Is Afterpay the end of the credit card?

If there is a special item you simply can’t live without but don’t have the money for, the traditional way to buy it has been with a credit card.

Today, however, the whole idea of credit cards are under threat from the “buy now pay later” instalment plan providers like Afterpay and Zip Pay, who are presenting a real challenge to the credit card companies.

With a credit card you are incurring a debt of as much as 20 percent on your balance.

That might be manageable if you pay off your balance down to zero each month, but many people let their card balances accumulate to the point that it becomes a real problem.

The average amount of credit card debt for Australian card holders is $4200, while over half a million Australians carry debts of greater than $5000.

Although interest rates have been in freefall, credit cards companies have largely maintained their rates. Consumer group Choice has accused them of “stealing” $6.3 billion by maintaining their rates as the cash rates have fallen.

The attraction of the ‘buy now pay later’ or instalment plan providers is that – unless you default on your instalments – there is no interest charge.

If you use funds from these providers sensibly, you simply pay for the instalments when they are due.

The fees are paid by the retailers who have secured your purchase, and interest only comes into the equation if you miss your instalments.

Data from the Reserve Bank of Australia supports the view that Australians are falling out of love with credit cards.

Credit card spending slumped by $8.1 billion in April to $19 billion, or the lowest monthly spend since April 2011, and balances fell 11 percent to $41.5 billion.

It could be argued that some of this was the result of the COVID-19 disruptions, but the trend is longer term. The RBA says there was a 7 percent decline in the number of credit card accounts in the year to March 2020.

We are yet to hear an April update from Afterpay, although the company has reported a 97% increase in underlying sales for the first quarter of 2020.

In July it announced it had amassed almost 10 million active users around the world, and is raising  $1.05 billion from investors for international expansion.

In response, the credit card companies are fighting back.

US bank Citi, which has an Australian credit card book of $4.5 billion and the fourth largest market player, has entered into an agreement with online retailer Kogan which replicates many of the features of the instalment plan offers.

Although Citi’s card boss Alan Machet told the Australian Financial Review this month that it was too early to call the death of credit cards, Citi did record a 10 percent decline in card balances between April and June, after a 3 percent fall in the first quarter.

For April, spending on Citi cards was 40 percent lower year on year, although June spending was at the same level as June 2019.

As with many markets, the COVID-19 pandemic has been a significant disrupter the consumer credit market.

Whether credit cards can reclaim their status post pandemic remains to be seen, but what is clear is that, for the first time, they are facing real competition from a product which for many consumers is a more attractive option than 20 percent interest on balances.