Capital One will no longer allow its cardholders to use its credit cards to fund their purchases with buy now, pay later (BNPL) options due to competitive and financial risks involved with such transactions.
The move comes at a time when consumers are choosing to spend less on credit cards and are instead preferring to checkout using flexible payment options such as those offered by Afterpay and Klarna. Capital One, which currently supports more than 62 million U.S. accounts, saw its credit card purchase volume declined by 16 percent year over year in Q2. While the volume partially recovered in Q3, consumers’ shift in buying and payment behaviors toward installment payment plans is ominous for credit card issuers.
According to the U.S. Federal Reserve, use of revolving credit has declined for the seventh time in the last eight months, with credit card debt dropping to $5.5 billion — a three-year low. That is not to say that consumers are not spending enough; they are just using their credit cards less. European FinTech Klarna saw its revenue grow by 44 percent in the first half of 2020, according to CNBC. Meanwhile, Australia-based Afterpay reached 6.5 million active users in the U.S. market by the end of September this year, pulling in $1 billion in total sales, according to Business Insider. The growth of Klarna and Afterpay speaks to consumers’ voracious appetite for flexible payment options that help them plan their spending and avoid credit card debt.
For credit card issuers such as Capital One, enabling their customers to use such offerings is a double-edged sword. While it helps them stay on top of consumers’ wallets, such offerings eat into their revenue as consumers no longer have to pay interest fees, which makes for a significant share of revenue for card issuers. It also increases issuers’ risk of facing payment defaults and chargebacks as use of buy now, pay later options can lead to overspending.
Capital One’s decision might also be indicative of the company’s plan to roll out its own flexible payment offering, much like Chase did. The company said that it will still allow its customers to use flexible payment options using their checking accounts and debit cards.