Mastercard’s BNPL Bombs

Mastercard Inc. (NYSE: MA) dropped a bomb this week, a buy-now-pay-later (BNPL) bomb, when it announced the launch of a new set of APIs that would allow banks, alt-lenders, and a diverse group of other fintechs to participate in the growing trend of short-term, consumer lending at a merchant's point-of-sale/point-of-information. Prior to this 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 e-commerce giant Amazon. However, Mastercard's entry into the BNPL frenzy threatens to devastate the current provider landscape. Mastercard's new BNPL offering will benefit both consumers and merchants, but it may result in a race to the bottom (margin compression) for existing BNPL platforms as well as new entrants to the BNPL marketplace enabled by Mastercard's APIs.

To put the magnitude of the addressable BNPL market that Mastercard is opening up into perspective, Mastercard has merchant acceptance at over 37 million locations worldwide. Affirm, on the other hand, serves over 3,000 merchants. And, while many of Affirm's merchants are large, Mastercard's BNPL market expansion will dwarf that of Affirm and all other current BNPL providers combined.

In terms of market positioning, Mastercard will not provide the BNPL service directly to its merchant partners, and as a result, its business model will be significantly different from that of most existing providers. Mastercard will make its network available to other types of lenders so that they can compete for the BNPL business of its eligible acceptance partners. In essence, the new APIs for Mastercard's Installment Payment Service will enable banks, credit unions, alternative lenders, digital wallets, neobanks, card acquirers and issuers, and fintechs of all types to "plug-in" to Mastercard's rails, resulting in 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.

Mastercard is expanding the BNPL market on three fronts with this single initiative: new merchants for acceptance, new BNPL providers, and new consumers, who include almost anyone who has a Mastercard branded physical or virtual card. And it's easy to see why this will benefit both businesses and consumers. Merchants stand to benefit from increased consumer usage, which is likely to result in increased consumer spending, as well as easier implementation of BNPL capabilities, as one of the key technical features of Mastercard's program is the elimination of the need to integrate at the merchant's point-of-sale, resulting in a less disruptive merchant onboarding process. At the same time, as a result of increased competition among providers, consumers can benefit from better financing terms on short-term, micro-loans, in addition to the core principle of Mastercard's raison d'être: greater choice in how payments for goods and services are made.

However, it stands to reason that what benefits merchants and consumers will not necessarily benefit existing BNPL providers. In fact, Mastercard's new BNPL program may pose an existential threat to existing BNPL providers. Increased competition among BNPL service providers facilitated by Mastercard's new Installment Payment Service may precipitate a race to the bottom in profit margins by blowing up and expanding the current BNPL market to the extent that Mastercard has the potential to do. It's important to remember that the majority of current BNPL players are not very diverse – BNPL is their core offering, and in many cases, their only offering. As a result of the introduction of meaningful competition, one of the potential (and likely) outcomes will be margin compression, as new entrants into the BNPL marketplace compete for business by lowering consumer borrowing costs.

Look no further than Affirm's announcement this week that it will be adding cryptocurrency trading to its app to illustrate this point. "Our superpowers are in developing sophisticated, scalable technology, risk management, and highly efficient access to capital," says Affirm CEO Max Levchin. Expect us to look for more opportunities to buy and build in order to capitalize on our core strengths." Though I am not implying that this strategic move was in response to Mastercard's BNPL bomb, it does foreshadow a logical, strategic path forward for existing BNPL providers in light of Mastercard's new offering.