Capital One Stops BNPL Credit Card Transactions – Digital Transactions
Capital One Financial Corp. prohibits all of its credit cards from being used for point-of-sale lending transactions, with the exception of the UK where buy now, pay later products are under review for possible regulation.
In a statement, CapOne said it would ban “transactions identified as point-of-sale loans charged to its credit cards, regardless of the point-of-sale lender.” Debit cards and checking accounts are not affected by this action.
Capital One considers these types of transactions to be risk, according to a Reuters column. “We must expect hostility from Capital One: BNPL providers try to eat his lunch,” says the column.
Buying Now, Paying Ongoing Payments typically require the consumer to use a payment card that will be charged 25% of the total price at the time of the transaction and three more installments of 25% each every two weeks. Most BNPL providers allow credit and debit cards. Installment payment provider Klarna AB says between 80% to 85% of its transactions are carried out with debit cards. Australia-based Afterpay Ltd. claims that 90% of its transactions are done with debit cards.
Still, observers suggest CapOne’s move might be a wise one. “Capital One’s strategy… is a good credit decision because it stops refinancing past debt,” says Brian Riley, director of credit advisory services at Mercator Advisory Group. “There are several problems with the BNPL model that comes into play. He points out that this can be an easy extension of credit, and sometimes too easy. There is a lack of clarity on disclosures, as fintechs like BNPL providers are less regulated than banks. Third, testing of “repayment capacity” standards is limited.
“The market is meeting a need,” Riley says, “however, the problem is that the loans are not bank grade.”
As with most payments, the move is risk-based, Ben Jackson, COO of the Washington, DC-based Innovative Payments Association, said in an email message. “Just because a loan is granted in a new way does not mean that the subscription no longer applies. You usually can’t use one credit card to pay off another credit card bill, so why would it be any different for other types of loans? Jackson said.
“The classic three Cs of credit still apply: collateral, capacity and character,” continues Jackson. “If you use a credit card to pay for a purchase now, to pay off a loan later, you are using one form of unsecured credit to pay off another form of unsecured credit, which calls into question your ability to repay. So you have encountered warranty and capacity issues.