As BNPL Giants Push Debit Cards, Credit Unions Counter with Pay Later Offerings
By Steve Cocheo, Senior Executive Editor at The Financial Brand
Simple Subscribe
Subscribe Now!
Executive Summary
- Affirm, Klarna and other major buy now, pay later companies are growing beyond their original products. A key expansion: Debit cards, which provide flexible entrée into after-purchase BNPL.
- Financial institutions examining fund flows have been seeing significant leakage — with more and more money flowing out to repay BNPL debt.
- How to fight back? Build your own pay-later programs on a debit card foundation.
Angel Siorek was booking haircuts online when she noticed something she hadn’t seen before.
“I had selected ‘woman’s haircut’ and not only did I see one, but three, buy now, pay later options,” says Siorek, an executive with Velera, the payments credit union service organization.
Finding BNPL options at her favorite haircutter was a surprise, but not actually a major one, either to Siorek the consumer or Siorek the vice president of debit payment solutions for Velera.
“You just can’t check out without seeing a BNPL option — it’s everywhere,” says Siorek.
Many of those in-the-moment options are presented by fintech BNPL payment companies — firms like Afterpay, Affirm and Klarna and, in some cases, by major banks.
The sheer scope of this competition for financing everything, from major online and in-store purchases to services like, well, haircuts and blowouts, is so ubiquitous that smaller institutions may not fathom the competitive impact.
Ben Maxim, chief technology officer at MSU Federal Credit Union, had his own epiphany while visiting a chain pet supply store to pick up dog food. He’d always thought of BNPL as an online payment mechanism. But then he spotted an Afterpay sticker on the store’s register. That started him digging into the possibilities.
Other financial institution executives have been delving into their organizations’ own transaction records — and are finding some sobering facts.
Take Educators Credit Union of Wisconsin. There, Ashley Madala, chief lending officer, says that in 2023 the organization made a deep dive into transactions and found that over 46,000 of its 150,000 members were using buy now, pay later products.
“That was far more than I had anticipated,” says Madala. “But it showed me that this was something that our members really wanted and needed.”
In fact, the urgency for BNPL lay behind another pattern picked up in the credit union’s research: frequent overdrafts.
“Customers were losing track of the number of offers they had taken from the various BNPL channels,” recalls Madala. They had taken on multiple plans, with different payment due dates and different installment plans. There was no “air traffic control.” They lost track of what was due when, so as their BNPL providers tapped their credit union debit cards for installment payments, many were becoming overdrawn, with too many installments hitting their checking accounts at once.
Educators Credit Union isn’t unique. Emelda Baca, senior vice president of consumer lending at Arizona Financial Credit Union, says her organization performed similar research. The revelation: So many members were using BNPL that in 2021 $1 million a month was flowing out of the credit union to make installment payments.
But the challenge runs deeper than that.
Fintechs’ Debit Card Thrust Changes Competitive Balance
The major fintechs in the BNPL space have been expanding their original models for some time, exploring other ways of providing financing to credit-hungry consumers. As the big players have moved beyond digital shopping to taking their services to the physical point of sale as well, they have been offering their own branded debit cards.
“These fintechs acquire consumers at the retailer level, and now they’re rolling out more banking-type products and services around BNPL to create a larger moat around their brand and their relationships with that consumer,” says Bryce Deeney, co-founder and CEO at equipifi. His firm works with financial institutions to incorporate pay-later features into their product lines.
As described in a July story on The Financial Brand, bundling debit with BNPL is the big thing for fintech players. Affirm, rather than a bank, was the debut user of the Visa Flexible Credential program, offering a debit card with the back-end option of switching debit purchases to pay later options. Klarna announced details of its own deal with Visa later, launching its debit card in Europe with a pilot group of users in the U.S. and a growing waiting list of people who wanted the debit card.
Klarna has sunk deeper roots into the U.S. over the summer with its much-delayed U.S. initial public offering. And the company opened up its U.S. debit card beyond the pilot group. As the Klarna U.S. website says, “The wait is over: 5 million asked. Now it’s here for everyone.” (Although a pop-up box adds: “Coming soon to more customers: To ensure the best experience, the card isn’t available to everyone yet, but it will be. Stay tuned for updates!”)
Meanwhile, the Affirm Card keeps on growing. In a mid-September securities briefing, Zane Keller, head of equity investor relations for Affirm, called the card “one of our cornerstone products now.” At the end of Affirm’s fiscal 2025, ended in June, active cardholders had nearly doubled, to 2.3 million, and in-store spending on the card had grown by 187%.
Echoing Angel Siorek’s observation, Keller added, “It’s no longer the case that we’re viewed as being a nice-to-have or some type of niche product. Any type of merchant, especially in e-commerce, is really now expected to have at least one BNPL option available at checkout.”
Yet, Keller acknowledged that offline usage remains a challenge. “I don’t think any player in the BNPL industry has really figured out totally how to crack offline yet,” said Keller. “And, at least in the United States, the offline market is six times the size of the online market.”
On the other hand, “challenge” is a relative term. Holders of the Affirm Card use the company’s services much more frequently than the overall customer base. Debit cardholders engage with Affirm an average of 20 times annually, versus nearly six times annually across all Affirm users.
“Our ambition is to capture closer to everyday spend, which would imply transactions per user of 365 or so,” Keller said.
So, it’s not surprising that Siorek sees every use of an alternate payment channel as a lost opportunity for traditional players.
Read more:
Traditional Players Have a Way of Pushing Back
These firms and others in fintech are gunning for traditional financial institutions’ turf.
But credit union executives speaking at an event sponsored by Deeney’s company insist that a good way to battle such incursions onto traditional players’ turf is a counter-insurgency: moving their institutions from standalone debit card services as offered by virtually every bank and credit union to adopting “smart debit” — the fintechs’ game, played from the other side of the table.
This is debit that incorporates the ability to switch the initial purchase debit transaction. Through a website or app, the institution’s approved customer can turn qualifying purchases from debit to a payment plan. It’s a form of after-the-fact BNPL, offered through the digital channel for purchases of types and sizes that the institution is willing to finance. (Unlike those fintech BNPL players that sometimes offer merchant-subsidized 0% plans, the depository institutions generally charge interest.)
Deeney says two distinct market segments can be targeted here. One includes people who have already tried fintech buy now, pay later — like those Educators Credit Union found among their customer base. These people can be converted when their longstanding banking provider begins offering pay later service. The second segment are those Gen X and Millennial consumers who have not gone for fintech BNPL but who trust their banking provider and might try it.
Interestingly, while Baby Boomers have not gravitated to BNPL for many purposes, Deeney says some like the idea of installment plans for larger purchases, including travel.
Read more: How Consumers Under 40 Are Driving Radical Transformations in Payments
Getting Started Pushing Back
Institutions watching deposits and payment volume moving out believe that they have to offer something if they are going to lean into customer and member loyalty to reverse the tide.
“In order for credit unions to remain relevant, and to be able to engage with their members, we’re going to have to pivot to these types of solutions that our members are already participating in,” says Indira Khan, a veteran lender and now chief transformation officer at Suffolk Credit Union in Suffolk County, N.Y.
The need for pay later services overlaps with a long-running need for small loans. Traditional small loans can be prohibitively labor-intensive to provide, executives point out, and for many consumers larger unsecured personal loans aren’t always easy qualified for. And many consumers find the process of asking for a loan intimidating.
By contrast, a debit-card-based form of credit offers some advantages, they say.
One is that the process can be substantially automated, requiring little day-to-day human involvement.
Another is that there is a built-in budgeting aspect to these short-term loans. The consumer spends the money first, and, if offered a pay later option that they accept, the funds originally spent are deposited back into their account. This can help contain the debt to a manageable size, and the loans are made in bite-size chunks.
Putting deposits and installment plans in one central relationship helps avoid the crazy quilt effect of having plans from all sorts of BNPL lenders coming due at overlapping times, leaving consumers high and dry. Being a single stop for the consumer can help avoid their being overwhelmed, executives say.
At Suffolk Credit Union, for example, management permits a maximum of three pay later plans per member at a time, with a maximum debt of $2,500. Terms can run for three, six or nine months.
“Delinquencies have been practically nonexistent because of these parameters,” says Khan.
Educators Federal Credit Union’s Ashley Madala says performance has been better than other unsecured lending the organization does.
“What’s nice about a smaller dollar loan is that even if you do get one payment, and for some reason don’t get any more, it’s not such a huge hit to your portfolio, and you’re still able to give those members a chance,” says Madala.
Institutions offering these plans for a significant period generally report quick uptake once consumers find out about them, and ongoing growth.
Beneficial ripple effects can accompany such programs, as well. One is increased primacy. Typically these programs require that a checking account used as the base for a debit pay later arrangement has to be linked to a direct deposit relationship, in part to facilitate repayment from the borrower’s source of current income.
Tom Gessel, SVP and chief innovation officer at First Credit Union, in Arizona, says that people who hear about the service that don’t have a direct deposit relationship, or who may only have a savings account, can be persuaded to open broader relationships.
Read more: BNPL Isn’t Just Lending, It’s a Card Growth Engine
