CBA undercuts Afterpay and Zip, bringing “strong competition” to the Aussie BNPL scene

Commonwealth Bank of Australia has entered one of the buzziest fintech sectors around, announcing its own CBA buy-now pay-later (BNPL) offering to be rolled out in mid-2021.

The service will offer an interest-free split payment option for approved CBA customers, linked directly to their bank accounts.

Importantly, there will be no additional costs to businesses above CBA’s standard merchant fees, meaning the product undercuts some of Australia’s most successful fintechs.

To use the CBA service, customers will be assessed based on specific eligibility criteria and credit assessments.

In a statement, CBA group executive for retail banking services Angus Sullivan said the institution is well placed to offer a “prudent and responsible” BNPL service, based on insights sourced from transactional data gathered over many years.

Consumers will be able to use the service anywhere a mastercard is accepted, for transactions of $100 to $1,000.

It will not be available to access cash, or for gambling purchases.

Additionally, late repayments will incur a $10 fee and, while there will be caps on late payment fees, it is not yet clear exactly how they will work.

All fees and charges may be applied to the customers’ linked CBA account.

Incumbents catching up

This is just the latest development in a fast-moving industry, and it could spell trouble for some of Australia’s fintech darlings.

With no fees for merchants, the service may well undercut the likes of Afterpay and Zip, which charge fees of between 3% and 6% to the merchants, including small businesses, and make the majority of their revenues from these fees.

They also restrict merchants from passing on any surcharge to customers.

CBA itself has a significant stake in European player Klarna, which entered the Australian market last year as a rival to Aussie giants Afterpay and Zip, and almost immediately picked a fight over merchant fees.

Incidentally, Sullivan said CBA’s in-house BNPL “complements and underscores” its investment in Klarna, catering to consumers that are not its own banking customers.

Earlier this month, PayPal also announced its plans to launch a split payment option for online transactions in Australia, with no fees for merchants.

Yin Yeoh, senior industry analyst at IBISWorld, also points to Westpac, which has a stake in Zip Pay and NAB’s zero-interest credit card offering.

There’s growing demand for flexible payment options, and the incumbent big banks are taking notice. CBA likely won’t be the only bank to launch its own BNPL offering.

While the likes of Zip and Afterpay had the early-movers’ advantage, it was arguably only a matter of time before more competition, and competition from the big players, emerged.

And, with a ready-made set of merchants and customers, CBA’s offering will be “strong competition”, Yeoh suggests.

However, regulatory scrutiny is ramping up. As well as the ever-contentious merchant fees discussion, the RBA is keeping a close eye on the amounts being charged in late fees and the wellbeing of consumers.

“If BNPL operators can strike a balance, they will do well,” Yeoh says.

Early days may benefit CBA

All of this also comes amid questions over the profitability of this sector at all. Research from IBISWorld released this week suggested the BNPL industry is one of the least profitable in Australia.

While industry-wide revenue is expected to grow by 25% during the 2020-21 financial year and reach $817.1 million, the average profit margin is expected to sit at -2.6%.

Yeoh says for a business like CBA, this might not be too troubling. Again, the existing merchant relationships might give it an edge, and it will benefit from larger balance sheets and a lower cost of capital.

Equally, this is a sector that is just ramping up.

“An industry’s profitability is influenced by a few factors, including demand conditions and start-up costs,” Yeoh explains.

“Most industries report losses during their infancy.”

With the number of credit cards in use dropping, and services such as Afterpay, Zip and Klarna becoming more popular, the research suggested the BNPL sector will likely achieve profitability by the 2023-24 financial year.

Entering the BNPL space could allow CBA to recapture some of the credit card revenue that is slipping away, Yeoh says.

“The increasing distrust for credit cards is one of the reasons behind the rapid growth of BNPL,” she adds.