Few fintech verticals have thrived during the Covid-19 pandemic like the buy now, pay later (BNPL) space.
With e-commerce surging as people around the world shelter in place, BNPL services – which allow consumers to pay for products or services in installments at zero-percent or low interest rates – have likewise skyrocketed. A recent Motley Fool study found that over a third of US consumers have used a BNPL service.
During a session at the virtual LendIt Fintech USA 2020 conference, BNPL was the topic of discussion for two CFOs at competing startups: Laura Nadler, US CFO at Australia-based Afterpay, and Karen Hartje, CFO at Minneapolis-based Sezzle.
Both CFOs agreed that the COVID-19 pandemic has benefited the BNPL space. But as in other industries, the companies were nervous back in March.
“Going into the pandemic, we didn’t know what to expect in terms of merchant buy-in and consumer behavior. We were concerned,” said Hartje, who described how Sezzle responded to the unfolding crisis by tightening up underwriting standards for consumers.
“None of us wanted to find ourselves in this situation, but it’s been an opportunity to prove our ability to manage risk,” Nadler added. “We see consumer payments holding up very well looking ahead.”
The panelists also agree that COVID-19 will have a long-term impact on consumer habits and preferences that is bullish for BNPL.
“I think it’s a benefit because we’re seeing more and more adoption of e-commerce in the retail industry,” Hartje said. “I think that will continue to grow.”
Meanwhile, Nadler said she views the growing popularity of BNPL “as an acceleration of the [e-commerce] trend.”
“There was a period in the spring when online shopping went up 10%,” she noted. “It previously took ten years to achieve that growth rate.”
BNPL services are especially popular with young people, who use debit cards more frequently than other cohorts. According to Hartje, Sezzle initially attributed this discrepancy to a matter of preference, but soon concluded it was due to lack of access.
“Back when we were in college, access to credit cards was readily available. Because of the Credit CARD Act of 2009, it’s now illegal for credit card companies to advertise on campus.” Hartje noted that Sezzle’s budgeting tool is developing credit reporting to help young people build their credit scores.
Nadler had a slightly different view on why Gen Zers are shunning credit cards.
“It stems from the experience millennials and Gen Zs have had with the great recession, and now the pandemic, which will shape shoppers and consumers for some time,” she said.
Another reason for the growing use of BNPL seems to be the desire to avoid credit card interest payments. Over 39% of respondents to the Motley Fool study said avoiding credit card interest payments was a factor behind their using BNPL services.
A challenge facing BNPL startups is building loyalty with customers. Cash-back and rewards programs have enabled credit card companies to build fanatic customer bases over a period of several years. Both Sezzle and Afterpay are tackling this issue head-on.
“We believe in a customer-first strategy,” Hartje said. “We listen to our customers and what their needs are.” Hartje pointed to a variety of initiatives at Sezzle, including credit reporting, loyalty rewards, and an integration partnership with Ally Bank for financing large purchases.
“Our success is aligned with good consumer outcomes; that really resonates with consumers,” added Nadler. “Our program rewards and incentivizes consumers for on-time payments.”
Another thing both CFOs agree on: the BNPL industry is going to be huge.