Industry Expert Discusses Implications for Credit Unions
By John San Filippo
On August 24, 2023, buy now, pay later (BNPL) provider Affirm announced quarterly and fiscal year-end results that significantly exceeded analyst expectations. Specifically, the company reported:
Loss per share: 69 cents vs. 85 cents expected by analysts.
Revenue: $446 million vs. $406 million expected by analysts.
The company also offered strong guidance for the fiscal first quarter, projecting $430 million to $455 million in revenue versus $430 million expected by analysts. The following day, Affirm stock soared by 28%.
Finopotamus spoke with Bryce Deeney, co-founder and CEO of the Scottsdale, Ariz.-based BNPL platform provider for financial institutions equipifi about the credit union implications of this announcement and the state of credit union BNPL in general.
The Affirm Debit Card
According to Deeney, credit unions should pay particular attention to Affirm’s new debit card. The card was rolled on in the second quarter to about 200,000 consumers and has added approximatley75,000 users per month with minimal marketing efforts.
“Most people think a debit card is a just a debit card. It's connected to your bank account, you swipe it, the money comes out,” said Deeney. “The Affirm debit card obviously does that, but it does a lot more. It allows the consumer, if they have an account with Affirm, to also say, ‘I want to split out this purchase over time.’ Affirm allows that consumer to do that before they even go shopping. Essentially the consumer gets a little line of credit for that particular purchase.” He added that Affirm users also have the option to log into the Affirm website and spread out payments for purchases they’ve already made with the Affirm debit card.
Deeney further explained that the Affirm debit card is a tethered card, meaning that it draws funds from a consumer’s account at another financial institution, e.g., a credit union. Affirm earns interchange through the use of its card, then pulls the funds from the user’s credit union account using inexpensive ACH rails.
“The average credit union debit card earns a credit union about $140 to $150 a year in interchange,” noted Deeney. “Assuming Affirm never launches their own deposit account – which I think is not a safe assumption – and all they're doing is disintermediating the interchange that was earned by the credit union, every member that switches to the Affirm card for everyday use will result in a $140 to $150 annual loss of non-interest income for the credit union.”
Know Your Members
Asked what credit unions can do to mitigate the impact of all this and benefit from the surge in BNPL popularity, Deeney said, “The first step is just awareness and education. The easiest way to do that is to look at your own data. Look at how many of your members are utilizing third-party BNPL companies like PayPal, Affirm, Square, Klarna. That will at least give you a baseline understanding of what percentage of members today are already using these services.” He added that those numbers can be further segmented by debit card versus ACH, to see how much interchange that activity represents.
According to Deeney, the best way to combat encroachment by third-party BNPL providers is for credit unions to offer a better BNPL program. “It's a new payment method that consumers like to use for a myriad of reasons compared to credit and debit,” he noted.
“That's why I love BNPL. It puts the power of financing back in the consumer's hands,” he continued. “With a traditional credit card, the credit union gives you a $10,000 credit limit and hopes you’ll use it responsibly.” He said that BNPL coupled with a debit card allows the consumer to manage unexpected expenses more effectively by spreading them out over a set number of payments. “It allows the consumer to pick and choose which transactions they want to finance versus those they just want to come out of their checking account.”
The Credit Union Advantage
Finopotamus asked Deeney what advantages a credit union BNPL program can offer that a third-party program like Affirm can’t.
“The credit union can charge a significantly lower fee than what Affirm is charging today,” responded Deeney. “Part of the Affirm report stated that their mix of loans at 30% interest is now up to 22% of their loan portfolio.” He explained that due in no small part to the deeper relationship a credit union has with its members, the credit union can underwrite these microloans at a significantly lower rate.
He added that equally important is that credit union BNPL comes from a “trusted partner of the consumer and it's delivered in a channel that doesn't change the consumer's behavior.” He noted that while Affirm requires a unique mobile app, credit union BNPL – at least in the case of equipifi – is accessed through the credit union’s existing mobile app.
Finally, noted Deeney, credit union BNPL consolidates all of a member’s BNPL transactions into one location versus using the numerous BNPL providers offered by various online merchants.
“Why does a credit union offer bill pay? Because it lets the member log into digital banking and set up all their payments in one place,” observed Deeney. “That's exactly what we're doing with buy now, pay later.”
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