What Buy Now Pay Later Has in Common With Visa and Mastercard’s Early Days

Buy now, pay later (BNPL) has become the modern-day version of layaway, but with a better value proposition — the consumer can buy now, take possession of the merchandise now and pay for it in equal monthly installments later. This new way to pay also provides an opportunity to reach new customers, Jim McCarthy, president of  i2c, told Karen Webster in a recent conversation.

In speaking about Walmart’s recent decision to replace its layaway program with a BNPL option through Affirm, he said unlike old layaway programs that served only existing clients and did nothing to bring in new ones, introducing pre-approved and active BNPL account holders to new merchants is a whole new ballgame.

Read more: Walmart Cancels Holiday Layaway; Amazon Extends a Hand to SMBs

“Affirm is going to bring in new clients because [it has] built a two-sided network,” McCarthy told Webster, adding that as Affirm acquires customers who shop and pay using its service from other merchants, those consumers can now shop at Walmart using a payment option they have used before and like.

Building BNPL Networks  

McCarthy compared today’s BNPL to the early days of Visa and Mastercard, when it was a struggle to gain merchant acceptance until merchants saw that doing so would drive new consumers and new consumer business to their front doors.

That’s the case today with BNPL as consumers with a credit card may opt for an installment credit option with a more certain payoff timeframe. For consumers who are underbanked or unbanked, the BNPL option is a way to buy using credit, while simultaneously building a credit profile.

At the same time, Walmart may face the dilemma of what happens when a good Walmart customer gets turned down when they apply for credit for a particular purchase. McCarthy expects that Walmart will follow this very closely to better understand the experience and may even have contractual obligations for Affirm to approve an application if it meets some kind of underwriting/risk floor.

“A lot of those [decisions] are kicked around at the contractual level,” McCarthy said.

A Customer Acquisition Tool and Credit on Training Wheels

One possible reason for sunsetting layaway, McCarthy and Webster discussed, was that it was less about taking something away and instead providing more consumers who never had a new way to pay for their purchases.

“Layaway may have run its course as a customer retention tool,” he added. “Given Walmart’s scale, it’s really about customer acquisition — where do they get that next customer who hasn’t walked in their doors?”

Regardless, BNPL occupies an interesting space between pay now and pay later. It’s not a debit product, even though it takes on some of the characteristics of one since consumers are paying back in set installments over time using funds on hand — and the consumer perception that they are not taking on credit in the more traditional sense of the word. “It’s credit on training wheels,” McCarthy explained.

And a credit product that McCarthy strongly believes there is market demand for and contends that Visa and Mastercard enabling BNPL for traditional card issuers may expand that market to more people by extending it to any merchant that accepts their card products. It’s also a bridge for issuers whose retail/consumer business units and credit/risk underwriting units have their own P&Ls to manage — where the cost of underwriting four $50 monthly installments is more expensive than the return on the investment of serving this new retail customer.

“Clearly there’s a market for [BNPL],” McCarthy said. “How that market evolves and changes in terms of people that are credit hungry versus those that now have established credit … that is the question. As people grow up and establish credit, will they want other, more general purpose-like instruments?”

BNPL has gained ground with so many merchants already, he said, because part of the purchase flow is to display the installment monthly payment offer right next to the product. BNPL becomes part of the consideration of the purchase, not an afterthought.

“With BNPL,” McCarthy noted, “the fact that you can actually now expose terms next to the merchandise and drive higher conversion rates is ingenious.”