Credit cards could lose ground to buy now pay later (BNPL) service providers, which have a promising future with multiple potential growth paths.

Those were the key takeaways from a BNPL session at Future of Fintech conference on Wednesday in New York that was presented by market intelligence firm CB Insights.

“We believe that buy now pay later will do to credit cards what digital banking did to branches: steal growth and elevate the customer experience,” Anisha Kothapa, senior analyst for fintech at CB Insights, said during the session.

The data points to four trends to watch with BNPL:

1. BNPL firms will get stronger;
2. Financial services incumbents will enter the BNPL arena;
3. Business-to-business BNPL solutions will emerge; and
4. Billions more people will have access to credit through BNPL.

On point No. 1, Kothapa cited figures from payment processor WorldPay’s 2021 Global Payments Report that BNPL represented 2.1% of global e-commerce transactions, projected to double to 4.2% in the next three years. The report pegged credit cards’ share of global e-commerce payments at 22.8% in 2020, projected to dip to 20.8% in 2024.

Deanna Traa, chief marketing officer at Canada-based e-commerce software firm Bold Commerce, said she expects a similar shift with BNPL.

“It’s clear that BNPL is currently supplementing credit purchasing, but will ultimately take market share,” she told Bank Automation News. “Consumers aren’t just using BNPL to purchase high-ticket items they might have not been able to purchase before, they’re using it to purchase items they would have bought anyway.”

“BNPL will only become more ubiquitous on e-commerce sites, considering that it benefits brands by pushing consumers over the edge,” Traa added.

Still, Daniela Hawkins, managing principal at financial services consultancy Capco, said credit cards’ position will be difficult to shake. “For now, BNPL options are supplementing credit and traditional options; credit cards are still the reigning champion and will be difficult to gain ground on, with mass affluent customers who enjoy loyalty rewards,” she said.

Several key drivers are behind BNPL’s growing influence, according to CB Insights.

BNPL is cheaper than credit. Kothapa cited a McKinsey report that found BNPL providers spend about 70% as much as private-label credit cards to acquire customers ― an average of $1,492 per customer for credit vs. $1,012 per customer for BNPL. Private-label credit cards report 55% of customers are active 12 months after acquisition, while BNPL providers report 87% are active customers, according to CB Insights.

BNPL is embedded into the checkout experience, showing customers how much they’re paying and when — whether this is over three months, six months or 12 months — making for a more transparent spend. Credit, by comparison, can charge purchasers hidden fees and high interest rates, Kothapa added.

Partnerships with big-name retailers are trending, Kothapa said, pointing to Sezzle‘s partnership with Target, Klarna‘s partnership with Macy’s and Affirm‘s partnership with Amazon and Shopify. “These retail partners are a cheap way to acquire customers because they already have a massive customer base,” she said.

BNPL is more efficient than credit. Rather than a credit inquiry, BNPL providers determine customer eligibility using alternative data, artificial intelligence (AI) and machine learning (ML) for credit assessment. “The same buy now pay later companies are also using AI and machine learning to reduce the amount of delinquent loans they have,” Kothapa noted.

BNPL’s efficiency allows it to act as a central repository of data for all those involved in the payment, Kothapa added. Credit cards involve the merchant, cardholder, issuing bank, acquiring bank and card network that “sits in the middle,” connecting the two banks. The BNPL provider connects to all those parties, giving it “a much more robust data set like stock-keeping units,” which could be useful for merchants and manufacturers.

In that vein, Capco’s Hawkins noted, “Linking individual financial data to the applications they use to transact is the next ‘big thing’ in the era of open banking and payments.” She told BAN that banks, merchants and BNPL firms “will have to form partnerships to best serve the consumer; this will be a challenge for the smaller banks and a huge advantage for the mega-issuers.”

BNPL reaches more people. BNPL appeals to millennials, Generation Z and general consumers, Kothapa said, noting that these consumers want to avoid paying credit card interest, want to make purchases that otherwise wouldn’t fit their budget, and want to borrow money without going through a credit check.

BNPL companies are expanding, innovating in more market spaces such as wedding planning and health care, Kothapa noted.

The digital banking and branches analogy for BNPL and credit cards is noteworthy. John Cameron, manager and senior consultant at fintech NCR, wrote in an April 1, 2021 article about the effects of digital banking on physical bank branches, including “faster service, increased security, significantly reduced branch administration overheads ― often after the branch closes ― and a customer-first culture.”