Discover Is the Latest Card Network to Bust Into BNPL, a Market With Heated Rivalry

The buy now, pay later trend has gained enough steam that the major card networks can’t afford to ignore it. The latest evidence that the credit card giants want to hedge their bets came this week with the news that Discover Financial Services invested $30 million in Minneapolis-based Sezzle Inc., a fast-growing installment lender with 2.6 million users and a merchant base of 34,000. 

The funding comes after Discover agreed in February to let Sezzle users pay in installments through the Discover network at certain U.S. merchants. Now, with the funding round, the two companies plan to introduce an installment-lending service on DIscover’s network.

Discover’s move follows action by rivals Mastercard Inc. and Visa Inc. to position themselves to tap into the BNPL trend. Visa in 2019 announced its Installment APIs, technology that links to Visa issuers and lets merchants using Visa cards at checkout the option to pay for purchases in equal portions over a number of months. That news followed by mere weeks Mastercard’s close on its purchase of Vyze Inc., a provider of technology that lets merchants offer installment credit at the point of sale.

And just in recent weeks, the BNPL market has heated up as long-term rivals have jockeyed to grab a portion of the e-commerce trade generated by shoppers who have turned to their mobile phones and laptops in response to the pandemic. Earlier this week, computing giant Apple Inc. said it will develop a BNPL option for its Apple Pay mobile-payment app in collaboration with Goldman Sachs.

Earlier this month, Klarna AB paid an estimated $160 million for Hero Towers Ltd., a 6-year-old social-shopping service that lets consumers interact online with store employees. Sweden-based Klarna is one of the biggest BNPL players in the U.S. market, with 17 million users, more than twice the figure a year ago. Its client base includes 24 of the country’s 100 largest retailers, more than any other BNPL player, Klarna claims.

Now, with a stake in Sezzle, Discover can bid for a much more sizable piece of this rapidly unfolding business. Indeed, the allure of what is typically a deal in which the consumer can pay for a purchase in four installments over a matter of weeks is pulling in hard-core debit card users. At least some of these consumers have proven to be susceptible to BNPL’s interest-free structure, according to research released this week by Auriemma Consulting Group Inc.

That opportunity hasn’t been overlooked by the BNPL players. The number of debit card holders offered an installment option has increased 10 percentage points over the past two years, according to Auriemma’s research. Likely to have even more impact is Auriemma’s finding that more than half of consumers have been offered a BNPL option, whether the shoppers were online or in-store.

And established players are seeing rising acceptance. Affirm Inc. said in May its user base had grown 60% in the year leading up to May, reaching 5.36 million.

But there are warnings here as well as opportunities for Discover. The BNPL market is growing fast but is also attracting plenty of keen competition. With its stake in Sezzle, Discover will soon see how much—and how soon—it can grab a significant share.