Buy now, pay later growth heralds credit card 'bloodbath'

Total credit card purchases fell 6.2 per cent in the year ended November 30 while debit payments jumped 23.2 per cent, the Reserve Bank of Australia's retail payment data shows.

Total ATM withdrawals fell 16.1 per cent as consumers shun cash in favour of card and online payments.

Bradford Kelly a payments consultant and former head of sales and services at Mastercard, said the report proved a "bloodbath" for credit cards, with negative consequences for the interest fee streams earned by banks as the cards' issuers.

"Revolving balances on cards are shrinking faster every month. Some of that is buy now, pay later but not all," Mr Kelly said. "This has a knock-on effect. Card balances are below $3000 which is tiny.

The buy now, pay later sector's stunning merchant and consumer growth rates stem in part from fintech innovation around virtual or ghost cards offered by the likes of Afterpay, Zip, and Klarna, Mr Kelly said.

The ghost cards mean the buy now, pay later lenders don't need to approach each merchant and integrate with lots of different point of sale solutions to offer transaction services. Instead the lenders have a separate settlement relationship (outside the transaction) with the merchant to maintain its 5 per cent or 6 per cent fee.

Buy now, pay later's increasing market share has lit a rocket under fire under stocks like Afterpay and driven a number of incumbents to list on the local bourse.

In the past year, Sezzle shares have more than tripled while Afterpay has advanced 226 per cent. Splitit has almost doubled, Zip Co. has firmed 27 per cent and Openpay has advanced 69 per cent.

On Tuesday Sezzle reported December quarter sales climbed 205 per cent year-on-year to $US320.8 million ($414 million), with growth of 40.6 per cent on the prior quarter.

"I think we're starting to answer some of those doubts that PayPal is going to squash the sector," said Mr Youakim. "PayPal is not going to squash Sezzle. We've a solution that is differentiated and merchants view it completely different, consumers view it completely different, for that reason I feel good about where we're at."

Earlier this month Afterpay said its average US basket size increased 30 per cent over the 2020 holiday period.

The key US market is arguably early in its transition to a buy now, pay later debit card model embraced by younger consumers, versus the credit cards favoured by older generations.

"We've always said we're two to three years behind the Australian market in terms of where we sit in the US and products are evolving differently in the US to Australia," said Mr Youakim.

Just a bit of upramping from me. From AFR.