by Duncan Currie, Australia and New Zealand Country Manager, Marqeta
You can’t build a spaceship out of wood. Similarly, you can’t expect to deliver the best possible, modern credit card offering using outdated technology.
The demand for consumer credit has never been higher. The Australian RBA says that demand for Buy Now Pay Later (BNPL) services may have tripled over the previous two financial years, processing around $10 billion of purchases in Australia and NZ in the 2019/20 financial year alone. The global COVID pandemic has only contributed to its continued strong growth.
At Marqeta we’ve had a front row seat to these changes, with our modern card issuing platform used globally by disruptive brands and major financial institutions to launch new card programs. This has included most of the major BNPL brands, like Afterpay and Zip.
Growing demand usually means emerging opportunity, and innovative providers have consistently sought to engage the market with new services and offers. These are exceptionally innovative organisations whose tech platforms allow a great deal of flexibility and responsiveness. When they see a market opportunity, they simply go for it.
These new innovators saw a rising discontent with credit and built out new consumer offerings to help capitalize. A critical enabler of the BNPL is a modern platform to build on, allowing instant lending decisions, virtual cards that can be instantly issued into a mobile wallet, and easy integrations with retailers.
The BNPL players all saw that rather than offering consumers large credit limits (if they could qualify for them) that can encourage overspending and poor spending decisions, they re-architected a new solution. This allowed consumers to borrow to fund individual purchases and pay back the balance in installments, with no fees and interest, and a transparency around repayment schedules that credit card companies had not been able to match.
Companies like Afterpay, Zip and Klarna have leveraged modern payments infrastructure to make on-the-spot lending decisions and issue virtual cards in the moment, able to easily build out large merchant networks, and lately even spinning the technology out further in some cases, to give people the option at the point of sale to pay with debit or split a purchase into instalments.
At the same time, credit card use is shrinking. But the big question in the future COVID economy, at what true rate? It is reasonable to surmise that customers who would previously have used credit cards are now switching and using BNPL.
Marqeta’s 2020 State of Payments research showed that 1-in-3 have now used a BNPL platform, with 80% of them increasing their use of BNPL since the pandemic began.
Meanwhile, credit card products and the platforms they exist on, have remained largely unchanged since the 1980s. The formula is easy. Low rates, low fees, links to rewards programs. It works, but in the face of a new breed of modern services it’s time might be numbered.
Unfortunately for the big credit providers, their well-known and previously successful products have been largely untouched and are built on old tech. It’s not obsolete, it is still fit for its purpose – but it isn’t capable of doing much more than that.
Their competitors are building spaceships, and all they have to counter with is a timber release.
There is certainly some evidence the larger credit players are trying to catch up. Recent credit card offerings to market like CBA’s Neo Card and NAB’s Straight Up Card both are offering Interest Free options, both with Monthly Fees in lieu of interest, with CBA’s reportedly accounting for one third of new applications. But by and large, credit cards are locked into rigid rewards schemes, old-fashioned approval criteria and offer little insight into spending pattern and flexibility around the repayment experience.
These are a clear play for those in the BNPL target market, but they are still setting themselves some difficult barriers. Applications for those cards apply the same credit criteria as a Platinum Qantas Frequent Flyer card, although the profile of the applicants is much different – there aren’t too many millennials around whose credit scores would net them Platinum status.
By using a modern card issuing platform, innovators can manage the risk profile at a product level rather than a customer level, making it harder for the cardholder to get into a debt cycle. They can also help educate them on the use of credit cards, limit access to high-risk merchants and make transaction level decisions. They can actually improve the way the customer uses the product and in doing so, increase the customer’s engagement with their brand, and create customizable reward programs that reflect changes in customer behavior.
The approach has implications for everything from BNPL and consumer spending, to how businesses borrow and access capital, with new innovators like Capital on Tap and Brex also leveraging modern platforms to upend that space.
So why aren’t larger players rapidly transitioning to newer tech platforms? Simply put, ripping out and replacing core card infrastructure is costly, time consuming and complicated, and can often lead to banks having to support a complicated patchwork of systems. It’s putting them on a slow pace of change, having to build newer, more modern options on new tech platforms, completely separate from their core products.
For a long time, financial institutions ruled the credit market with every possible advantage. It has become clear that the new breed, with their vastly superior technology, are democratising the way we all use cards – and in doing so showing that the product you offer is only as good as the materials you have to build it with.
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