While CommBank’s (CBA) low-merchant-fee buy now, pay later (BNPL) product will put pressure on Afterpay’s business model, CBA’s less flexible terms to consumers mean it is unlikely to threaten Afterpay’s core business.

Across the world, the nascent BNPL industry is booming. Although still minority players, consumers are increasingly turning away from credit card providers and towards the new sector. This is especially true in Australia, which bustles with large BNPL players such as Afterpay and Klarna, as well as smaller providers like Zip, Humm, and Brighte. Now, though, incumbents – no longer content merely with partnership – have chosen to enter this market and provide their own BNPL product.

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Just over a year after its partnership with Klarna, CBA has decided to launch its own BNPL proposition. Echoing what Afterpay offers, CBA will allow customers to split purchases from A$100–1,000 ($76.70–767) into four instalments, payable every fortnight.

All payments will be done by a digital card that appears usable at the point of sale (POS). The bank won’t charge either interest or account fees, making the product free for reliable customers but charging a fee of A$10 ($7.60) for late payments, the same as Afterpay.

CBA’s plan is to undercut Afterpay where it hurts: its merchant fee. The incumbent intends to charge merchants the same as its current card fees, currently 1.8%. This is considerably lower than Afterpay’s 5% merchant fee and is likely to put pressure on the BNPL provider, which generates the majority of its revenue from merchants, rather than collecting interest from consumers.

For CBA, this is likely to be more of a hedge than anything truly transformational, sensing the arrival of payment-to-payment transfers and the slow end of interchange revenue, combined with lacklustre growth in credit cards.

Afterpay advantages

For Afterpay, however, this represents a more serious threat to its business model. Fortunately for the BNPL provider, it still has several advantages, namely its consumer friendliness. In contrast to Afterpay, which will serve almost anyone, CBA is only offering the service to customers who have a regular income flowing into a CBA transaction account.

The bank will also subject customers to internal and external credit assessments vs. Afterpay’s own algorithm, and CBA will ban customers from the service where there is evidence of the customer struggling to pay back other BNPL providers. These factors suggest that while CBA might allow POS purchases, customers will need to be vetted beforehand to make sure they are credit-worthy.

Similarly, Afterpay goes further on credit limits, allowing up to A$2,000 ($1,534.70) and a minimum spend of A$35 ($26.90). And with the average debt held by Afterpay users at just A$100 – CBA’s minimum threshold for installment repayments – a good proportion of Afterpay’s low-value business is likely to be safe with the BNPL provider.

Additionally, for merchants, Afterpay represents a fast-growing online marketing platform that can provide a channel to new customers and generate higher retail spending. This will make merchants think twice about abandoning Afterpay over the high fees it charges.

CBA advantages 

However, CBA does have some advantages. This includes a four million-strong customer base in Australia vs. Afterpay’s 3.4 million in Australia and New Zealand, as well as the ability to use BNPL anywhere that Mastercard is accepted. In contrast, Afterpay still relies on affiliated merchants, giving less choice to its smaller pool of customers.

Tightening regulation in the Australian BNPL sector is also likely to have incentivised CBA to join the market. Given that all players will need to offer some more restrictions, with more regulation expected, incumbents will be able to offer a more restrictive product and still expect some customers.

For CBA, this low-risk venture into BNPL will be the bank’s chance to test how easy it is to get into the sector itself and how it should approach it in the future. However, the bank seems to have missed a trick by concentrating on the merchant side of BNPL, rather than competing with Afterpay on user experience. CBA could have also merged its new BNPL product with its rewards programme, offering something better than Afterpay.

Afterpay will nonetheless need to recognise the seriousness of this and future potential challenges to its market share. However, by navigating future regulation, remaining a consumer-friendly product, and being a successful marketing channel for merchants, the provider should be able to come out as strong as ever.