The good, bad and ugly of Travel Now, Pay Later options
With Uplift announcing a number of new partnerships with airlines and hotels including Southwest earlier this month, I thought it would be worth digging a bit deeper into the various buy-now pay-later (BNPL) options popping in travel. For all of us who have been sitting around at home waiting to jump on a plane for that coveted beach vacation, it makes sense that many of the other players (Klarna, Afterpay, Affirm, and even American Express) who traditionally focused on retailers are trying to take a crack at the market as travel opens up in a big way. The question for me though is whether it will make sense for consumers and these companies to go big into the travel vertical.
For those of you who are not familiar with this form of payment, BNPL offerings provide a micro-loan at the time of purchase so that a consumer can make a purchase that he or she may not have enough money for at that time. The BNPL provider makes a credit decision at the moment of purchase, and then allows the customer to pay back that loan over a fixed set of periods (usually 2 to 6 periods over the course of a few months). All of the providers charge the merchant some discount rate, and it’s usually more than a credit card fee, since the idea here is that this purchase would have been lost or at least been smaller in dollar value without a way to pay in installments. For the buyer, some providers will charge a penalty to the customer, if he or she doesn’t pay all of the installments in time. With other providers, there may be some APR that gets charged to the customer to spread the payment over multiple periods. In all situations, the provider takes on the risk of payment default, and pays the merchant the full amount of at the time of purchase. And it’s a BIG market. Bank of America estimates that BNPL volume could grow to $1T by 2025 from less than $100B today.
Traditionally, travel has always been considered by merchant acquiring banks to be more risky than other purchases for a few reasons. Travelers are booking a flight ticket or a hotel reservation for something relatively far in advance of an actual trip, and a lot of things can happen between now and then. Some examples include: an airline or hotel going out of business, changing total capacity or any of the recent events such a pandemic or regional lockdown. Add to the things that can go wrong on the merchant side, BNPL providers also need to be mindful that a person’s financial situation could change pretty quickly, especially in today’s market. Looking through Affirm’s latest earnings report, we can already see the loss on loan purchase has been steadily increasing. This may not be an indication that more consumers are not making good on their micro-loans, but it is something to consider.
Affirm and Uplift have been talking a lot recently about the increase in travel and ticketing on their platforms, and it makes sense given our desire to escape after more than 14 months at home. But since these BNPL providers are taking on the risk associated with the traveler and travel supplier, everyone involved should be aware of the pitfalls. Travelers could easily default on their micro-loans as their financial situation changes, and since they are paying someone other than the hotel or airline, it can also be harder to make adjustments when plans change (whether those changes are self imposed or mandated). For the BNPL providers, they also need to consider what happens when travelers cancel their plans and ask for their money back.
As travelers, we all want to get out there as soon as possible even if it’s a little out of reach today. For new tech BNPL providers, there’s a desire to continue accelerating at hyper growth in a very competitive market. This could mean that more people who are slightly less credit worthy or slightly less financial stable will want to opt for BNPL, and providers could then be more lenient in offering an installment plan than they maybe should be. It’s clear that Travel Now, Pay Later is an offering that can help both parties achieve their goals, but it’s also important to keep in mind the potential downsides by going too big in this market segment. As I said, this market has massive potential for volume, but providers just need to make sure that they don’t over-accelerate into “riskier” industries for the sake of growth.
