It all started with gasoline stations and small businesses– you remember, the percent added to sales purchases that is passed on from the retailer to the customer. A $36 mug is assessed a three percent charge if paying by credit card but no fee if you pay cash or use a debit card. Since Covid-19, I have experienced an additional service fee when dining out and Covid-19 surcharges for restaurants and hotels… and this trend is expanding into retail.
The policy of passing along service fees to the customer may not translate well into retail since consumers will resist paying for the cost of doing business (why pay more based on method of payment?). Two years ago, I was vacationing in San Diego and a restaurant added a surcharge due to the rising cost of employee healthcare and wages, essentially passing the increase over to us. Why should customers have to pay for this? They are not responsible for the restaurant’s cost of doing business. Imagine if we had to do this for our computers, smart phones and voice assistants. A surcharge is a surefire path to alienating customers. On that note, I never went back to that restaurant and neither have my friends.
As competition in the consumer payment market grows, retailers and brands should take warning and be wary of passing more fees onto customers. Nickel and diming customers for fees won’t stick and it’s not worth losing the lifetime value of a customer.
Added credit card fees that businesses are trying to pass off to the customer are ultimately going to backfire. As a result, usage of debit cards, buy-now-pay-later (BNPL) and online payment models like PayPal will continue to rise.
The push for passing along additional fees is due to rising costs and higher rates charged by the credit card companies. Granted, it is more transparent than raising prices to hide the fees, but it is still short-sighted. Traditional credit card companies be forewarned: As businesses try to pass on service charges to customers for using credit cards, consumers will turn to debit cards, cash and BNPL options.
Next-gen fintech companies are growing, and compared to Wall Street’s Visa, Mastercard, Discover and American Express, these smaller companies are resonating with younger consumers. The buy-now pay-later model has not only gained substantial traction in the past year but has been on the rise since 2016. Global market share of BNPL was only 0.4 percent (yes, zero point four percent) in 2016 and now represents 2.1 percent of the market. International pioneers in BNPL include Sweden, German and Norway, and in each country the payment plan is above 14 percent. Sweden’s dominance is attributed to the success of Klarna, an online payment plan that launched in 2005, well ahead of other major players. The fintech payment field is getting crowded:
In a 2020 survey by Statista Global Consumer Survey, 69 percent of respondents stated they have paid cash in stores, restaurants and other points of sale; 64 percent used debit cards and 58 percent used credit cards. Mobile payments were low at 8 percent. For online payments of goods and services, Statista reported credit cards and online payments (PayPal, Amazon Pay) as being equal at 56 percent with debit cards at 52 percent. Traditional credit card companies be forewarned: As businesses try to pass on service charges to customers for using credit cards, consumers will turn to debit cards, cash and BNPL options.
The BNPL field is forcing the major credit card players (with their deep pockets for spending on marketing and customer acquisition) to develop their own BNPL solutions. My Chase Plan, Amex’s Plan It, and Visa Installment Solution (coming soon) may help the big brands fend off most of the smaller players.
Credit (no pun intended) goes to the fintech startups for popularizing and making it possible for next-gens to pay for products and services over time without interest. What resonates with younger consumers is that they don’t pay for this service. A downside is that although BNPL may offer customers a great budgeting tool, it does not help build a credit history for when they eventually need to borrow money for a car or home.
But don’t count out fintech too quickly. Smart BNPL brands are starting to offer credit building products similar to credit cards. For example, once Sezzle users have paid off a purchase in full, they are eligible to enroll in Sezzle Up, which enables them to boost their Sezzle Spending Limit. Veronica Katz, CFO at Sezzle explains, “By enrolling in Sezzle Up, users also authorize Sezzle to report their payment history to the credit bureaus, enabling them to build their credit score by keeping their accounts in good standing. Sezzle Up users are also able to track credit progress by viewing their credit scores on Sezzle statements.” Any cynic would look at the BNPL innovation as a thinly veiled credit card business.
BNPL Pros and Cons
- BNPL offers customers free small loans over time but there are significant limitations to spending. Credit cards, on the other hand, offer higher spending allowances.
- BNPL provides a predictable payment schedule with zero interest. Credit card payments can be unpredictable and if balances are not paid in full, high interest rates may be incurred.
- Credit cards are more widely accepted globally whereas BNPL products are specific to retailers and not as widely accepted.
PayPal, the Pioneer
PayPal is the most established and trusted brand for online payments and credit, and the company has recently introduced new products called Pay in 4 and PayPal Zettle. The total payment volume (TPV), the key performance indicator for PayPal, was up 50 percent while revenue was up 20 percent year over year. In the first quarter of 2021, PayPal’s TPV amounted to around $285 billion U.S. dollars, representing a 50 percent year-on-year growth. This payment volume was generated through the over 3.74 billion transactions which PayPal processed during that period. In 2019, the payment provider’s annual payment volume came to $712 billion.
Last year, PayPal’s Pay in 4 product was launched and it continues to grow in popularity with shoppers. As with BNPL companies, customers pay for goods and services over four installments. A key benefit offered by Pay in 4 is that the installments can be aligned with bi-weekly paydays, so the system becomes a budgeting tool managing expense and revenue flows that are in sync.
Doug Bland, SVP and general manager of global credit of PayPal, said in a recent interview, “There is a misconception that younger generations don’t like to use credit, however, this is simply not the case.” In a Forrester/PayPal survey, 48 percent of Gen Z (18-22 years old) were extremely comfortable using credit. Bland added, “Younger consumers just want transparency in lending practices including what costs, interest rates and transaction fees apply. PayPal is a responsible lender and fully transparent when lending money to consumers.”
PayPal added 14.5 million net new accounts in the first quarter bringing its total to 392 million active accounts. Jim Magats, PayPal’s SVP of Omni Payments, states, “Undoubtedly, our transactions increased. The average transaction value is higher per user and current users are more engaged, replacing cash and checks with PayPal payments.” PayPal is also offering new products for retailers like PayPal Zettle which provides merchants services beyond payments, such as integration with accounting, POS, inventory management and e-commerce systems.
What Does a Brand Stand For?
A growing number of consumers, especially millennials and Gen Z are becoming more and more loyal to companies that not only talk about social good, but in fact act on it. Part of PayPal’s success is due to staying in step with both consumer and merchant needs and expectations. PayPal is focused on improving the customer experience and supporting small businesses. Since the inception of the U.S. government’s Coronavirus relief bill, PayPal has facilitated $3 billion in loans under the PPP program to approximately 100,000 businesses.
BNPL fintech companies are in step with cultural trends and have openly promoted social initiatives to their younger target markets. Katz states, “We believe that our efforts in sustainability, DEI, recent Climate Neutral certification, and value-based marketing are what give customers more trust in Sezzle.” In fact, according to CNBC, 84 percent of users trust Sezzle to keep their financial information secure, compared to only 28 percent that trust banks and credit cards. Sezzle also offers Sezzle U, an initiative that provides education and answers to the questions that consumers have about how to build good credit, financial health, and the best ways to budget and manage finances.
As competition in the consumer payment market grows with more and more companies entering the arena, retailers and brands should take warning and be wary of passing more fees onto customers. Nickel and diming customers for fees is an added pain point in the shopping journey. It just won’t stick and it’s not worth losing the lifetime value of a customer.