How to respond to buy now, pay later

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Illustration by Wenjin Chen/Getty Images

Consumers are increasingly interested in buy now, pay later products, which are cutting into credit card usage. Here’s what community banks need to know about these products and how they can take advantage of this model.

By Colleen Morrison

Why pay today what can be put off until tomorrow? That’s the question millions of consumers are asking as they jump on the buy now, pay later (BNPL) bandwagon.

Emerging as the latest form of point-of-sale (POS) lending, BNPL introduces new ways for consumers to make purchases and spread out their payments. These installment payments increased between 300% and 400% in 2020, fueled in part by COVID-19’s effect on consumers’ cash flow, according to McKinsey & Co. Yet, as the pandemic’s influence on consumer behavior begins to normalize, BNPL growth continues; 60% of consumers indicated they’re likely to turn to these POS financing programs between mid-2021 and mid-2022, McKinsey & Co reports. And FIS predicts BNPL will climb to 3% of global ecommerce revenue by 2023.

“The buy now, pay later industry is growing at a very rapid pace simply because consumers are looking for ways to access financial services in different ways,” says Phil Goldfeder, senior vice president of global public affairs at $13 billion-asset Cross River in Fort Lee, N.J., an enabling bank for BNPL providers like Openpay (see sidebar below).

Pros and cons for consumers

BNPL products make attractive options for consumers, offering instant gratification with no interest. They provide a straightforward way to purchase an item and split its cost over a set period of time, generally four payments over six weeks.

Quick Stat


of buy now, pay later users experience credit score degradation

Source: Credit Karma/Qualtrics Survey

“It’s a loan that allows consumers to access the product quickly, have the certainty of knowing when the obligation will be finished … rather than comparing it to the revolving credit of a credit card,” says Laura Udis, payday and small dollar lending program manager at the Consumer Financial Protection Bureau (CFPB).

But disadvantages exist as well, including fees invoked for late payments and reduced consumer protections for the purchased products. For example, BNPL product credit rate disclosures are not included under Truth in Lending Act requirements, and while some disclosures are provided, they may not be as clear as those for credit cards. In addition, error and dispute resolution and basic returns may be more complicated when using BNPL.

“If consumers are returning items that they purchased, there are different return procedures and billing procedures that come into play compared to using credit cards,” Udis says. “It may be easier to use a credit card if a consumer isn’t certain that they will keep the product.”

Consumers may face financial hurdles when using BNPL products, too. A Credit Karma/Qualtrics study found that 34% of those who used these services have fallen behind on one or more payments, and 72% had their credit score lowered.

BNPL: The community bank play

Those drawbacks present opportunities for community banks to emphasize their roles as trusted financial partners. For example, products competitive with BNPL solutions, such as the Visa Installments Solution or Mastercard partner Splitit, introduce avenues for community banks to engage with BNPL as a customized feature for credit card holders on approved credit lines.

In addition, education may go a long way in supporting consumers who may otherwise choose BNPL products. Reminding customers about the protections of credit cards and the benefits of card rewards programs may help them embrace and choose a card-centric solution instead of a POS installment payment.

The quick rise of BNPL means community banks must address that growing demand to remain competitive. In fact, McKinsey estimates that banks are already losing between $8 billion and $10 billion in annual revenues to these new offerings.

Goldfeder recommends looking beyond today’s hype at the bigger picture to form a strategic response.

“It’s an evolution. It used to be that if you were a lending company, you lent. If you were a payments company, you were in the payments space. There’s more and more expansion of verticals,” he says. “The next logical question is, ‘OK, today Openpay is doing buy now, pay later. What are they going to want to do next?’ Cross River is already positioning itself to be able to service whatever that next [thing] is.”

Why Cross River Bank is embracing BNPL

Following a banking-as-a-service (BaaS) model, Cross River in Fort Lee, N.J., services multiple buy now, pay later (BNPL) providers, from a much-touted relationship with market leader Affirm to a newly launched partnership with U.S. newcomer Openpay. The community bank provides core infrastructure and embedded financial solutions to fuel BNPL products for consumer banking loans.

“At the end of the day, we’re all trying to meet the demand of consumers,” says Phil Goldfeder, senior vice president of global public affairs. “Cross River, by building our own technology—essentially serving as a de facto technology company ourselves—we’re able to meet those needs without compromising on our responsibility to the banking infrastructure.”

Colleen Morrison is a writer in Maryland.