4th July, 2019
Late last week, global payment solutions giant Visa announced plans to integrate a payment-by-instalments solution into its existing offering – a move that has rattled the industry to its core.
As a result of Visa’s announcement to create its own ‘buy now pay later’ service, this contentious area of finance has become even noisier.
Share prices of micro-loan providers like Afterpay and Zip Co plummeted, and regulatory authorities started licking their lips in anticipation of Visa’s imminent arrival into the micro-loan sphere.
In recent years, the concept of paying for things in instalments has become wildly popular, with both the SME sector and the bigger end of town offering this payment method in an attempt to increase sales.
READ: Pros and cons of ‘buy now pay later’ services
Originally, the option to buy something now and pay for it later was a very retail-oriented concept. Once industries like fashion, homeware, appliances and furniture got wind of this idea, they quickly started making the micro-loan-as-payment option a core part of their sales strategies.
But as time ticked on, the concept started being adopted by small- and large-scale service providers (think electricians and accountants) as well.
From the many ramifications that are likely to occur as a result of Visa’s entry into the micro-loan industry, it’s clear that SMEs in Australia and around the world will be among the primary beneficiaries of Visa’s brazen move.
Every industry, and especially the financial services industry, has new players coming and leaving all the time. The begging question is, what is it about Visa taking on the likes of Afterpay that has everyone talking?
To answer this, let’s take a step back and understand how strong Visa’s influence is from a global financial services perspective.
These days, it’s rare to find someone who lives in a western society that doesn’t use a card to make payments.
For the most part, the convenience of credit cards has transitioned from luxury to expectation over the years, resulting in most people opting to use them as their primary method of payment.
READ: Consumers are driving change in payments
Even those who are sworn off credit cards (which could be for a variety of fair reasons), still use debit cards to make everyday purchases.
Visa is one of the very few companies in the world who facilitate the technology that makes these cards work. As a result of the vast amount of control that they hold over the payments market, as a generation, we rely on them heavily.
Ever since companies like Afterpay found their feet in the global payments market, they’ve been enjoying the fact that people use their Visa powered cards to make purchases and have facilitated micro-loans accordingly.
But, with Visa now entering the market, the ease of using their existing line of credit to receive a micro-loan, has the potential to trump any other similar offering.
So, if Visa does indeed join the micro-loan party, it might be ‘bye’ now and ‘see you’ later to all the other providers in the market.
Now that we’re clear on how big of an influence Visa can potentially have on global buy now pay later offerings, let’s take a look at things through the lenses of start-up founders and small business owners.
Putting aside the broader question of whether Afterpay type solutions are good for small businesses in the long run, the reality is that it in the short term, it has proven to be a worthwhile venture.
SMEs that use this payment option have made their products or services seem more affordable and have therefore been generating more leads than ever before.
READ: What will the payments industry look like in 2020?
For small and early stage businesses, if it’s easier to turn a browser into a customer, keeping the company’s head above water also becomes much easier as well. Because of this, as long as the option for payment-by-instalments exists, the offering will always be popular among SMEs.
Assuming Visa does start dabbling in micro-loan payments, here are three specific perks that SMEs might potentially enjoy:
Until now, many SMEs have been reluctant to offer an option for customers to pay in instalments due to challenges around integration. There is often a complicated technological backend configuration process that comes along with integrating platforms like Afterpay into an existing payment portal.
Once Visa lands on the scene, seeing as their technology is already integrated into most existing payment solutions, the chances are that there probably won’t be as many complications associated with setting it all up.
If this happens, many more SMEs will likely feel more comfortable to take on this service – giving them access to all the benefits that come along with it.
The main way that the micro-loan providers make their money is through merchant fees, which are normally charged as a percentage of the transaction amount.
Early stage business owners are always looking for a bargain. Sometimes, they’ll even forgo a higher quality service in order to make some sort of saving.
Seeing as the key point of competition between many of these providers is the difference in percentage of merchant fees charged, a new player in the market (especially such an influential one) can cause percentages to drop.
If percentages drop, fees drop – and that is an obvious benefit for founders or small business owner.
While the buy now pay later concept might be growing in popularity, there are still many people around the world who still don’t know about it, and even those who do know about it, lots of them don’t really understand how it works.
In order for a business owner to take advantage of the benefits that payment=by-instalments can bring, they need to rely on the micro-loan provider’s marketing efforts.
If a business is going to invest its own money into advertising, it would seem more effective to put a more direct focus on marketing their business, rather than publicising that they offer an Afterpay like payment solution.
With Visa’s imminent entry into the market, it automatically means that there will be even more awareness and knowledge about this offering. This is likely to encourage more people to become users of the service, creating an even larger sales funnel for SMEs.
With the potential benefits for SMEs now clear, it’s important to flag that while this type of offering has proven to be lucrative for both the facilitator and the user, it has been anything but an easy ride from a regulatory perspective.
Ever since the Royal Commission into the banking sector, financial service providers have been heavily scrutinised, having their every move being placed under a microscope.
More specifically, AUSTRAC recently launched a full-fledged investigation into Afterpay’s activities, and the skepticism about these practices doesn’t seem to be getting any lighter.
It’s without a doubt that Visa’s flashy arrival to the payment-by-instalments scene will spark further regulatory scrutiny, making the future roadmap of these types of offerings even harder to predict.