Credit card numbers have been declining for a while now, with Reserve Bank data showing the number of credit cards used in Australia fell 6.6% in last financial year. And it seems the COVID-19 crisis is only intensifying that decline, with Australians dumping 100,000 credit cards in May alone. With 14.23 million credit cards currently in circulation, we are now at levels last seen in 2009 (1).
In this shift away from plastic, Aussies are increasingly turning to Afterpay and other Buy Now, Pay Later (BNPL) platforms, particularly now, as COVID-19 continues to wreak havoc on the economy. For those in an uncertain financial position, BNPL can provide a way for them to cover the essentials, allowing them to pay the cost back over time, with no interest, minimal fees, and perhaps most importantly, no credit check.
Afterpay, in particular, has seen huge growth over the past months, with Aussies using the platform to process around $2 billion worth of sales throughout the crisis so far (2). Unsurprisingly, as a result, Afterpay shares have experienced astounding growth, increasing 740% during the pandemic, from $8.90 per share on 23 March to more than $70 per share in July (3).
Over in the US it’s a similar story. Afterpay now has more than 5 million active users in the US, with 1 million of those users joining during the past 10 weeks. In terms of basket size, the number of items in Afterpay baskets increased by 40% during the period of March 1 to May 15, compared to January 1 to February 29 (4).
“At a time in which e-commerce has become the primary way people are shopping, there is a growing interest and demand among consumers to pay for things they want and need over time using their own money — instead of turning to expensive loans with interest, fees or revolving debt,” said Nick Molnar, co-founder and US CEO of Afterpay.
So it seems BNPL is on the up. Indeed, market research company IBISWorld predicts the BNPL industry as a whole will grow 9.8% annually over the next five years (5). What then, does the future hold for credit cards? While the landscape of payments may be changing, what is certain is the credit card industry won’t go down without a fight.
Seemingly taking the stance of, if you can’t beat them, join them, many credit card providers are now offering instalment plans in an attempt to provide a similar – or in their eyes, better – offering to that of BNPL. American Express is the latest credit card provider moving into this space, as it now prepares to launch its Plan It instalment product here in Australia.
Plan It has been available in the US since 2017, and is now being released to American Express cardholders here in Australia, replacing the existing Pay Your Way offering. But, while Plan It may be launching within an extremely competitive market, American Express believes the flexibility of the product will allow it to compete.
“This really is a unique product,” American Express vice-president of consumer lending Austin Huntsdale said. “It’s already embedded in the card so there’s no separate application process. Customers have the ability to perform much larger transactions and spread them over more time.”
How Does It Work?
As an American Express cardholder, you can set up a Plan It instalment plan on any purchase of $150 and more, to then pay it off in interest-free instalments over a period of either three, six, nine or twelve months.
The amount you can spend will depend on your approved credit limit – and you can have as many Plan It plans on the go as your available balance allows. You can also continue to spend on your card outwith those plans, to continue to take advantage of interest free days as long as you pay your closing balance, plus any ongoing monthly instalments by the due date.
To set up a Plan It plan, simply log into your account via online banking or through the app, select the eligible purchase and choose the length of the instalment plan. Once set up, American Express will add a fixed monthly fee to your minimum monthly payment on your credit card statement.
The fee you pay will depend on the type of card you have, ranging between 0.42% and 1.04% of the purchase price. However, as an introductory offer, all plans created from now until 30 September 2020 will charge a standard fee of 0.73% of the plan amount, except for those made on the Low Rate and Essential credit cards, which will have a fixed fee of 0.42%.
Flexibility: American Express points to the flexibility of Plan It as a definitive advantage over traditional BNPL products. When setting up a BNPL plan, you rely on the vendor to have BNPL in place – and while BNPL is definitely becoming more widespread, it’s not available everywhere. On the other hand, you can use Plan It anywhere American Express is accepted.
Instalment Period: Plan It offers much longer instalment periods, allowing users up to a year to pay off their purchases interest-free. Afterpay, on the other hand, requires users to pay off their purchases in four fortnightly instalments. It is worth pointing out that while lengthier plans can make instalments more affordable, it does increase the time the user is in debt.
Spend: As for how much users can spend, with Plan It that really depends on each user’s credit limit and the available balance on their card. With that being said, the allowable purchase amount could be significantly higher than some BNPL providers allow. On the flip side, with Plan It’s minimum spend of $150, it essentially excludes users who are attracted to BNPL for the opportunity it provides them to pay off smaller spending amounts in instalments.
Ease of Use: American Express argues that for American Express cardholders, Plan It is always on hand. Users don’t need to create an account with a BNPL platform, and there is no need to set up an instalment plan prior to each purchase. Instead, users who want to set up a Plan It plan can opt in to the plan of their choice after making the purchase by logging into their account.
Cost: In terms of interest, both Plan It and BNPL sell themselves on the fact that they allow users to pay off their purchases over time, with no interest charges. Plan It users will pay a fee on each plan however, on top of any annual fees and interest charged elsewhere on the card. As for BNPL fees, those depend on the provider. Afterpay charges a late fee, but no fees to set up a plan, while other providers charge monthly account fees, and fees to access additional features.
Features: It is worth pointing out that while credit cards in general come with higher fees than BNPL, they may balance that cost with the extras on offer. American Express cardholders can earn rewards on plans and everyday card spending, while also taking advantage of other perks. While Afterpay recently announced its partnership with Qantas to allow users to earn Qantas Points on eligible purchases, for the most part, BNPL does not allow users to earn rewards – although perks such as exclusive deals and discounts may be offered.
Aiden spends $10,000 on a new lounge suite. As an American Express cardholder, he decides to convert the purchase to a 12-month Plan It instalment plan.
With a monthly fee of 0.73% of the original purchase price, Aiden is charged $73 per month in fees, meaning he pays out a total of $876 in fees over the 12-month instalment period.
Each month, Aiden’s instalment comes to $906 (made up of $833 plus $73 in fees), repaying a total of $10,876.
Given that overall repayment amount, the effective interest rate on the instalment plan is 15.79% p.a.
While it is worth considering the fact that a fee over 0.73% would increase the amount repaid, in this instance Aiden comes out ahead, as the standard purchase rate on his card is 19.99% p.a.
Of course, it’s not just American Express offering instalment plans as part of its credit card offering – there are other players already on the scene.
Back in August 2019, Citi announced a partnership with Kogan.com, allowing Citi cardholders to set up instalment plans over 3, 12, 18 and 24 months at the checkout when shopping with the online retailer. As with AmEx’s Plan It, these plans make up part of the cardholder’s available credit limit, and instead of interest, a fee is charged based on the length of the plan.
Outside of Kogan.com, Citi cardholders now have the option to opt in to a number of instalment plans on their everyday spending. There are currently no fees charged for setting up an instalment plan, and cardholders can pay off their plan at any time without early repayment fees.
CommBank has partnered with BNPL provider Klarna to allow cardholders use the platform to buy what they want online, and then cover the cost of the instalments with their CommBank card. There are no fees or interest as long as each instalment is paid on time.
This is different to their Pay on Demand service launched recently.
More on Klarna later.
Latitude credit cards, such as the 28° Global Platinum Mastercard, offer cardholders access to Latitude Pay. Although purchases made via Latitude Pay are not processed through the card itself, as Latitude cardholders they can access certain deals when using the BNPL payment platform.
More on Latitude Pay later.
With a Skye Mastercard, cardholders can use it for everyday spending to benefit from up to 110 days interest free, with the option to convert purchases of $250 or more to a SkyePlan. Offered over 9, 12 or 15 months, these plans are interest-free, but do come with an establishment fee (3% of the purchase price on 9-month plans, 4% of the purchase price on 12-month plans, and 5% of the purchase price on 15-month plans).
Exclusive instalment plan offers are also available at selected retail partners. It’s worth noting that there is an expired promotional rate of 25.99% p.a. that applies if you don’t meet the repayments.
SmartPlan is Westpac’s answer to the instalment plan game, giving its cardholders two SmartPlan options to choose from.
According to Westpac, it’s possible to track up to eight SmartPlans at any time, which can be managed via online banking or the bank’s app. With a Large Purchase SmartPlan, no interest is charged throughout the plan, but an establishment fee will apply depending on the length of the plan.
Eligible Virgin Money cardholders can choose to set up an instalment plan on unbilled retail purchases of $500 or more, or request a cheque for $500 or more up to their available credit limit to cover a future purchase.
While these Fixed Payment Option instalment plans are not interest-free, they do allow cardholders to pay off larger purchases at a lower interest rate over a fixed rate of one, two or three years.
ING and Bankwest have also dipped their toe into instalment options for their credit cardholders, allowing users to pay for eligible spending in set instalments at a lower interest rate.
How you interact with your card’s version of BNPL will depend on what’s on offer and how your provider operates. Before you opt in to an instalment plan, always consider the following.
And, as you are using your credit card rather than a BNPL platform, it’s also worth taking into account the various costs that go along with being a cardholder. These can include annual fees, interest, and other fees such as late fees.
As you can see, what card providers have to offer in the way of instalment plans varies across the board. Whether they offer value really depends on your needs as a consumer. Do traditional BNPL platforms do a better job? Again, with so many providers in the market, each BNPL offering varies greatly. Let’s take a look at the main players in Australia right now.
Afterpay is without doubt the biggest name in BNPL. Using Afterpay, you split your online or instore purchase into four payments, paying the first payment at the time of purchase, and the remainder fortnightly until it’s paid off. As long as you pay all your payments on time, you will pay nothing extra – no fees and no interest. If you’re late making a payment, you will pay a late fee of $10.
Brighte offers a payment plan to allow homeowners to cover the cost of solar, batteries and various other home improvements. While users have to go through Brighte vendors, it does allow access to 0% interest instalment plans on payments up to $30,000. There is a $1 weekly account keeping fee and a $4.99 late payment fee, with total fees capped at $49.90 per year.
Bundll is a payment platform that allows users to make delayed payments on everyday spending. Using the platform, you get two weeks to repay each Bundll, with the option to ‘snooze’ payments for a further two weeks. While there is no interest charged, each ‘snooze’ costs $5, and there is a late fee of $10.
Soon to be launched is the new feature, superbundll, which will allow users to roll a number of bundlls into one payment plan paid off over six fortnightly payments. This will come at a cost of 5% of the original superbundll amount.
With Humm, you can buy ‘Little things’ and ‘Big things’, which you then pay back in fortnightly or monthly repayments. In terms of cost, no interest is applied.
Part-owned by CommBank, Klarna is a Stockholm-based company that allows users to buy now, pay later when shopping the Klarna app – or when spending outside the app with retailers that allow Klarna payments. Users must be 18 or over.
When you make a purchase, Klarna carries out a credit check to determine your ability to make payments. This is a ‘soft’ credit check, which won’t affect your credit score. There is a minimum spend of $35, and repayments are made over four fortnightly instalments, with the first charged when the seller confirms the order. No interest is applied, and there are no late fees at this stage.
With Latitude Pay, you can shop at participating retailers to buy items such as homewares, fashion and appliances. You can shop online or instore, paying 10% of the purchase price upfront, and the remainder in nine weekly repayments. There is no interest, but a $10 late fee applies if you miss a payment.
This payment platform – not to be confused with the lay-by payment system – allows you to buy items now, and pay them off over six weekly payments, with the first charged when the order is completed. No interest is applied, but a credit check is performed prior to purchase, and a late fee of $10 is charged for each missed payment.
With Openpay, you create a payment plan that allows you to pay for things over time, covering anything from clothes and accessories, to car servicing and dental visits. Using Openpay, you can spend up to $15,000, with the first payment of 20% of the purchase price paid upfront. Payments are then charged fortnightly over either 2-3 months, 6 months, 9 months, 1 year or 2 years, depending on the spend amount.
While no interest is charged, the fee structure is complex.
Payright allows you to purchase goods and services from its approved merchants, to then pay off the cost in instalments over time. Offering a credit limit up to $10,000, Payright allows users to pay in interest-free fortnightly or monthly instalments with terms of up to 36 months.
There is an establishment fee of $0-$89.95, which is added to the loan amount and payable over the loan term. A monthly account keeping fee of $3.50 also applies, as well as a payment processing fee of $2.95 which is added to each repayment. A late payment fee of up to $12.95 is charged and added to the overdue payment.
Working in a similar way to Afterpay, Sezzle allows users to buy items from Sezzle retailers, to then pay off their purchase in four equal payments. With no interest, and no fees to pay as long as you pay on time, you simply cover the first payment at checkout, then the remaining three payments each fortnight after that.
You will be charged a $10 late payment fee if you miss an instalment, but this will be waived if you make the payment within 48 hours of the original due date. You can reschedule your payments for free the first time, but it’s $5 per reschedule after that.
Unlike other BNPL platforms, Splitit doesn’t provide access to new credit. Instead, it allows you to use your own Visa or Mastercard credit card (or debit card) at Splitit retailers, to then pay off your spending over time with no interest and no late fees. Splitit’s website indicates the company makes its money by charging merchants fees to use its services.
How does it work? When you make a purchase, the first payment will come off your credit card. From there, the remaining balance will be held on your credit card, with each monthly payment reducing that held balance until the final payment is made.
With Zip Pay, you buy now, pay later, creating a Zip account that allows you to pay off a number of purchases at once, with a credit limit up to $1,000. On the first of the month, you pay off the total balance of the previous month’s purchases via automatic direct debit, or pay a minimum of $40, interest-free.
If you don’t pay your balance in full, you will pay a $6 account fee. There is a $5 late fee if you don’t pay at least your minimum monthly payment within 21 days of the due date.
Zip Money allows you to pay for larger items over $1,000 using your Zip account. With this option, you pay no interest for the first three months, after which point, a rate of 19.9% p.a. applies. You can make monthly, fortnightly or weekly repayments of an amount of your choice, paid via direct debit, and you can make additional payments at any time.
In terms of fees, you will pay an establishment fee of $0-$299 when you sign up, a monthly fee of $6 if you have an outstanding balance, and a late fee of $15 if you don’t make your minimum repayment within 21 days of the due date. There is also a processing fee of 1.25% on each bill.
Just like each of the credit card instalment plans, each BNPL plan provides something different – with fees, limits and small print that varies enormously from plan to plan. Which means, just like with credit cards, it’s crucial you understand how your BNPL platform operates before you start using it.
Is one option better than the other? Not necessarily. It really depends on how you use the service – and what you want to get out of it.
Getting started with BNPL is quick and easy, as there are typically no credit checks or extensive application forms to complete. Some providers say they may order credit checks and perform other repayment capability checks, but these are not on the same scale as those performed by credit card providers.
✔ This can make BNPL more appealing, especially to those who have little credit or poor credit.
✔ It is good for users who know they will be responsible with their spending, who either don’t want a credit card, or wouldn’t get approved for one.
✖ On the other hand, those users who are inexperienced or irresponsible could end up in trouble with debt.
With certain BNPL platforms, such as Afterpay, you can essentially use the service for free.
✔ As long as you make each repayment on time, there are no fees to pay and no interest.
✔ If you don’t pay on time, you will pay a fee, but these fees may be capped.
✔ Afterpay in particular suspends service for users who fail to make their repayments, encouraging responsible spending.
✖ Some BNPL platforms charge establishment fees, fees for use, and many other types of fees, which can really add up, even if there is ‘no interest, ever’.
When using BNPL, you may not be able to use your chosen BNPL platform everywhere you want to use it.
✖ While major players such as Afterpay are widespread, they’re not available everywhere. This could mean you need to use different BNPL providers for different types of spending, or switch to an alternative such as a credit card.
✖ Managing spending and repayments over a number of BNPL platforms can be difficult – and if fees are involved, they will add up.
With BNPL, you typically have a set timeframe in which to repay your purchase.
✔ This could work well for you if you lack motivation to pay off your debts and benefit from having a set repayment schedule.
✔ It could also be of benefit as it works to reduce the amount of time you spend in debt, unlike a credit card, which allows for revolving debt as long as you repay the minimum each month.
✖ Some BNPL platforms allow users to only pay a minimum amount, so that the user keeps paying fees to maintain their revolving debt.
Check your options on how to clear your BNPL debt.
While you may need to take time to apply for a credit card, once you have been approved, your credit limit is there whenever you need it.
✔ Using a credit card instalment plan, you are simply spending within your available credit limit, to then convert your spending into a plan post-purchase.
✔ As credit card providers are bound by responsible lending laws, you should only have access to credit that you are able to repay.
Many credit card instalment plans allow spending to be repaid over a longer period of time, with some repayment schedules lasting 18-24 months.
✔ This can work well for cardholders making larger purchases, giving them more time to pay them off.
✖ While no interest – or in some cases, a lower rate of interest – applies, fees can still add up, especially on longer plans.
Some restrictions may be placed on the type of spending that can be converted into an instalment plan.
✖ There may be a minimum spend, which may not be convenient for users who want to spread the cost of smaller purchases.
✖ Some instalment plans stipulate the type of purchase or the retailer, which limits use.
Other costs apply.
✖ When you have a credit card, you will usually have to pay an annual fee, with other costs such as interest also being applied.
✔ There are plenty of no annual fee cards to choose from, and as long as you pay your closing balance each month by the due date, you can avoid interest as well.
With a credit card, you can benefit from additional perks.
✔ Rewards credit cards allow you to earn rewards on your spending. Apart from Afterpay, which recently announced a partnership with the Qantas Frequent Flyer program, BNPL platforms don’t allow for rewards earning.
✔ Premium credit cards provide a number of perks, although you tend to pay a higher annual fee to take advantage of them (similar to rewards cards).
You can use your credit card to build your credit.
✔ As a responsible cardholder, you can work on building your credit by always paying your repayments on time and not going over your credit limit.
✔ This can make it easier to apply for more credit in the future.
✔ While irresponsible use of both credit cards and BNPL can have a negative impact on your credit score, only responsible use of your credit card can build up your credit score.
Disclaimer: The information contained within this post is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
6. Photo source: Pexels
Pauline is a personal finance expert at CreditCard.com.au, with 8 years in money, budgeting and property reporting under her belt. Pauline is passionate about seeing Aussies win by making their money – and their credit cards – work smarter, harder and bigger.
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