The Adults BNPL – Charge Cards Surge

Australian Charge Cards with $56.8 billion Surge to 18.2% of Payments

Charge cards are the adults version of Buy Now Pay Later.

Charge cards operate in a similar way to BNPL allowing users a period of interest free use – BNPL its 14 days, while charge cards offer one month.

Charge cards have no credit limits, so a consumer is free to spend $500 or $500,000 a month, you just have to be able to pay ALL of the balance at the end of the month.

CHARGE CARDS IN AUSTRALIA

Charge Cards – American Express and Diners Club – JCB the Japanese charge card does have acceptance in Australia.

Charge card annual sales $56.8 billion vs consumer credit cards $198.79 billion (Visa, MC, Amex credit cards).

Charges cards 8% of transactions but 18.2% sales.

The spend increase has occurred without overseas travel and airlines which make up 24% plus of charge card spend – so expect more increases in market share when overseas travel returns. 

 MONTHLY SPEND PER CUSTOMER

 Charge Cards - $3,425

 Credit cards - $1230

 Debit cards - $806

 BNPL apps - $96 to $218

 PrePaid Debit - $31

 It’s fascinating that Fintech have used BNPL (Afterpay) and Prepaid cards (Revolut) to try to access consumers – both these categories have very low spend yet similar costs.

It will take a BNPL customer 32 years to spend as much as a charge card customer does in one year – a major driver for profitability.

 CHARGE CARD vs BNPL

 Annual sales $56.8 billion vs BNPL $11.4 billion 

 Spend per customer - charge card $41,077 vs BNPL $1230 

 Credit losses per customer - charge card $3.78 vs BNPL $39.50 (BNPL based on 48% bad debts)

 BNPL CREDIT RISK VS CHARGE CARDS

The closest product types to BNPL are charge cards American Express (Amex) and Diners Club, debit cards, P2P transfers, payday lenders, salary advance lenders and ATMs cards - all short term products which are measured over days and months - not yearly as BNPL does.

Amex Australia 2020 accounts ex ASIC – with 70% charge cards 30% revolving credit cards:

Amex sales 2020 $44.5 billion and bad debts/provisions of $14.5 million.

Afterpay global sales $21.1 billion bad debts/collections $220 million

Amex Australia with twice the sales than Afterpay does globally - BUT 15 times less bad debts!

Just think about that for a moment – what it’s really shows is the massive credit risks Afterpay take and it’s not getting any better – in fact it’s worse.

BNPL BAD DEBT TRICK

In addition BNPL apps play a trick with bad debts – they access bad debts against total sales which reduces bad debt significantly. The example is a BNPL $100 sale requires $25 dollars to be paid upfront – so the loan is $75 – not $100.

BNPL by comparing write offs to total sale reduces bad debt by 25% - this is a massive red flag in what are already massive bad debts.

It’s like a retail bank including the deposit figure with mortgage defaults – great for reducing losses but doesn’t measure the true health of the portfolio

 NAB BUYS DINERS CLUB

NAB has purchased Citibank Australia’s retail bank and also Diners Club and SpotPay a BNPL platform.

This will make NAB the No 2 in credit cards and with a full suite of payment products which will enhance its merchant proposition as well as potentially appeal to its business base.

'The adult BNPL': Why charge cards have resurged in popularity

SAVINGS.com By Harrison Astbury on December 08, 2021 

 Charge cards are slightly different from credit cards in that they generally have more lax credit limits with the balance usually required to be paid off in-full every month.

In October, credit and charge card total spend in original terms was up over $25.7 billion - an increase from $24.6 billion in September.

However, balances accruing interest, or debt, continued to decline from $18.46 billion in September down to $17.84 billion in October. 

Meanwhile, the combined market share of American Express and Diners Card, in spend value terms, has recovered significantly, rising to 18.2% - the highest since June 2017. 

That's up from 14.9% in January 2021. Meanwhile, Visa and Mastercard's share has sunk to 81.8%.

According to payments expert and former Diners Club executive Grant Halverson (pictured below), this represents a resurgence in charge cards. 

"Charge card average spend is $41,077 per card [annually] - that will make BNPL's [buy now pay later] eyes water," Mr Halverson said.

"Charge cards are the adults' BNPL."

 RBA data does not discriminate between American Express charge cards and credit cards, however Amex financial reports end-2020 show around two thirds of its cards are of the charge variety - both consumer and corporate.

Mr Halverson said the resurgence in charge card spend is reflective of a "change in consumer sentiment, and building a brand around free credit."

"This cuts across BNPL's 14 day loan," he said.

Mr Halverson is referencing the fact that many BNPL platforms require the first payment a fortnight after purchase.

The criticism for BNPL is thick, with the sector making up less than 2% of all retail payments, for an average spend of $1,230 among customers.

Credit losses per customer, according to Mr Halverson, amount to $3.78 for credit cards, and $39.50 for BNPL.

This comes after Financial Counselling Australia opined that BNPL debts are "worse than ever", with calls for the short-term credit platform to be regulated like other credit.

Charge card resurgence not public service-led

Diners Club's largest client is the Commonwealth Government, which provides many employees with charge card services.

In Australia the charge card sector is dominated by two competitors - American Express and Diners Club.

American Express is leading the charge, according to Mr Halverson.

"I think Amex has made a comeback based on its brand and the move by many consumers to non-debt products, for example debit and BNPL," Mr Halverson told Savings.com.au.

"Diners has declined badly in 2020 according to their accounts - down 52% - which is mostly public servants, so they are not spending on T&E [travel and expenses]."

It's expected the Citi-run Diners Club will transfer to NAB ownership once the major bank's Citi acquisition finishes early in 2022.

"Does Diners have a shot? If NAB rebuild the Diners brand then the two competing brands will bring life back into the category," Mr Halverson said.

NAB coy about plans for ailing Diners Club business

BANKING DAY 7 December 2021

The Diners Club charge card franchise will be acquired by National Australia Bank as part of its acquisition of Citigroup’s local domestic banking business after the parties agreed to a string of “additional conditions”.

NAB announced that it was acquiring Citi’s Australian retail operations in August. However, the future of the Diners Club business remained unclear because NAB boss Ross McEwan did not directly reference charge cards in his presentations to investors and also indicated that inclusion of the Diners asset in the transaction was subject to further undisclosed conditions.

However, both NAB and Citi confirmed to Banking Day in the last week that ownership of the charge card operation would be changing hands when the sale is completed early next year.

Diners is the second largest issuer of charge cards in Australia behind American Express and the biggest contributor to its revenue line is its longstanding arrangement with the Commonwealth Government to supply charge card services across the public sector.

A Citi Australia spokesperson confirmed on Monday that responsibility for servicing the Commonwealth mandate would move to NAB as part of the sale.

“The Commonwealth mandate you are referring to is part of the Diners Club portfolio, and will transfer to NAB in March 2022, when the sale transaction is expected to complete,” the spokesperson said.

The current tender for the Commonwealth charge card mandate is due to expire at the end of December 2023.

NAB said in August that it would pay a A$250 million premium to the net assets of Citigroup’s retail banking operations in Australia.

That puts the price of the deal at about $3.77 billion because Citi reported net assets of $3.47 billion on its balance sheet at the end of December.

It remains unclear whether the price might be adjusted by the inclusion of Diners Club in the transaction given that it accounts for approximately $124 million of Citigroup’s book value.

The other potential additional cost for NAB is licensing fees it may have to pay US financial services company, Discover Financial, the owner of the international network used to process Diners Club transactions.

NAB will no doubt provide additional disclosure regarding such matters in the future, but faces a strategic challenge to renew Diners Club’s financial performance after it absorbed big revenue hits as a result of the pandemic.

According to accounts lodged with ASIC, Diners’ revenue more than halved to $17 million in the 12 months to the end of December 2020 even though the value of receivables on its balance sheet only declined by 9 per cent.

This led the company to report a net loss of $11.3 million last year.

Grant Halverson, a financial services consultant and a former managing director of Diners Club’s Australia, believes NAB might have been able to acquire the charge card issuer at less than net assets.

“Given the decline in the business – receivables down by nine per cent and revenue down by 52 per cent – you would be struggling to pay a lot for it,” he said.

Notwithstanding that judgement, Halverson thinks that NAB could extract significant long-term value from Diners merchant base added to its current offering along with Citis SpotPay the BNPL app.