BNPL Competition Is Fierce. For Now, Satisfaction Is Highest for Credit Card Issuers: A Q&A with J.D. Power’s Miles Tullo
Plus, SEC approval of a spot Ethereum ETF will happen, but not anytime soon.
Number of the Week: $24 million (explanation below)
BNPL Competition Is Fierce. For Now, Satisfaction Is Highest for Credit Card Issuers: A Q&A with J.D. Power’s Miles Tullo
One in five U.S. shoppers has used Buy Now, Pay Later (BNPL) services. Consumers ages 35 and under now comprise 53% of BNPL users, but they’re using the option to pay for less costly, daily essentials in their lives rather than for big-ticket items. And Klarna’s CEO keeps talking about going public. The global BNPL market is expected to hit an estimated $1.21 trillion by 2030 with a compound annual growth rate of 21.5% from 2024 to 2030. One thing is clear: The fight for BNPL customers is already fierce, and overall customer satisfaction strongly indicates the likelihood of brand loyalty and usage. For now, satisfaction is highest among traditional credit card issuers—with more likely to wade into the BNPL pool, putting pressure on companies like Klarna, Afterpay and Affirm to play catch up.
Recently, J.D. Power released its 2024 U.S. Buy Now Pay Later Satisfaction Study, which found that BNPL providers Klarna, Afterpay and Affirm lagged American Express Plan It, My Chase Plan and Citi Flex Pay in overall U.S. customer satisfaction, which was measured across six dimensions: customer support, making purchases where desired, perks for making purchases, reasonableness of terms, digital review and account management, and security of account information. On a 1,000-point scale, Plan It ranks highest in BNPL satisfaction with a score of 695, followed by My Chase Plan (686) and Citi Flex Pay (676), as compared to Klarna (633), Afterpay (626) and Affirm (618). Overall customer satisfaction with BNPL services jumped 16 points year over year, with the biggest increases driven by digital account management, account information security, and reasonableness of terms.
FIN Editor in Chief Holly Sraeel recently interviewed J.D. Power’s Miles Tullo, managing director of financial services, on what’s ahead in the battle for BNPL borrowers, the swings in customer satisfaction across dimensions and the impact on BNPL usage, and how regulatory guardrails could create a healthier market for consumers.
FIN: What was the motivation to look at U.S. customer satisfaction with Buy Now, Pay Later services and how did you approach the study?
Tullo: BNPL is a growing and important method of payment that consumers are using at the point of sale. J.D. Power measures customer satisfaction with brands and the products they offer. For this Buy Now, Pay Later study, we used our Consumer Point of Sale Choice module, surveyed 86,000 consumers in the U.S., 18 years of age or older, and asked them: “Tell us how you paid at the point of sale in the last 90 days, and we gave them 11 different options—credit cards, debit cards, cash, check, buy now, pay later, and so on. For those who said, “I've used Buy Now, Pay Later at the point of sale,” or “I've used a credit card and then converted that purchase into an installment payment on my credit card,” we then gave a representative sample of that population an opportunity to answer questions about the brands that they use when they're transacting with a Buy Now, Pay Later or a credit card-based Buy Now, Pay Later option. So 4,135 consumers went on to take the Buy Now, Pay Later satisfaction study.
FIN: Customer satisfaction with Buy Now, Pay Later services from traditional credit card issuers—Amex, Chase and Citi—outpaces that with fintech players like Klarna, Afterpay, and Affirm. What do you make of that?
Tullo: It was surprising. The more you dig into the results, though, it becomes a little less surprising. There will be a time when you start to see all brands consistently ranking higher. We measure satisfaction through six dimensions that ultimately define customer satisfaction with a brand: customer support, making purchases where I want, perks for making purchases, reasonableness of the terms, viewing and managing an account digitally, and security of account information. These dimensions make up the entire experience. Card issuers receive higher scores virtually across the board than the Buy Now, Pay Later fintech companies. … The largest gaps in those six areas are customer support, reviewing and managing accounts digitally, and security of information. The infrastructure that these card brands have for customer support is substantial. It was a little surprising to learn this because [Klarna, Afterpay, and Affirm] were built around the digital experience, but we're talking about Chase, Citi, and Amex whose massive digital budgets exceed the [other] brands, and they’ve been studying digital experience forever. So they have a strong infrastructure that they're leveraging. Then there’s the security of account information; it's just natural that consumers would be more skeptical of these newer brands when it comes to their financial information than they would be with an Amex, Citi or Chase.
FIN: How do demographics and user behavior figure into customer satisfaction?
Tullo: So you’re hitting on a key point: those card-based solutions tend to be used by higher quality credits—consumers with higher credit scores who are financially healthy. We see throughout these results and in many of our studies that financially healthier consumers have a higher satisfaction level with brands in financial services. But all the brands we're talking about that aren't traditional credit card issuers have the highest growth in satisfaction year over year—and they're catching up as consumers get more comfortable with them.
FIN: Can we talk about the scoring strengths and weaknesses of each brand, by dimension, as it relates to customer satisfaction?
Tullo: We don't share those results publicly, unfortunately. …But I can say there are big differences between the brands.
FIN: Okay, let’s do it this way. So within dimensions, how big were the swings between the lowest- and highest-performing brands?
Tullo: So here's one: Customer support, for example, is one dimension where the gap between the lowest-performing brand and the highest-performing brand is 112 points. That is significant. We're confident that there's a very big difference between the lowest-ranked brand in that particular dimension and the highest-ranked ranked.
FIN: Let’s run through the gaps in satisfaction between the highest- and lowest-performing brands in the other dimensions.
Tullo: Perks is an 88-point difference. Payment terms is 52, security is 123. Reviewing and managing accounts digitally and making purchases where I want are right around 100. There are big differences between the brands, and it's not that every brand that's last in one [dimension] is last in all. Some have made investments in some areas and are really strong, but maybe that [other] area isn't as important to the customer set who’s using Buy Now, Pay Later loans, so maybe their satisfaction score isn't as good—and vice versa.
FIN: Talk about the top reasons customers cite for using Buy Now, Pay Later services.
Tullo: We asked customers to give us the top three reasons for using each of the 11 payment methods I mentioned earlier. They might have 15 different choices. The top three reasons for Buy Now, Pay Later: number one is to defer payments to later—you're leveraging the tool to do exactly what it does. Second, which I find so interesting and important, is repayment terms are reasonable—that's number 11 or 12 in terms of the rankings for credit cards. So if you think about someone who's deciding to purchase with a Buy Now, Pay Later loan or a credit card, first and foremost, they're trying to defer their purchase to a later point in time. There are 10 other reasons for consumers using credit cards that come before reasonable repayment terms. That’s kind of fascinating to me. For Buy Now, Pay Later, it's “I like the repayment terms" and the idea that I can make four equal payments, it's clearly defined for me, it’s easy to do, I set up my auto-pay and I’m done. So that's number two. Number three is budgeting and avoiding overspending and debt. … I know if I spread this out over four or more payments, whatever it may be, I can live within my budget, it's not going to end up in some revolving credit formula that I don't understand, and bothers me when I consider my alternative, which would be a credit card in this case. So those are the biggest reasons. Low cost of use is fourth.
FIN: What about the reasons customers gave for not using BNPL services?
Tullo: Same thing—it's very straightforward. People say “I just don't need to borrow money, so I'm not going to defer my payments.” The second is cost; they're saying that it's more expensive for them to use [the service] than they want. Interestingly, the third reason people don't use Buy Now, Pay Later is budgeting; it leads to overspending or debt. So for the same reasons that part of the population is saying they use it, another part of the population is saying it scares me. And then fourth, people say the repayment terms are unreasonable.
FIN: Does overall customer sentiment toward Buy Now, Pay Later services lead to any projections on future use?
Tullo: We did see an increase in average overall satisfaction that was significant, from 618 last year to 634 this year. So satisfaction is up, and reputation scores are also increasing. So more consumers are saying that the brand they use has a good reputation versus a bad reputation. We're also seeing the percentage of consumers who say they're definitely going to reuse—that's increasing—was up four percentage points to 48%. All that indicates a normalizing, strengthening industry that should continue to grow.
FIN: Do you have insight into whether customers with multiple Buy Now, Pay Later relationships fall into the financially vulnerable segment of users?
Tullo: I don’t have data about who is most likely to use multiple BNPL brands, but I agree with your intuition that it’s vulnerable and overextended consumers.
FIN: How difficult is it for the brands to address the areas of satisfaction where they scored lower than rivals?
Tullo: None of these are easy changes. When you think about the dimensions, it takes a lot of investment, time, and energy to effect [change within] them. Across all the work that we do, whether it's Buy Now, Pay Later, debit cards, or anything else, those brands that invest in fixing and overcoming the weaknesses versus their competitors see improvements in customer satisfaction. There is a direct correlation between customer satisfaction and key business metrics such as intent to reuse, intent to switch, usage of multiple products, and so on. These are big business decisions that must be made, but they're worth making. That's going to be particularly true as the industry matures. Right now, it's a bit of an acceptance and consumer reach play—just get your product in front of more people and you're going to do more business. But as the business matures, that recipe is going to change, and brands will have to have good customer satisfaction to retain their merchants and to get customers to use these products religiously.
FIN: What about the types of BNPL purchases made by financially healthy users versus those that are financially vulnerable?
Tullo: We didn't explore the types of purchases with this other than size. We didn’t study individual purchases. We asked about preference: If you had a large purchase, which payment method would you prefer to use for that transaction? “Vulnerable” and “Overextended” consumers are most likely to prefer BNPL for large purchases over $500 (12% and 8%, respectively), while only 4% of “Healthy” consumers prefer BNPL for the same purpose.
We can learn a lot about the choices people are making. …What we do know is that, as consumers are getting more comfortable with these Buy Now, Pay Later payment methods, they’re using them for more and more different kinds of purchases, and the purchases are getting smaller—all the reasons they give for using [the service] makes sense.
FIN: How many BNPL customers fall into the financially healthy category of users?
Tullo: Twenty-one percent (21%) of “Healthy” consumers use BNPL. You’re more likely to find that users of BNPL solutions come from non-financially healthy segments. It’s those that have short-term financing challenges that are most likely to use Buy Now, Pay Later solutions—that shows in our data.
FIN: What about BNPL usage differences by generation?
Tullo: There’s a direct negative correlation with age. So Gen Z is significantly likely to use a BNPL solution, Gen Y highly likely, and Gen X a little bit less. Baby Boomers and pre-boomers are unlikely.
FIN: What factors are going to drive future growth of BNPL?
Tullo: There’s a short answer and a longer-term answer. In the short term, it’s largely acceptance and consumer access. The latest entrant that we studied is Apple Pay Later, and they have instantly grabbed market share. It's accepted virtually everywhere, and they have a huge customer set that they can tap into. But long term it will come down to which of the dimensions consumers rate as most important. Over time, I think we’ll see a shift toward security and, obviously, terms will always be a factor. Like with credit card terms, the same will happen with Buy Now, Pay Later. People will be shopping the terms more if they have the chance to use different options at any one checkout.
FIN: Looking out over the horizon, what’s most important for the BNPL market to evolve?
Tullo: Regulation will be helpful for the space so that consumers feel confident about it. Credit reporting can be useful. …These things are going to start to normalize the market.
FIN: What regulatory guardrails might be necessary for BNPL?
Tullo: This is a product that is being leveraged at a higher rate by customers who are having short-term funding issues, so it's just an opportunity for things to go badly. Right now, the providers are doing a very good job on their own, managing their losses. They're doing a really good job. But as acceptance becomes more and more challenging to get, and as new consumers become more and more challenging to find, industries start getting creative and doing things that ultimately result in a [financial] crisis. I would expect that could happen here, so I think that would be an area where a Consumer Bill of Rights, in a sense, may ultimately be necessary, but right now the brands are really doing a nice job.
FIN: What are the brands’ greatest concerns about market growth?
Tullo: I’ll speak from my point of view, rather than any individual brand's point of view. Acceptance is getting harder and harder to get in this space. The big merchants are getting locked up by existing providers. The credit card issuers already have near-100% acceptance in the market and all they need to do is say hey, you just made that purchase, do you want to convert it? I don't think there's fear of other entrants—the next Affirm, the next Klarna—coming into the marketplace. Those who have come in and made their mark are here. It's going to be how many credit card issuers start putting the option on their cards, and what does that do to those that created this new view on Buy Now, Pay Later. As a consumer, once I get comfortable with that, to make a transaction and convert it afterward, I don't need to open a new line with somebody else. But the credit card issuers must do it. They have to launch something. …Some are staying away from it because they [think] it competes with their core product, but it's getting too big, I think they have to.
FIN: Do you think we'll see acquisitions in the BNPL space?
Tullo: The brands that got this whole thing going are more focused right now on diversification of their businesses and delivering digital financial solutions for consumers more broadly [than] on making acquisitions to be a bigger player in the Buy Now, Pay Later space. But naturally, over time, acquisitions shouldn't be a surprise because, as markets mature, that’s what happens.
Noted & Noteworthy
FTX founder Sam Bankman-Fried could be at least 72 years old when he gets out of prison for the 7 counts of crypto fraud and conspiracy for which he was convicted in November 2023. In a Manhattan federal court filing this week, U.S. prosecutors asked for a prison sentence of 40 to 50 years for the defendant, sparing little in their 116-page sentencing memo that argues “Bankman-Fried is deserving of a severe sanction, proportionate to his role in this historic fraud.” Prosecutors cited factors such as the “sheer scale” of the “long-running” fraud (at least $10 billion in losses), the serious emotional and financial harm it caused to thousands of victims, the willful, “brazen disrespect for the rule of law”…based on “a pernicious megalomania guided by the defendant’s own values and sense of superiority” and that the sentence be “sufficiently severe to provide justice for the defendant’s crimes and to dissuade others from committing similar crimes.” The one-time wunderkind—who went by “SBF”—could also be on the hook for $11 billion in fines and forfeiture. The maximum penalty Bankman-Fried faces is 110 years; his lawyers have asked for no more than a 6.5-year prison term. His sentencing is scheduled for March 28th.
The U.S. government is continuing its never-ending quest to provide regulatory oversight of cryptocurrencies as their popularity among investors continues to grow. This week, U.S. Senators Laphonza Butler (D-CA) and Jack Reed (D-RI) sent a letter to Gary Gensler, chair of the U.S. Securities and Exchange Commission (SEC), urging the agency to reject any future crypto exchange-traded fund (ETF) applications, presumably including those made by Grayscale, BlackRock, VanEck, Franklin Templeton, and Invesco Galaxy for spot Ethereum ETFs, and other crypto exchange-traded products (ETPs). In their letter, Sens. Butler and Reed, both of whom are on the Senate Banking Committee, said that “retail investors would face enormous risks from ETPs referencing thinly traded cryptocurrencies or cryptocurrencies whose prices are especially susceptible to pump-and-dump or other fraudulent schemes. …The Commission is under no obligation to approve such products, and given the risk, it should not do so."
Many industry players expected the SEC to approve spot Ethereum ETFs by May, but Bloomberg’s Eric Balchunas, senior ETF analyst, now puts the odds of approval at 30%, down from his earlier forecast of 70%. In an election year, the approval of future crypto ETFs and ETPs could come down to political hedging for Gensler more than anything else. “[T]here is no upside for SEC Chair Gary Gensler to approve a spot Ethereum ETF given how upset progressive Democrats were over the agency's approval of a spot bitcoin ETF earlier this month,” said TD Cowen Washington Research Group’s Jaret Seiberg, financial services and housing policy analyst , in an exclusive interview with The Block in January. Seiberg, who said the approval of a spot Ethereum ETF is “unlikely until late 2025 or early 2026,” thinks that Gensler wants more insight into the performance of spot Bitcoin ETFs before proceeding: “This is consistent with his broader approach to crypto, which is to move incrementally and slowly when it comes to providing regulatory approvals or clarity."
After the SEC approved 11 spot Bitcoin ETFs in early January, the world changed very little, with neither financial catastrophe nor ecstasy occurring, as FIN’s James Ledbetter wrote at the time, saying: “If anything, this month’s quiet reception of spot Bitcoin ETFs illustrates what a mundane development this is.”
Since their approval, spot Bitcoin products have seen roughly $10 billion of net inflows. Although the timing of the SEC’s approval of spot Ethereum ETFs is uncertain, the outcome will likely be the same: They’ll be greenlighted.
In other SEC news, the agency charged 17 individuals who participated in a $300 million Ponzi scheme, orchestrated via Houston-based CryptoFX, LLC, that targeted more than 40,000 Latino investors from 10 U.S. states and two foreign countries. The complaint alleges that, over more than two years, the individuals charged “acted as leaders of the CryptoFX network,” soliciting investors by promising crypto asset and foreign exchange trading returns of 15% to 100%, but that the $300 million raised from investors was instead used “to pay supposed returns to other investors, to pay commissions and bonuses to themselves and investors, and to fund their own lifestyles.” The SEC seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties against each defendant. In September 2022, the SEC took emergency action to halt the CryptoFX scheme and charged its two main principals, Mauricio Chavez and Giorgio Benvenuto. In June 2023, California’s Department of Financial Protection and Innovation issued a desist and refrain order against CryptoFX and two of its promoters for violating California securities laws “by offering and selling unqualified securities and making material misrepresentations and omissions to investors” in a multi-level marketing scheme that targeted the Latino community.
FINvestments
🦈 Number of the Week: Move over, Revolut. The UK’s Griffin Bank, a Banking-as-a-Service platform, has raised $24 million in an extended Series A round and secured a banking license one year after it began the application process (UK fintech giant Revolut, whose valuation has dropped to roughly $23 billion, has yet to obtain a banking license). The latest funding round was led by MassMutual Ventures, NordicNinja and Breega, with participation from existing investors. Through Griffin’s full-stack platform, fintech companies can access embedded financial solutions for their customers.
🦈 Amsterdam-based D2X, a crypto derivatives exchange for institutional investors, scored a $10 million Series A funding round led by Steve Cohen’s Point72 Ventures, with participation from GSR Markets and existing investors including Tioga Capital, Fortino Capital and Jabre Capital Partners. Set to launch in the second quarter, D2X claims to be the first crypto derivatives trading platform in the European Union (EU) to obtain a MiFID MTF license. The license was granted by the Dutch Authority for the Financial Markets and authorizes D2X to operate a regulated trading venue for cash-settled crypto futures and options.
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