $ 200 million.

“We are still seeing many untapped opportunities to expand BNPL’s services in the United States by approaching it more from the side of what merchants want,” said Simone Mancini, CEO of Scalapay, which has developed commerce sites. electronics for traders before co-founding Scalapay in 2019.

Mancini points out that some of BNPL’s biggest players, including Swedish company Klarna and Australian company Afterpay, favor their brands over the names of traders.

“Klarna and Afterpay want to bring consumers to their sites, but at the end of the day, merchants don’t want to be disintermediated. They want to make the BNPL payment experience their own through their own websites and stores, ”Mancini said.

Scalapay works with 3,000 business partners, including premium clothing retailers Decathlon and Calzedonia, where it uses an API connection to create a personalized BNPL payment process. Users are asked to provide basic information to qualify for a loan financed by Scalapay to be repaid in three equal installments without interest.

While the basic service looks like many other BNPL providers, Mancini says Scalapay’s approach allows participating merchants to extend BNPL offerings through more channels, including social media. About 20% of participating merchants connect directly to Scalapay; others connect to Scalapay through the API through a dozen major ecommerce platforms, including Shopify and Magento.

“I think as the BNPL market matures, traders want installment loans to be just another option in the cash, without the name of a third-party BNPL super-app dominating things,” Mancini said.

One of Australia’s largest BNPL providers, Openpay, plans to roll out BNPL services in the US next month under the Opy name, targeting a wide range of borrowers with higher purchases, according to Brian Shniderman, US CEO and Head of Global Strategy. at Openpay.

“Traders told us that what is missing in the BNPL marketplace is a way for consumers to purchase an item that they feel is just beyond their reach – a higher level of luxury like a porcelain crown at the dentist or a better brand of tires, ”Shniderman said. .

Opy has developed a proprietary engine to tailor offers to each consumer, targeting middle to high-income consumers with short-term, fixed-fee loans that match existing financial obligations, he said.

Earlier this year, Opy announced an agreement to make its BNPL services available to 1.2 million US-based Worldpay merchants through its owner, FIS.

Opy is also developing a route to offer its services to banks through the aggregator model, but details are not yet available.

“BNPL lenders provide funds through merchants at the time of the purchase decision, with a transparent agreement and a lump sum. Traditional credit card lenders need to find a new formula that offers a simpler payment plan at the start – not the end – of the transaction, ”Shniderman said.