PayPal, Square, among fintechs that could replace traditional credit card payments: Kansas City Fed

Duncan_Andison/iStock via Getty Images

• Fintechs, including Square (NYSE:SQ), PayPal (NASDAQ:PYPL), and Affirm (NASDAQ:AFRM) have the potential to replace credit card payments, cutting into profits for providers of credit card services, according to the Kansas City Fed's payments system research briefing.
• Still, in the past month, BNPL stocks, with Affirm Holdings (AFRM) -27% faring the worst, trade in net negative territory, though AFRM +132% outpaces its peers by a wide margin Y/Y, as seen in the charts below.
• Moreover, BNPL is already making a dent in banks' profits as banks lost $8B-10B in revenue per year for the last two years to fintechs offering BNPL products, the Kansas City Fed cites data from McKinsey's Consumer Lending Pools data. BNPL could also reduce profits for payment card networks/processors such as Visa (NYSE:V) and Mastercard (NYSE:MA).
• Given the risk of losing credit card profits to BNPL products, payment networks/processors have collaborated with BNPL providers, as well as acquiring them.
• Recall towards the end of September, Mastercard (MA) started its own BNPL program with bank partners.
• In October, Klarna (KLAR) teamed up with Stripe (STRIP), whereby Klarna uses Stripe's infrastructure to accept credit card payments from consumers in the U.S. and Canada.
• Earlier this year, Cross River Bank originated the majority of loans facilitated through Affirm's (AFRM) BNPL platform.
• First National Bank of Omaha recently introduced a BNPL offering to merchants by partnering with Skeps, a provider of a BNPL lending product, and EXL, an operations management and analytics firm, the report says.
• Even commercial banks have recently launched new BNPL products, including JPMorgan Chase (NYSE:JPM), which introduced MY CHASE PLAN, a digital BNPL option that enabled credit card customers to pay off purchases through fixed installments.
• Another sign that the use of these BNPL products continues to grow is PayPal's (PYPL) volume on BNPL during Black Friday, soaring nearly 400% on a Y/Y basis, PayPal CEO Dan Schulman told CNBC's Jim Cramer. "We did some 750,000 transactions alone in one day on Black Friday," Schulman added.
• Still, as BNPL adoption grows domestically, calls for regulation of BNPL services may persist, which could change how BNPL products operate, the Fed bank notes.
• Previously, (Sep. 9) A third of U.S. consumers fall behind on BNPL purchases.

Comments

[SeeAroundTheCorner]

There is a view today that PayPal has become a legacy fintech with aging tech that will be surpassed by the likes of Block and crushed by new forms of payments like Diem. A lot of investors lost faith in Microsoft during the waning years of the Ballmer era believing that it had become a legacy company that would never make the transition to the next thing in computing. PayPal is in a similar situation today with all the new emerging fintechs.

[ding dong]

"Mastercard (MA) started its own BNPL program with bank partners."

What does this mean? The credit cards are already BNPL and banks give out lots of them?

Maybe they mean people that do not have credit history?

[ritholtz47]

@ding dong
CC is like a BNPL in 30days card. Extending anything more than 30day to pay later, is a risk.

[Karl Kelly]

Will be like Google of years ago. Declining $ per clicks, but far more clicks.

[SeeAroundTheCorner]

@Karl Kelly While $/transaction declines, gm% per transaction will increase.

[marpy]

IMO - A pile of BS. Every time I use my credit card, I make 2% while every time I use Paypal, Square etc, it cost me money. So yes the alternative Fintechs have a place but as it is, they will never replace credit cards.

[HunterKiller89]

@marpy "they will never replace credit cards"
because a simple rewards program is so hard to add?

[marpy]

@HunterKiller89 No - Its easy to add a rewards program but Its much harder to make a rewards program meaningful and to make a profit on it. They can not compete in that area.
Tell me - other than protecting your credit card number and limiting your liability, what does Paypal bring to the table for the user - Not much. The cost of there service is relatively expensive when compared to the alternatives. The only time I use Paypal is when I shop on E-Bay or don't want to provide Alternative payment Information. On Amazon , I never use any Fintech as Amazon provides "trusted security".
So where is the market that will make Fintech mainstream?? I don't see it. You could say that the advances credit cards have made make them "Fintech" . ;-)
So really in most cases, what is Fintech other than a fancy name for what the big players are already doing?? ;-)
Smoke and Mirrors ring a bell! ;-) Notice I did not say "all cases"

[64MGB]

@HunterKiller89 - Guess my question is how capable are these new entities in being to handle all the slow-pay, no-pay and inevitable credit losses on their BNPL programs?

I haven't looked at Square, but think headlines on recent earnings reports were suggesting they are they are not profitable and losing money.

Perhaps the myriad of new mobile internet-cloud companies are today's equivalent of the 2000's dot-com bubble.

[nickfrancois]

Credit card companies like MA and V will be fine.

They are very well managed and generate large cash flows. And they have already global networks in place.

And credit cards won’t go away. They remain key to online and offline payments and bring trust to the system. And they benefit from the secular move away from cash transactions all over the world.

To top it up, credit card companies are not idle. They are moving quickly into new means of digital payments and BNPL. They are aware of the need to complement their offerings in payments to be in all segments.

So I won’t worry. I will keep MA.

But as a complement to MA, I added PYPL to my portfolio.

[dgi123]

@nickfrancois I never understood the hype about BNPL. Isn't that the definition of a credit card haha. And if BNPL charges negligibly low interest or even no interest at all, how is that business going to survive when people default on payments?

[nickfrancois]

@dgi123 yes agree on the BNPL.

Someone in the system will bear the risk of payment default for BNPL payers. And as of now, the risk lies with BNPL companies.

And this is unlike credit card companies like V and MA who do not bear the credit card credit risk. Banks do.

While all is good now for BNPL, the system will be fully tested during the next recession.

[iway]

@dgi123 thats something i didn't understand. now i'm 36, i had someone in there 20's try to explain BNPL a year or 2 ago to me. my first question was how do they make money? we all know the world goes round on money, if they make no money, y invest in a stock thats only BNPL. great for ppl with no money, but business need/want money. long term i see it being as an option for ppl but limited to X amount

[LongTermActivist]

Sounds like a bunch of boomers whining over finance innovation as usual.
Yes I agree if you can't afford the product then don't buy it. This goes for Credit and BNPL. The benefit of BNPL often is the ability to spread payments over time for often 0% interest. This is key! What regulators need to do is introduce equal limits and checks the same way they do for other Credit issuers.

[dgi123]

@LongTermActivist Why would any business take on the risk of people not making payments and also not charge any interest. That's a terrible business model

[LongTermActivist]

@dgi123 sell the cash flow

[marpy]

@LongTermActivist Buy now, pay later has in one form or another been around for 50 plus years. nothing new - just new marketing.

[Harsh Truth]

Debt, debt and more debt, the goal is to enslave people by enticing them to take on the debt and develop an addiction for that.

[Rosesarered]

@ddca48 People are always at choice and are free to engage their brains and live within their means. Personal responsibility is now old fashioned! LOL

[drbob512]

Like SOFI, PYPL and SQ to replace legacy banks going forward. All 3 are bargain priced now so buy some now and more on dips. Not bargain priced but still good buys are NVDA and TTD.

[quantump]

Lightning Network will replace all of them.

[SomeGuy14]

@quantump

LOL. Nobody actually believes that. It’s just “number go up” needs some sort of rationale.

[Skih20]

As far as I can see, firms like V,MA, PYPL SQ, and FISV have excellent management, great cash flow, and all are very astute about deploying their capital to stay with the curve (if not ahead). The macro trend (TAM) is vast, and all should play well in this sandbox. None are going to play w/o BNPL and crypto accommodations. The market seems to be looking for ghosts, while ignoring the qualities of the players and the growing pie.

[Skih20]

@Skih20 Oh, and I would throw GPN into that group, as well. Great company in that space that often flies under the radar.

[Max Adams]

@Skih20 I was about to add this.)

[deebkk]

what is BNPL ? HOW DOES IT WORK ? Thanks

[andreo69]

@deebkk Buy Now Pay Later

[deebkk]

@andreo69 thanks ! have a good day

[usera2020]

@deebkk Google it. Lots of info.

[TomasViewPoint]

BNPL is where credit cards started back in the 60's and 70's.

Now it's new again just like vinyl records.

[Fooly Finance]

@TomasViewPoint Yeah, it's essentially a broader form of lay-away, except with every business and you get the product upfront.

[RAIMENT]

@TomasViewPoint

You nailed it. Recycle old technology, the interesting thing here is, there is no added value.

[t0587kn]

I had to respond to this guy: does KS FED know what they are talking about ? What payment network be used for any such transaction (POS ->Bank) ? Or, It will be all magic !!

[BuddhaLove]

LONG $V $PYPL $SQ $MQ $SOFI for fintech and $AAPL if you want to throw them in there with their Apple pay.

[civ-e]

when you BN”Pay Later”, don’t you still have to use V/Ma as you normally would have, but just “later”?

[augmented reality]

@civ-e yes!!! Correct

[pepe argento]

@civ-e yeap

[followtheblind]

@civ-e Or Amex.

[Calm_Investor_999]

Long $V $MA

[JazzPaw]

When do the BNPL providers start increasing the number of payments, and how will they make money that way? Right now, consumers can afford to pay off in four payments, but credit balances last much longer than that. I have no faith that consumers will stay out of credit card debt.

[Radcon3]

I do not agree with the premise of the articles tile. Credit cards will never be replaced. But, some of the comments remind me of people who never believed in streaming stocks when they came out, because all they watched was NBC, CBS and ABC. BNPL is not a entity of itself, it’s a added feature to a company’s platform like PayPal, who have grown through their wallet of many fintech services they provide. It’s a big, big changing world out there.

[SeeAroundTheCorner]

@Radcon3 it’s a little bit like Dropbox. Steve Jobs famously argued that storage was not a standalone business but he got it wrong as evidenced by the success of Dropbox.

[mani raj]

@Radcon3 I agree. Credit card companies would most probably partner with companies like $afrm.

[Sk69]

And in such partnerships the fintech will assess the creditworthiness of those customers who are new to the bank. A virtual card will be instantly issued to the customer and the card will be charged with the price of the BNPL product and then the payments will come to the card in the form of EMIs. Frankly I dont see revenue loss for the banks unless the BNPL fintech operates on it's own and chooses to take the BNPlL amount on their books.

[Entreri]

Millennials, 44% use mobile wallets, overall for general pop only 10%. The shift is happening.

[Peter Jaworowski]

@Entreri sure, but most mobile wallets are still connected to a credit card. I use Apple Pay sometimes and Walmart Pay, but in each of those cases the charges still go directly to my credit card that’s link to them.

[Hurray]

@Entreri My son uses Venmo to pay his split rent, replacing a check. But he is loaded with rewards credit cards for everything else.

[New Adams]

Can you buy a chicken sandwich by BNPL? If not, what's the point?

[HunterKiller89]

@New Adams Actually, yes, you can....