Power of Payments Ep. 14: JPMorgan vs Stripe and Block, CFPB is coming for BNPL, and is LTO a viable BNPL alternative?
- This week, we talk about JPMorgan’s acquisition of payments firms Renovite, and the CFPB’s recent report on BNPL firms, which suggests that regulation is coming for the sector.
- We also discuss why lease-to-own, which is another type of installment payment option, has been gaining popularity in recent months.
Welcome back to the Power of Payments podcast. I’m your host, Ismail Umar.
We just held Tearsheet’s Power of Payments conference last Thursday, which was our first in-person conference in many years, and where decision-makers from leading firms like Visa, Goldman Sachs, Citi, Amex, Square, Wise, and many more, gathered in New York City to talk about the challenges and opportunities ahead for the payments industry.
A big thank you to everyone who came, and we hope to see you at our next in-person conference – The Big Bank Theory – which will be held in Miami on the 8th of December this year.
In today’s episode, we discuss JPMorgan’s acquisition of payments firms Renovite and why it matters, the CFPB’s recent report on BNPL firms, which suggests that regulation is coming for the sector, and why lease-to-own, which is another type of installment payment option, has been gaining popularity in recent months.
The following excerpts were edited for clarity.
Why did JPMorgan Chase acquire payments firm Renovite?
Last week, CNBC reported that JPMorgan has agreed to acquire a California-based payments startup called Renovite, for an undisclosed amount, to fend off threats from fintech firms like Stripe and Block.
The bank, which is a major player in global payments, said that acquiring Renovite will speed up its ability to roll out new offerings to merchants.
Merchant acquirers are crucial providers that work behind the scenes to enable sellers to accept in-person and online payments, and keep a small cut of each transaction. While JPMorgan is the world’s biggest provider of merchant services by transaction volume, payments firms like Stripe and Block have joined the race in recent years, thanks to booming ecommerce sales and the proliferation of new payment methods.
JPMorgan ran trials with Renovite as a vendor last year, but the banks says it was so impressed with its products – especially a cloud-based switch that routes payments to different providers – that it decided to acquire the company outright.
The bank says the plug-and-play nature of the switch platform allows it to add new payments options in a fraction of the time it used to take before, because it requires far less coding.
The Renovite acquisition is the latest in a string of fintech deals made under CEO Jamie Dimon. Since late 2020, JPMorgan has acquired at least five startups – including an ESG investing platform and a UK-based robo-advisor – in addition to making a series of smaller fintech investments.
Dimon has repeatedly raised the alarm about the threat fintech players pose to traditional banks, especially in the highly competitive payments space.
Fintechs have used payments processing for merchants to help them build ecosystems that have garnered massive valuations. They’ve also generally been more nimble in enabling new payment methods, like BNPL offerings from Klarna and Affirm.
Dimon has been forced to defend JPMorgan’s growing expenses this year, as it invests billions of dollars in technology despite a 25% stock slump driven by recession fears.
The Renovite deal suggests that the longtime CEO is undeterred by concerns that he’s spending too much on tech.
CFPB signals that regulation is coming soon for BNPL firms
The Consumer Financial Protection Bureau recently issued a report suggesting that Buy Now, Pay Later firms will now be subjected to stricter regulatory oversight. The bureau plans to issue guidance to oversee BNPL providers like Affirm and Klarna and have them complete “supervisory” exams in line with credit card company reporting requirements.
While the CFPB has jurisdiction over banks, credit unions, and other financial firms based in the US, it didn’t previously regulate BNPL providers, who argued that they were exempted from many of the existing rules governing consumer lending.
The CFPB first announced that it would investigate the BNPL industry in December of last year. In the course of its investigation, the agency found that BNPL firms are approving more customers for loans – 73% in 2021 compared with 69% in 2020 – and that delinquencies on these services are rising sharply.
Late fees are also climbing. The CFPB found that over 10% of customers were charged at least one late fee in 2021, compared to less than 8% in 2020.
CFPB director Rohit Chopra outlined the other dangers of BNPL offerings, including data harvesting and taking on multiple large loans at once. He said these will likely become more acute as consumers begin to use BNPL for routine expenses, and to pay for things like groceries and gas due to macroeconomic pressures and inflation.
The Financial Technology Association, an industry trade group, pushed back against the allegations that BNPL could harm consumers if left unregulated, arguing that BNPL as it exists today provides a valuable alternative to other lines of credit, with low interest and flexible payment terms that make everyday items more affordable for consumers.
But recent research suggests otherwise. A DebtHammer poll showed that 32% of customers skip out on paying rent, utilities, or child support to make their BNPL payments, and BNPL services can also lead to bigger purchases. In May, SFGate reported that the average Affirm customer spends $365 on a single purchase, as opposed to the $100 average cart size recorded in 2020.
The CFPB development could be a blow for the BNPL sector, which has already been struggling due to rising interest rates, growing consumer debt, and slimmer profit margins, as well as shrinking investor confidence against fears of an approaching recession. The share prices of public BNPL companies have been under pressure this year, with Affirm down more than 75% and Zip down 79%. And Klarna's valuation plunged by around 85% in July.
Does lease-to-own provide a “recession-proof” alternative to BNPL?
Since we’ve been talking about BNPL’s recent struggles, let’s now turn our attention to another installment payment option that has been gaining popularity in recent months.
As inflation continues and consumers seek out flexible options to pay for household items like refrigerators, laptops, and furniture, lease-to-own, a type of installment payment that has actually been around for decades, seems to be re-emerging as a potential solution for consumers seeking an alternative way to break up their purchases into manageable payments.
While BNPL has lately been criticized for leaving subprime consumers with mounting debt, proponents of LTO say that it provides these consumers with flexible payment options without indebting them. Some are even referring to it as “BNPL’s recession-proof cousin”.
So, what exactly is LTO, and how does it function? What is its utility for financial providers, brands, retailers, and consumers? What are the differences between BNPL and LTO, and what are their pros and cons relative to each other?
I spoke with Orlando Zayas, CEO of Katapult, a firm that integrates with retailers and ecommerce platforms to offer a lease-to-own service for consumers. Orlando shared with me his views on how LTO could potentially ease the burden of inflation on consumers, especially as providers of other payment options like BNPL tighten their lending standards.
In our conversation, Orlando explained that BNPL and LTO are often compared to each other, because they’re both alternative payment solutions that allow consumers to buy products in installments, without utilizing traditional credit.
However, they have different purposes and different audiences. While BNPL is often used by customers as a way to spread out their payments over time, there are still some standards as to who can obtain items using this method. On the other hand, LTO uses an underwriting process, but is primarily focused on supporting nonprime or subprime consumers. Additionally, BNPL is used most often for smaller items like clothing or groceries, while LTO is utilized more for acquiring durable goods, such as furniture and consumer electronics.
As the name suggests, when a person uses BNPL, they are purchasing an item, whereas when they use LTO, they lease it. With an LTO transaction, consumers typically have many different paths to ownership for the product they’re leasing. With each payment, the customer has the option to exercise a buyout option at any time, continue leasing for the full term of the agreement resulting in automatic ownership of the item, or to return the item without any further obligations other than paying any outstanding fees that were already incurred.
Orlando argued that, depending on a person’s situation, LTO and BNPL can both be valuable options. His firm Katapult actually has a partnership with the BNPL provider Affirm, under which, if a consumer doesn’t qualify for Affirm, they are referred to Katapult, and when a consumer does well with Katapult, they refer them to Affirm. This allows the two firms to offer consumers either BNPL or LTO, depending on their specific financial situation and requirements.
Orlando also talked about how the LTO industry has evolved over the years, and how the current model could help address issues of inequality and price transparency in financial services.
While LTO has been around for decades, the current model offered by Katapult and other newer LTO companies is different. Traditional LTO is usually offered by a brick-and-mortar store with few goods to choose from, which come from a single supplier, and are of lower quality and higher expense. However, Orlando says Katapult and the other new LTO companies are omnichannel, meaning that they can be utilized in-store as well as online. Additionally, Katapult integrates with brands like Wayfair, Lenovo, Purple Mattress, and more, to provide consumers with a broader range of options.
Orlando claims that the process of applying for a lease-purchase agreement is also quick, easy, and transparent. Applicants are approved within seconds, and they are given the details of their lease upfront, so that they’re familiar with the terms, and don’t get any unwanted surprises later.
With traditional lenders and BNPL providers tightening their lending decisioning due to the macroeconomic climate, more consumers might be declined by these providers. As prices continue to rise and economic growth slows down, people who are already living paycheck-to-paycheck are likely to struggle even more.
Orlando says lease-to-own allows these consumers to make recurring lease payments and determine a schedule that works for their lifestyle, whether that’s weekly, biweekly, or monthly. Additionally, with the lease purchase, consumers can return the product at any time, without future recurring payments, and with no further obligation other than paying any outstanding fees already incurred. For those with no credit or blemished credit, this might be one of the few options for them to get the items they need without spiraling into debt.
Orlando concluded our discussion by claiming that brands, retailers, and consumers all stand to benefit from lease-to-own. For brands and retailers, LTO is another tool for capturing an overlooked audience – they can reach a new customer base that may not have had access to their products otherwise. Additionally, by offering LTO, retailers and brands could increase transactions, improve customer loyalty, and boost revenue. And for consumers, LTO offers a path to purchasing the goods that they need – especially those without credit, who may not be able to access them otherwise.