CBA goes head-to-head with Afterpay with buy now pay later launch

Buy now, pay later services are tipped to become ubiquitous due to Commonwealth Bank’s move into the booming sector this week, heightening competition in an already saturated market.

From Wednesday CBA will go head-to-head with Afterpay and Zip Co, when it starts allowing customers to take out small loans to be repaid in interest-free instalments, a type of financial product that has been growing rapidly.

By moving into BNPL, Commonwealth Bank is looking to secure its position as the dominant bank for younger customers. Credit:Michael Clayton-Jones

The banking giant said 86,000 of its customers had pre-registered for the service, and it believed about 4 million CBA customers were eligible for the product.

With banks facing a decline in credit card usage and competition from fintech disrupters targeting their younger customers, analysts predict more banks are likely to adopt a similar strategy to CBA and offer their own buy now, pay later (BNPL) service.

National Australia Bank, for example, is expected to acquire Citi’s upcoming BNPL product as part of last week’s $1.2 billion planned acquisition of Citi’s Australian retail bank.

Managing director of payments consulting firm The Initiatives Group, Lance Blockley, said CBA’s move into BNPL was a sign this type of payment was becoming more ubiquitous, and he expected other banks would follow suit.

“They are following the trend in the market. Something needed to be done to change the traditional credit card construct to make it more relevant to younger people, and this is one possibility,” he said.

“BNPL in this form is just a new evolution of the credit card construct. You’ve been able to buy now, pay later for the last 50, almost 60 years by using a credit card.”

In moving into BNPL, CBA will be the first Australian major bank to offer a similar service to Afterpay, a BNPL company that has not yet reported a profit but had a stockmarket valuation of $38 billion on Tuesday, partly due to a recent takeover bid from US fintech Square.

CBA executive general manager Marcos Meneguzzi said a key reason for CBA’s move into BNPL was a desire to retain the bank’s strong position among younger customers, who are most likely to use buy now, pay later services. “Credit cards, debit cards, buy now, pay later, they’re all different methods that customers can choose on how to pay,” Mr Meneguzzi said.

Some analysts have predicted CBA’s entry into the already crowded BNPL market will squeeze what BNPL firms can charge retailers for the service. CBA’s merchant fees will be the same as what it charges for accepting credit cards, about 1 per cent, compared with about 4 per cent charged by Afterpay.

Jefferies analyst Brian Johnson said in a recent report CBA’s product, known as StepPay, would have the backing of the bank’s infrastructure, including its strong position among younger customers, its app, and its large fleet of payment terminals. Mr Johnson predicted BNPL services would become “globally ubiquitous,” saying banks overseas could create similar products.

“Just as Aussie Home Loans triggered a dramatic drop in mortgage margins in the 90s, StepPay could herald BNPL margin contraction,” Mr Johnson said.

Yet BNPL firms have dismissed the competitive threat from CBA and other banking giants, and some observers agree. Evans and Partners analyst Matt Wilson said he was not convinced CBA’s foray into the buy now, pay later sector would pay off, saying its lower merchant fees were not as important as its ability to generate sales leads to retailers.

“From a consumer’s point of view, you’ve got to create a platform that resonates with the generation that uses it. Afterpay is already there â€" I think CBA has missed their opportunity,” Mr Wilson said. “I think it’s a ‘me too’ strategy that will fail.”

Mr Blockey did not expect CBA’s entrance would have a major impact on Zip or Afterpay, saying PayPal’s move into BNPL was a bigger threat to these players.

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Clancy Yeates is a business reporter.

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