Buy now pay later sector crushing credit card growth

Is the dramatic success of buy now pay later (BNPL) companies such as Afterpay (ASX: APT) leaving a real dent in the use of credit cards?

Anecdotally that would seem to be the case given that the banks have been leading a chorus of calls to regulate the BNPL industry at the same time as they are developing their own versions – with many of those run through existing credit card accounts.

Now the numbers are starting to suggest that the BNPL boom has been accompanied by a cooling in the use of credit cards, although significant COVID-19 lockdowns in Melbourne and Sydney have also had a big impact.

During July, credit card spending plummeted by 11.4% to $19.5 billion, according to the latest Reserve Bank data.

Lockdowns have cut spending too

While much of this falling spending may have been the result of consumers being unable to fork over as much because of the closure of many retail outlets and restrictions on their movements, another metric suggests BNPL might also be playing a part.

The amount of interest owed fell 5.5 % $18.9 billion, which is the lowest number since February 2004.

The number of credit card purchases also fell by 15 million in July or 6.17 % and interest was $2.57 billion lower in July than the year before.

Lower credit card use, and an incredible $1.1 billion in repayments

Australians also repaid an incredible $1.1 billion of credit card debt in a single month – a turnaround from the increasing credit card interest since the end of last year’s lockdowns.

That may be due to them using the lower spending during lockdowns to pay down high interest debt but it could also be a result of many consumers using BNPL products as a substitute form of credit rather than credit cards.

The swap between credit cards and BNPL arrangements which usually split payments into four has been a source of intense annoyance for the banks, due to the fact that the BNPL sector is more lightly regulated because it markets itself as a repayment or budgeting tool rather than as a credit provider.

Switch from cards to BNPL is on

Growing economic uncertainty in the wake of the COVID-19 pandemic and time to restructure finances could have also caused many households to take the opportunity to rid themselves of revolving credit and possibly replace it with the chance to pay for purchases without interest through BNPL.

US research by Allied Market Research estimated that the global size of BNPL was US$90.69 billion in 2020 and was projected to grow at a staggering compound annual growth rate of 45.7% before reaching US$3.98 trillion by 2030.

“The COVID-19 pandemic has positively impacted the buy now pay later market, owing to growth in penetration of buy now pay later platforms among consumers for purchasing expensive household and other items for general use,’’ the research found.

Credit card debt has fallen before

This is not the first time credit card debt has fallen, with around $7 billion being wiped off in the six months after the first COVID-19 lockdowns.

Another indication that BNPL providers are substituting for credit card use is the drop in credit card accounts, with 670,000 people cancelling a credit card in the past year, and 44,000 chopping up their cards in July alone.

That brought credit card account numbers to the lowest level since February 2007.