‘Huge threat to the banks’: Why Commonwealth Bank is taking the fight to Afterpay

The Commonwealth Bank reported a $9.23 billion profit in 2018.

The Commonwealth Bank reported a $9.23 billion profit in 2018. Photo: Getty

Commonwealth Bank has entered the fiercely competitive buy-now-pay-later market with a huge investment in Sweden-based bank Klarna.

The $US100 million ($149 million) stake in the business (which counts US rapper Snoop Dogg among its investors) was announced as part of the bank’s 2018-19 annual report, which also outlined its 8.1 per cent drop in full-year profit.

The deal will make Commonwealth Bank Klarna’s exclusive Australian partner and the latest in a growing line of financial institutions banging at the door of the booming buy-now-pay-later (BNPL) sector, all eager to get a slice of a billion-dollar-plus market.

Klarna alone has more than 60 million customers and 130,000 merchants using its service worldwide, with revenue of $934 million in 2018.

BNPL stealing banks’ customers

IBISWorld senior analyst Tommy Wu said BNPL services like Klarna and Afterpay have dented the performance of more traditional lending products like personal loans and credit cards.

Commonwealth Bank’s annual report noted that “lower credit card income” through the 2018-19 financial year had contributed to the 8 per cent fall in the business’s ‘other banking’ income.

“It’s pretty safe to say that’s across the board. The BNPL sector is an alternative to credit cards, especially among millennials who tend to be more adverse to debt, so BNPL has definitely captured some of the market share from credit cards,” Mr Wu told The New Daily.

“It’s interest-free for many. The application process is a lot quicker than accessing a loan or taking out a credit card, which often takes a credit check or income verification. So it’s a really appealing alternative not just for millennials but everyone.”

A report into the BNPL sector by regulator ASIC found Australians owed a cumulative $903 million to providers by June 2018, up 90 per cent in two years from $476 million in April 2016.

Major payments providers, such as the big four banks, Visa and PayPal, all want a share of an almost $1 billion market, Mr Wu said.

They are currently in the midst of a race that’s seen NAB and Westpac throw their support behind Afterpay rival Zip, while PayPal has introduced its own BNPL service to customers, Pay After Delivery.

Kirsty Lamont, director with financial services comparison site Mozo, said the use of traditional lending products like credit cards has “declined significantly” in recent years with the “huge popularity” of BNPL services being the main culprit.

“That represents a huge threat for the banks and they’re looking to jump on the trend,” she said.

“It shows traditional forms of lending are falling out of favour and banks will have to find new ways to compete with peer-to-peer lenders and BNPL schemes to be able to maintain their personal lending profits and revenues.”

Commonwealth Bank chief executive Matt Comyn said Klarna offered more than just buy-now-pay-later services, but acknowledged the importance of innovative payments technologies to the bank’s future.

“I would definitely describe [Klarna’s] product offering as broader than the buy-now-pay-later (BNPL) segment, but absolutely, payments and our digital experience is a core part of our strategy,” he told media.

Consumers should be wary of BNPL

The popularity of BNPL products has not come without growing pains, and Ms Lamont cautioned consumers to be careful when using these services.

While the lack of interest repayments can make them an attractive proposition, it also means they sit outside existing credit laws – enabling vulnerable customers to take on debt they wouldn’t ordinarily be permitted to.

It also means consumers are only able to rely on the Australian Financial Complaints Authority (the national dispute resolution body) if the BNPL provider has voluntarily signed up to the regime.

Ms Lamont said many consumers have already been caught out, with a Mozo study of Afterpay users finding that 65 per cent using the service to make purchases they ordinarily wouldn’t make – and 30 per cent admitting to missing their scheduled repayments.

In 2018 alone, Afterpay recorded a 365 per cent increase in late-fee earnings, amounting to a total of $28.4 million.

With regulation of the sector still facing government review, Ms Lamont said consumers need to be smart when using BNPL schemes, only buying products they need and never missing a repayment.

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