Mastercard Inc. (NYSE: MA) dropped a bomb this week, a buy-now-pay-later (BNPL) bomb that is, when it announced the launch of a new set of APIs that would allow banks, alt-lenders, and a diverse group of other fintechs, the ability to participate in the growing trend of short-term, consumer lending at a merchant’s point-of-sale/point-of-information. Leading up to this past week, the recent BNPL headline grabbers were August’s announcement of Square’s intent to acquire Australian BNPL provider AfterPay for $29 Billion, and U.S. BNPL powerhouse Affirm’s partnership with ecommerce giant Amazon. However, the entry of Mastercard into the BNPL frenzy stands to blow-up the existing landscape of providers. Mastercrad’s new BNPL offering will be great for consumers and merchants, but may induce a race to the bottom (margin compression) for existing BNPL platforms, and the new entrants to the BNPL marketplace that Mastercard’s APIs will enable.
To provide a little perspective on the magnitude of the addressable BNPL market that Mastercard is opening up, Mastercard boasts merchant acceptance at over 37 million locations worldwide. In comparison, Affirm services over 3,000 merchants. And although many of Affirm’s merchants are very large, Mastercard’s expansion of the BNPL market will dwarf that of Affirm’s and all other current BNPL providers combined.
In terms of market positioning, Mastercard won’t be offering the BNPL service directly to its merchant partners, and as such, its business model will be distinctly different from most existing providers. Mastercard will make its network available to other types of lenders to compete to for its eligible acceptance partners’ BNPL business. In essence, the new APIs of Mastercard’s Installment Payment Service will allow banks, credit unions, alt-lenders, digital wallets, neobanks, card acquirers and issuers, and fintechs of all kinds to “plug-in” to Mastercard’s rails, creating a massive network of merchants, lenders and consumers. Per Mastercard’s own announcement, it lists the following companies as soon-to-be participants: Barclays US, Fifth Third, FIS, Galileo, Huntington, Marqeta, SoFi, and Synchrony in the U.S., and Qantas Loyalty and Latitude in Australia.
With this one initiative, Mastercard is exploding the BNPL market size on three fronts: new merchants for acceptance, new BNPL providers, and new consumers, including almost anyone who possesses a Mastercard branded physical or virtual card. And it’s pretty clear why this will be a boon to businesses and consumers. Merchants stand to benefit from greater consumer usage, likely manifested in increased consumer spending, and easier implementation of BNPL capabilities, as one of the key technical features of Mastercard’s program is the absence of the need to integrate at the merchant’s point-of-sale, resulting in a less disruptive merchant onboarding process. At the same time, consumers can avail themselves of better financing terms on short term, micro-loans as a direct result of increased competition among providers, in addition to availing themselves of the core principle of Mastercard’s raison d’etre: greater choice in how payments for goods and services are made.
But it stands to reason that what accrues to the benefit of merchants and consumers will not necessarily translate into a boon for existing BNPL providers. In fact, to existing BNPL providers, Mastercard’s new BNPL program may very well pose an existential threat. By blowing-up the current BNPL market and expanding it to the degree to which Mastercard has the potential to do, the increased competition among BNPL service providers facilitated by Mastercard’s new Installment Payment Service may precipitate a race to the bottom in profit margin. It’s important to keep in mind that most current BNPL players are not very diversified – BNPL represents their core offering, and in most cases, their only offering. So, with the introduction of meaningful competition, one of the potential (and likely) outcomes will be margin compression, as new entrants of the BNPL marketplace compete for business by lowering borrowing costs for consumers.
Perhaps, and very much to this last point, look no further than Affirm’s announcement this week that it will be adding cryptocurrency trading to its application. Per Affirm CEO, Max Levchin, “Our superpowers are in developing sophisticated, scalable technology, risk management and highly efficient access to capital. Expect us to look for more opportunities to buy and build, as we look to leverage our core strengths.” Though I’m not suggesting this strategic move was in response to Mastercard’s BNPL bomb, it does portend a logical, strategic pathway forward for existing BNPL providers in light of Mastercard’s new offering. With greater competition in the BNPL space, dedicated BNPL platforms will have to develop additional, value-added capabilities to complement their core offering, and supplement reduced profit margins.