The rise of buy now pay later and the future of paying

There's a major bar in Auckland's Viaduct that is paying $24,000 a week just for contactless card fees.

Darren Hopper, Paymark's data innovation expert, won't say which bar it is, but points to it as an example of the changing way New Zealanders are paying for our purchases.

Sure, the bar could quit accepting contactless cards - many small retailers don't accept them because of the cost - but the risk is that a longer wait at the bar will result in patrons deciding to go elsewhere.

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Eftpos cards- the ones with a magnetic strip and no chip - used to be the dominant card used by banks in New Zealand.

But contactless - debit cards and credit cards with the chip - are now standard and customers who want an Eftpos card have to specifically request one.

Promoted as being safer for consumers to use, contactless technology was initially slow to take off in New Zealand.

There were scaremongering stories about people being able to walk past and use a scanner to rip off your details.

But Hopper says those fears have now been largely debunked and statistics are showing wider acceptance, with contactless creeping up from 9 per cent of all payments to 23 per cent.

He predicts that will grow to 30 per cent in the next 12 months.

"It is all about convenience.

"Today's generation want to buy it now, own it now and want it to work now."

It's that same factor which has driven the rise of buy now, pay later payment platforms in the past 18 months.

The technology allows consumers to split their payments into four or more part-payments spread out over a number of weeks - but get their purchase now.

Research by New Zealand Post on the phenomenon this year found the deferred payments schemes had experienced a "staggering rise" and are set to keep growing.

It revealed that more than 228,000 Kiwis had already signed up to a buy now, pay later scheme, and they are particularly popular with female millennials.

More than one in 10 online shoppers had used such a scheme, 70 per cent of the users were female and 80 per cent were under 45 years old.

"These pay-later solutions are having a growing impact from social media. Instagram, for example, exposes consumers to appealing products accompanied by easy ways to own them," the report noted.

"The desire to spend and the removal of spending barriers, makes purchase very tempting - particularly in the clothing and footwear and health and beauty sectors, both in store and online."

Consumers don't pay interest on the part-payments but can be stung by penalty fees if they miss a payment.

Initially, providers were criticised for making a lot of money off penalty fees but many have now capped those charges, emphasising that most of their revenue comes from the merchants they sign up to use the service.

Australian Stock Exchange-listed Afterpay Touch is the biggest player in the New Zealand market and has more than 1200 merchants signed up to use its scheme here.

Consumers need to register a debit or credit card to use the service, In Australia, Afterpay has said 85 per cent of its consumers use debit cards, which mean they are using their own money to pay rather than credit.

This has appealed to a generation of millennials who grew up around the global financial crisis and saw their parents hit after taking on too much debt.

Many don't have credit cards and don't want credit cards, but still want to be able to make purchases whenever they want.

For retailers, it has been a boon to push sales in a tight market where they face ever more competition.

TradeMe signed up to use Afterpay in late 2017. Gerard Creamer, head of payments at the online marketplace, said it had seen swift acceptance of the service by its professional sellers.

"There has been a 61 per cent increase in usage in the last year. It has been pretty popular."

At the same time, TradeMe has enabled all sellers to accept credit card payments and Creamer says that has driven more online payments across the board.

'We have seen an increase across all instant payments - credit and debit."

The instant payment services means TradeMe can see whether or not something is paid for and how it is paid for, and it increases transactions.

"It speeds up the cadence of the marketplace." Faster payment removes delays in sending out items and encourages sellers to list new items more quickly.

"These products really help with the vibrancy of the marketplace."

It also means there are fewer cash and bank transfers, although many buyers still pay cash on picking up an item.

Creamer still believes there is a place for cash.

"People have these views that cash is disappearing. I think it has its place in the economy.
But from our perspective that is where the rogue behaviour happens."

TradeMe is working on technology that would allow purchasers who want to pay by bank transfer to have a seamless experience, by not having to leave the website to pay.

While buy now, pay later might drive more purchases and more frequent purchases, it also comes at a higher cost to the retailer, which in turn gets passed on to the consumer.

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The cost to retailers

Greg Harford, spokesman for Retail New Zealand, says eftpos is essentially free for retailers.

"If you use contactless debit cards it costs the merchant 1 per cent and credit cards 1.6 per cent. Buy now, pay later is at the expensive end, costing 4 to 5 per cent of the cost of a transaction.

"From the retailer's point of view they get extra sales coming in but they are massively expensive."

But despite the cost, Harford says there are strong competitive pressures to offer these services, and customers want them.

"It is certainly growing very quickly. Most of the major brands now offer that service."

The merchant fees are similar at all of the providers, but Harford hopes they will come down over time.

"I think retailers would certainly like to see more cost effective offers in the market."

As well as Afterpay there are three other major players: PartPay, Laybuy and Oxipay, which until recently were all New Zealand owned, and a slew of smaller operators.

In late August Zip Co, also listed on the ASX and Australia's second largest provider behind Afterpay, bought PartPay in a deal worth up to $65.8 million.

Founded by John O'Sullivan, the business was set up only in 2017 and now counts The Warehouse - New Zealand's biggest retailer - among its customers. O'Sullivan will stay on as New Zealand boss of the company.

PartPay was particularly attractive for Zip because it already has footholds in the UK and South African markets and owned shares in a US part payment company.

Zip Co chief executive Larry Diamond says PartPay was a good fit for it, both strategically and culturally.

Not much will change about the PartPay business in New Zealand as a result of the takeover, although Zip will bring its artificial intelligence technology into the service.

But Diamond hopes it will allow it to grow globally.

"We see this as at the very early stage of the buy now, pay later phenomenon."

He points to America as having huge potential due to its slow progress in using payment technology.

"America is third world for payments. They are still paying for groceries with cheques."

The end of credit cards?

But Diamond also sees buy now, pay later as a major way to disrupt the credit card market.

"Credit card volumes are really slowing down. You can see this product is falling out of favour," he claims.

Diamond says he has also been told by a bank that the average age of a credit card holder is 52.

Conversely, research by the Australian Securities and Investment Commission found one in four Australians already uses buy now, pay later and four out of five are planning to use it.

"If the growth rate continues for the next 30 years it will overtake credit cards," Diamond believes.

And he says it could be even faster for online payments.

"Online could get there quite quickly. In five years it could have a larger share going through [buy now, pay later] than credit cards. Australia could get there in three years."

Credit card companies are not taking it lying down. Visa this year announced it would launch an instalment service to its issuers and merchants in 2020.

"Participating issuers and merchants will be able to offer their customers an instalment payment experience at checkout using a Visa card they already have in their wallet," a spokeswoman for the company said at the time.

That announcement saw the share price of Afterpay take a hit until it responded by saying the Visa offer would still require consumers to have a credit card, and buy now, pay later was specifically attractive to millennials who didn't want a credit card.

In New Zealand, Paymark's Darren Hopper says most of the buy now, pay later transactions are still paid for using a credit card.

That could change, but credit cards are not going away anytime soon.

New Zealand had $7.19 billion owed on credit cards in August, up from $6.78 billion in August 2017, Reserve Bank figures show.

Visa's New Zealand country manager Marty Kerr says credit card spending and transactions are still growing.

"BNPL is definitely addressing quite a specific use case. However credit ... to me it is an and, rather than an or. We see them both growing."

Ruth Riviere, country manager for Mastercard New Zealand and the Pacific Islands, says its research showed that overall the proportion of consumers using cash or credit cards on a monthly basis declined in the six months to May, while debit card use has increased.

"Credit card is most preferred for large value purchases, while a debit card is preferred for everyday purchases like groceries, meals, petrol or clothing; cash is preferred for low value purchases and taxi fares."

Demographically, people aged 18-34 are more likely to hold and use a debit card as opposed to a credit cards, as they offer the same ability to purchase contactlessly via devices and shop online without going into debt.

"Consumers over 35 are more likely to use cash or a credit card."

But still, Riviere says Mastercard welcomes the growth of buy now, pay later in New Zealand.

"We view BNPL products as supplementing rather than replacing credit cards, used for one-off, retail purchases where credit cards continue to be useful for larger payments, international online shopping, recurring bills and business spend."

Hennie Burger, general manager products and merchant banking at ANZ, New Zealand's largest bank, says credit cards continue to be popular for its customers, especially those who want a flexible revolving credit product to manage large purchases, flexibility to shop online or when travelling overseas, or to earn rewards such as Airpoints.

"The Buy Now, Pay Later (BNPL) payment method is growing in popularity and is a valid payment option. We are seeing most BNPL payments made through debit cards linked to a customer's transactional account."

Burger says that while buy now, pay later volume and value spent is growing, it is still low compared with total spending through the credit card scheme networks.

"Demand for debit cards continues to be strong (particularly with younger customers). They allow people to use the money they already have to shop in-store, online and overseas."

But he says they see the way customers use their products changing over time.

"While credit cards will remain an important product for our customers, how we structure our card offerings and how customers control or interact with them may evolve over time."

Harford says it is too hard to predict whether buy now, pay later will become bigger than credit cards.

"It is quite a big call to make. We are certainly seeing strong growth. I'm not sure it will replace it."

Buy now, pay later has not come without its challenges. Regulators in Australia have questioned Afterpay over its processes for meeting anti-money laundering legislation.

In New Zealand the Government is also considering whether to allow buy now, pay later schemes to be "called in" to credit laws should they begin to cause any problems for consumers.

They are not currently regulated as a credit product because they don't charge interest.

Budgeting advocates say the products are too new to know if they are causing people to get into debt they can't get out of.

Hopper says if people are using their credit cards to make buy now, pay later payments, they could still end up paying interest and getting into debt.

"I think the consequences are, if you are not fiscally aware you could end up in a lot of debt if you load your credit card up.

"Yes, it's easy money and easy to sign up but because it is really easy it is also easy to make purchases you can't afford."