4 ms·

So... same business model as credit cards?

by jdiez17 4y ago

comte7092 4y ago
Credit cards also make substantial money on transaction fees, but yes you are correct.
thwayunion 4y ago
Huge caveat is that some BNPL services don't require credit checks.
otikik 4y ago
Don’t they work under very different regulatory frameworks though? (As in: banks have some regulation)
dwater 4y ago
Different customer base. These loans are generally more expensive and sold to people who can't qualify for credit cards. So yes, same business model but with the "Predatory" knob turned up.
Jochim 4y ago
AFAIK the interest rates on credit cards are nowhere near that of even regulated payday loans. The lack of interest on most cards if you repay in full each month can also make them a useful buffer if you have short term liquidity problems, ironically the problem that payday loan companies claim to solve. Payday loan companies as they operate now belong in the class of companies that should simply be destroyed. Put betting shops in there as well.
time_to_smile 4y ago
If BNPL was the same as credit cards, then why not just use credit cards? BNPL often ignores credit check or specifically targets groups that credit cards would deem too risky. For me this doubles the problem with the BNPL space: not only are the predatory, but I have serious concerns about their own risk management. I knew of a start up that was experimenting with running their own BNPL service with zero credit checks. The users that were being targeted had a 30+% default rate (because other users had credit cards) but the upper bound of interest that could be charged was around 25%... the company seriously didn't understand why they weren't able to make profit on this product. But hey, revenue did grow which is all VCs cared about so it worked for them.
paxys 4y ago
BNPL targets people who wouldn't otherwise qualify for a credit card or personal loan. Here's a simple test – if everyone paid their balances on time and in full, credit card companies would still survive. BNPL would not.
- crazygringo 4y ago
  > if everyone paid their balances in full and on time, credit card companies would still survive. That goes against my understanding. Do you have a source for that? I'm pretty sure credit cards make their money off of interest. It's not from the interchange fees from people who pay their balance each month, as those often go straight back to consumers through rewards programs, and just administration costs generally. The card I use most has no annual fee but 2% cash back on everything.
  - scottLobster 4y ago
    The ratio depends on the credit card issuer, but often times the rewards are just a fraction of the fees charged. American Express in particular makes more of their money from transaction fees and membership fees than interest. https://www.investopedia.com/articles/markets/012715/how-american-express-makes-its-money.asp https://www.investopedia.com/articles/markets/012715/how-ame...
    - crazygringo 4y ago
      Yes, but American Express is very much an outlier and always has been. It's also why many shops don't accept Amex, because it charges higher transaction fees.
    - nunez 4y ago
      AMEX allows you to have a rotating credit line now on those cards.
  - soco 4y ago
    Cashback is not really a thing around me (Switzerland) and other rewards are just practical jokes - like overpriced black socks subscriptions offered slightly less overpriced. Yet credit cards thrive.

So... same business model as credit cards?

comte7092 4y ago

Credit cards also make substantial money on transaction fees, but yes you are correct.

thwayunion 4y ago

Huge caveat is that some BNPL services don't require credit checks.

otikik 4y ago

Don’t they work under very different regulatory frameworks though? (As in: banks have some regulation)

dwater 4y ago

Different customer base. These loans are generally more expensive and sold to people who can't qualify for credit cards. So yes, same business model but with the "Predatory" knob turned up.

Jochim 4y ago

AFAIK the interest rates on credit cards are nowhere near that of even regulated payday loans. The lack of interest on most cards if you repay in full each month can also make them a useful buffer if you have short term liquidity problems, ironically the problem that payday loan companies claim to solve. Payday loan companies as they operate now belong in the class of companies that should simply be destroyed. Put betting shops in there as well.

time_to_smile 4y ago

If BNPL was the same as credit cards, then why not just use credit cards? BNPL often ignores credit check or specifically targets groups that credit cards would deem too risky. For me this doubles the problem with the BNPL space: not only are the predatory, but I have serious concerns about their own risk management. I knew of a start up that was experimenting with running their own BNPL service with zero credit checks. The users that were being targeted had a 30+% default rate (because other users had credit cards) but the upper bound of interest that could be charged was around 25%... the company seriously didn't understand why they weren't able to make profit on this product. But hey, revenue did grow which is all VCs cared about so it worked for them.

paxys 4y ago

BNPL targets people who wouldn't otherwise qualify for a credit card or personal loan. Here's a simple test – if everyone paid their balances on time and in full, credit card companies would still survive. BNPL would not.

crazygringo 4y ago
> if everyone paid their balances in full and on time, credit card companies would still survive. That goes against my understanding. Do you have a source for that? I'm pretty sure credit cards make their money off of interest. It's not from the interchange fees from people who pay their balance each month, as those often go straight back to consumers through rewards programs, and just administration costs generally. The card I use most has no annual fee but 2% cash back on everything.
- scottLobster 4y ago
  The ratio depends on the credit card issuer, but often times the rewards are just a fraction of the fees charged. American Express in particular makes more of their money from transaction fees and membership fees than interest. https://www.investopedia.com/articles/markets/012715/how-american-express-makes-its-money.asp https://www.investopedia.com/articles/markets/012715/how-ame...
  - crazygringo 4y ago
    Yes, but American Express is very much an outlier and always has been. It's also why many shops don't accept Amex, because it charges higher transaction fees.
  - nunez 4y ago
    AMEX allows you to have a rotating credit line now on those cards.
- soco 4y ago
  Cashback is not really a thing around me (Switzerland) and other rewards are just practical jokes - like overpriced black socks subscriptions offered slightly less overpriced. Yet credit cards thrive.