All you need to know on Square’s plan to acquire After Pay for $30B

AfterPay and other Buy-Now-Pay-Laters (BNPL) companies are replacing credit cards: Understand why in less than 5 minutes.

Last night during a dinner with some friends, we started a conversation about Square’s move to acquire AfterPay and I never imagined that the future of the BNPL industry would be so intriguing and interesting to most of my friends, who don’t have a lot of knowledge on the fintech industry.

Everything began when one of them said that he used this method to pay for his honeymoon, the other told me that he used it as well to buy some clothing. I also decided to share my opinion on it and see if it might also be relevant to them and to you who are reading this.

The main feature of this payment method is the flexibility it provides, it usually doesn’t make a hard pull on your credit scores and has an almost-zero interest rate. So… where is the catch?

Before we jump into that, let’s start from the beginning, whats is BNPL and some key findings:

It’s here everywhere

For those unfamiliar with the BNPL world, it’s simple: it’s that button in the checkout of any ecommerce that allows you to pay in parts. Whether it is on Apple’s website when you’re buying a new Iphone, Peloton using Affirm to buy your bicycle, Klarna on Etsy or Paypal on Ebay.

56% of Americans have used a BNPL, in July of 2020, according to The Ascent found that 37.65% of American adults had used a BNPL service. Since then, that number has jumped substantially, with 55.80% of Americans now saying they’ve used one of these services. That’s an increase of 48% in less than a year.

Why do they use it?

67% of millennials don’t have a credit card

According to a new study of BNPL apps by The Ascent, 67% of millennials don’t have a credit card. For some, that’s because they can’t get approved, and others prefer to avoid credit. Many don’t think it makes sense to use a credit card for small, everyday purchases and are worried about the impact of credit cards on their credit scores.

Half of these purchases are made because otherwise they wouldn’t fit in their budget and it seems as the perfect way to spend. It looks that BNPL gives them time and that is what the millennials need, that is the advantage of this model, and also makes them feel that BNPL provides the capital that their budget doesn’t.

3rd Party Provider Revenue Model

Which 3rd Party Provider is winning?

Do Buy-Now-Pay-Later models affect your Credit Score?

Yes, most BNPL companies don’t do hard pull on your credit report, however if you fail to pay on time they do affect your credit score.

Do Buy-Now-Pay-Later charge you interest rates?

Yes, some come with an interest-free period, while others charge interest rates of up to 30%. A typical interest-free offer will break up the total cost of your purchase into four installments, asking you to pay 25% of the purchase price up-front and then make the remaining three payments every two weeks.

Direct over 3rd Parties

61% of buy-now-pay-later users would rather use a BNPL service directly from a retailer like Apple, Amazon and Walmart than using a 3rd Party (Klarna, Affirm or AfterPay).

Higher Trust than Credit Cards

30% of buy-now-pay-later users trust BNPL providers more than credit card companies when it comes to fair business practices.

BNPL are the new Credit Cards

62% of buy now, pay later users think it could replace their credit cards.

Why do retailers need to use Buy-Now-Pay-Later models?

Because they allow them to double their sales, according to Brad Paterson,Splitit CEO, “installment payment options allow retailers and customers to align across their financial values like adhering to a budget, avoiding debt, and increasing their purchasing power. With the right solution, they’re also helping customers build a positive credit history while earning rewards from the credit card provider”.

If people prefer to use it directly on Amazon, Walmart or Apple, why does Square bother paying $30 billion to buy AfterPay?

Simple answer: because it’s a massive industry where everyone involved wins. And also because not all retailers are Amazon, Walmart and Apple.

The future for Retailers:

As the Buy-Now-Pay-Later Industry evolves, all retailers smaller than these 3 giants, will have 2 alternatives: 1) Continue using 3rd Party Providers (AfterPay, Klarna and Affirm) or 2) Develop their own Credit Scores in-house.

Why do Apple, Amazon and Walmart do their Credit Models in-house?

Because they know that traditionally, Financial Services have 3 times the net income of the retail industry. So why should they leave those margins to 3rd party providers?

But why is there a Trend for all Retailers except the top 3 (Apple, Walmart and Amazon) to use BNPL providers?

Because in the Age of Data, it’s more convenient to use a BNPL provider, to DOUBLE your sales even without making profit on the lending side; than Building Credit Models in-house with poorer data than the aggregated data network and power that BNPL have.

What if a Retailer grows to a point where it has enough data to stop using third party BNPL providers?

It needs to use an AI Credit Engine like Upstart or QUASH to gain more control, and assess the risk of their customers while focusing on the actual sales process.

And what is an AI Credit Engine?

A Platform that Financial Institutions use to leverage aggregated learnings to have competitive Financial Services in the Age of Data. It uses all the technology that a BNPL uses in-house, but democratizes the access of these capabilities so that the Retailers / Ecommerces knows how much risk they are assuming and have the final word on who, just like Amazon, Walmart and Apple.

Does AI Credit Engines work only with Ecommerces/Retailers?

No, It helps any Financial Institutions including Banks, Credit Unions and Fintechs.

What changes with Square’s Acquisition on AfterPay?

On one end we see Ebay, the biggest retailer using Paypal as a 3rd party provider. On the other end we see AfterPay deploying BNPL over all Square’s network. This acquisition, represents one of the biggest steps for more Retailers/Ecommerce deploying BNPL offerings. As we see better offerings for consumers, there will be less need to give down payments for things you want.

If I’m a Retailer, how do I start using an AI Credit Engine?

You hire a Credit Risk Director and provide him with QUASH.ai Platform

20 years ago, Marketing Directors were those guys responsible for buying Billboards in the streets. Today 99% of them are called Digital Advertisers. Today, those Credit Risk Directors who use QUASH’s AI Credit Engine or better known as a CREDVERTISING™ Platform, are now called Credvertisers.

What is a Credvertiser?

A Credit Risk Director, who prevents you from using a BNPL 3rd party provider, and by running CREDVERTISING™ Campaigns with Alternative Data and Auto Machine Learning, it allows you to have the most competitive Financial Services available.

All this world is constantly growing, and faster than we can even imagine, so we have to be prepared and acquire all the knowledge we can. That’s why we are focused on developing QUASH to its full potential to help in this digital era.