CBA BNPL Take II

A few months ago, I wrote about Commonwealth Bank and NAB half-heartedly throwing their hat into the BNPL ring with new instalment credit cards. These new credit cards allowed users to rack up credit as per normal, but instead of paying interest (and receiving the usual 55 days interest free), the cards attract a monthly fee, in a similar business model to Zip Pay.

I pointed out that the implied (read: disguised) interest rate on these cards was much higher than a regular credit card and users would do well to steer clear.

Last week, Commonwealth Bank announced they will enter the BNPL industry proper, with a more comparable instalment product imaginatively called "CommBank BNPL".

The key selling point to merchants is that there will be no additional fee on top of the usual merchant fee. This compares to Afterpay, who charges merchants an average of 4%. However, the downside to this is that merchants will have limited ability to promote this cheaper service, as it is accessed via a digital Mastercard, not a payment gateway.

The benefit to customers is that they can access BNPL anywhere Mastercard is accepted, which means CBA will not have to sign up merchants like incumbents like APT, Zip, and Klarna (etc) do.

The BNPL product will have a limit of $1000. Any purchase less than $100 will simply be taken from the bank account like usual; any transaction above $100 will automatically be split into four fortnightly instalments, which are automatically taken from your account when due. Clearly, CBA wants customers to form the habit of this being a default transactional card, somewhat automating the BNPL process for consumers.

To be eligible, customers will need a Commonwealth Bank account into which their salary is deposited, as evidence of their ability to repay the loan. Customers will also undergo a credit check, something that other providers such as Afterpay have avoided.

Reading through CBA's media release trying to poke holes in the product (something that was quite easy with their Neo Card), and I'm actually quite impressed with the offering. It costs the consumer nothing (unless they pay late) and costs the merchant nothing extra as it is processed in the same way any Mastercard transaction is. Risk to CBA is mitigated because the customer must show evidence of regular income being deposited. This is clearly one reason for Afterpay's JV with Westpac, as linking a Westpac account to an Afterpay account not only allows for better visibility of ability to repay, but also reduces the cost of sales for Afterpay.

CBA is no stranger to taking credit risk and is sufficiently capitalised, and it makes complete sense that the bank would enter the market, as BNPL is the next iteration of the credit industry, and one that resonates with the younger generation much more than traditional credit cards does.

Industry Implications

There are important implications for the industry here, as this new product is one that demonstrates a continued race to the bottom.

Around Christmas last year many BNPL businesses were offering very generous incentives to use their service. While this isn’t technically lowering the cost to the consumer it is increasing the cost of doing business for the companies to entice new customers on board.

While there have already been winners and losers in BNPL, like all credit products this will also end as a commoditized product with consumers and/or merchants selecting services based on price. Brand loyalty and momentum will be important, but over time could lose its shine as the industry rationalizes.

Another sign was the recent announcement by PayPal, announcing they will offer a BNPL product and will also not charge the merchant anything additional for offering this. This will be served via their existing online transaction engine while CommBank's service will be served via a card in one's digital wallet.

While the CommBank BNPL card may be a comparable product to Afterpay to the consumer the benefit incumbents will have is not just incumbency but that merchants have historically been the drivers of customer sign ups, which can be done at the time of transaction. CBA BNPL on the other hand, the customer must have had the intent to sign up well before they have even considered buying something, as they need to go through the requisite checks and setup process. However, once signed up, the process of buying in store would be seamless for a customer, especially those accustomed to using digital cards, but may be less so for online transactions. I've used Afterpay online and it is very quick and easy and unlike any Mastercard, does not require entering any card details.

So I do not at all think this will be an Afterpay killer. However, it is a genuine contender and is a product I could see myself using (as opposed to Neo), most likely if I was expecting to make an upcoming purchase at a store I knew didn’t offer free BNPL (like JB Hi-Fi for example). Importantly, it marks the continued shift in BNPL revenue models, and I think it is only a matter of time before merchants begin to push cheaper options like PayPal's Pay in 4.

I also do not think we are done. It is only a matter of time before ANZ, NAB, and WBC release a similar product, which I have no doubt will increase the size of the BNPL pie, but the slices will get smaller as more competitors enter. Contrary to what Afterpay have boasted in the past, the barriers to entry in this industry are low, especially for a well-funded bank.

Benefits of incumbency

While Afterpay, and to a lesser extent Zip, have early mover advantage, Commonwealth has size on its side. Commonwealth has the balance sheet to be able to invest in a product like and its business model is clearly geared for offering credit services. Afterpay and Zip have both shown how capital intensive the credit business is (even if Afterpay won't admit they are a credit business) with repeated capital raises through their short lives to enable their aggressive expansion.

CommBank also already have millions of individual and business customers that already have accounts, and already using Mastercard products. I think the jump to encourage these customers in taking the next step to sign up for a new card is low.

CommBank BNPL vs CBA/Klarna

Finally, it raises the question why CommBank would launch a product that directly competes with a product into which they have invested $350m. Similar to CommBank BNPL, Klarna also allows customers to pay off their purchases in four fortnightly instalments. Why would CBA do this?

I have two possible responses:

• CommBank BNPL offers users a different way to access BNPL, namely, through your digital wallet. Klarna on the other hand offers the service through the Klarna Portal, which is serviced through the Klarna app. This gives CBA another iron in the fire with slightly different angles for customers of different preferences.
• Additionally, while Klarna has only been in the Australian market since January 2020, it's 500k active customers lags that of Afterpay's 3.4m Zip's 2.5m, and Humm's 2.5m. Klarna may not have shown the explosive growth CBA anticipated and so they have produced another option to increase their exposure so the industry.

Final Words

My favourite line from the media release was from the CBA Group Executive for retail banking, Angus Sullivan, who said "We are going to treat it like it is credit". While this seems obvious (since buying now and paying later is literally the definition of credit", this is clearly aimed at Afterpay who like to masquerade as a tech company. Indeed, it is the largest constituent of the ASX Tech index.

To me the question is not actually why has CBA entered the BNPL market? The real question is Why has it taken so long? BNPL is a natural extension of CBA’s existing credit products and demonstrates the next stage of evolution of the industry. It is only natural for existing credit providers like banks to enter.

Written by Luke Durbin
Australian Equity Analyst

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