Payments

Special Report: Breaking down Buy Now, Pay Later

As 2020 comes to a close, we look ahead at what to expect in 2021

There were a number of fintech hits and misses in 2020, but there’s no question that “Buy Now, Pay Later” (BNPL) was one of the biggest hits – by far.

First, just what is “Buy Now, Pay Later?” In a nutshell, it’s a way of allowing consumers to purchase something (whether it’s a good or service) and pay for it over time. Growing up, we had a similar concept called layaway, where you paid a retailer for something over time but didn’t take home the item until it was paid for. The online installment plans are often – but not always – funded by large financial institutions such as JPMorgan and Wells Fargo.

Buy Now, Pay Later has essentially exploded in 2020, with the COVID-19 pandemic pushing consumers to stretch their dollars and merchants clamoring to find a way to help finance customers’ purchases – big and small.

A recent survey by Bank of America found that the market for BNPL apps could “grow 10-15x by 2025 to eventually process $650bn-$1tn in transactions,” according to a recent Yahoo Finance article.

Over the past few months, FinLedger has covered Affirm’s plans to go public, as well as its plans to delay going public. We have also reported on Katapult’s going public via a SPAC, and talked to payments giant Adyen about how it fits into the BNPL landscape.

In this article, we’ll break down some of the key players in the space, their differentiators, the risks involved and what’s ahead for 2021.

Key players

The Buy Now, Pay Later industry has a variety of players serving different geographies and range of products. Some companies are more focused on helping consumers finance higher-end products. For example, Affirm revealed in its S-1 that Peloton was its top merchant partner, making up about 28% of its total revenue for the fiscal year ended June 30, 2020, and 30% of its total revenue for the three months ended Sept. 30, 2020. (To give you an idea of what we mean by “high-end,” Pelotons on average cost about $3,000, including a one-year subscription.)

Affirm shared in a November 19 blog post that it had over 3.0 million consumers in its network. In a post from July 2020, it said it had over 5.6 million. In its recent S-1 filing, Affirm said that number was up to “over 6.2 million consumers” as of Sept. 30, 2020. It also has over 6,500 merchant partners. Like many other companies going public these days, Affirm has not reached profitability.

In Australia, Afterpay – with a staggering $33.2 billion market cap – is the dominant player. In October, the company made its in-store solution available in the U.S. Australia in general is becoming increasingly crowded with other participants including Openpay – which recently launched in the U.S. marketZip Pay, Payright, and Limepay

Another “Buy Now, Pay Later” giant is Swedish unicorn Klarna, which is also growing rapidly in the U.S. – recently expanding its offering and reaching over 11 million customers in the country. Over 200,000 merchants, including retailers such as H&M, IKEA, Expedia Group, Samsung, Abercrombie & Fitch, Nike and AliExpress offer Klarna’s plans online and in-store. The 15-year-old fully regulated bank claims to be “the most highly valued private fintech in Europe” with a valuation of $10.65 billion. 

Other BNPL players include PayPal (although not exclusively a BNPL play, is very active in the space with its own offering) and Splitit, which lets shoppers use their existing credit card to pay in small, monthly installments.

Tushar Shah, co-founder and managing partner of investment firm Kinderhook Partners, first invested in the global BNPL leader Afterpay in 2017. The company, he said, was worth under $200 million when it went public in 2016 and today is worth over $20 billion.

“This wasn’t even a business five years ago. And it went from zero to $20 billion in valuation,” he told FinLedger. “Buy now pay later has become a massive sector.”

These days, Kinderhook has helped back Postpay, a growing BNPL player in the Middle East.

The BNPL model works, Shah believes, in part because there’s “a whole wave of millennials who want to be off credit card addiction.”

“They use it as a budgeting means,” he added.

 For retailers, it’s an easy way to grow their customer base.

“They get a higher conversion rate on their website, and higher average order values,” Shah said. 

Risks

Despite all the growth in the BNPL space, there remains some concerns around it – especially on the topic of responsible lending.

In November, the Australian Securities and Investments Commission (ASIC) said its research found that one in five consumers engaged in BNPL transactions “were missing payments and some were facing financial hardship,” according to a Reuters article.

Some of those consumers were not able to afford essentials, or were taking out additional loans to be able to make their BNPL payments on time, the consumer watchdog group found in its research, according to Reuters.

Meanwhile, in a recent blog post, accountant Robert Collings pointed out some of the ethical questions surrounding BNPL, writing: “It’s been argued that users of the scheme don’t fully understand the financial contract they’re entering into.”

Collings said that if Klarna, for example, really was lending irresponsibly, its financial statements should highlight an increased level of defaults, losses or impaired debts. So, he took a look.

His conclusion? The company’s financials don’t “give any major suggestions that Klarna is lending irresponsibly.”

Collings writes: “If they were, we’d expect to see a much larger % of loans in stage 2 and 3. They’re lending a bit more aggressively than Afterpay, but that’s most likely due to scale.”

The one caveat is that Klarna’s loan write-offs are cause for concern, he says. But it remains to be seen just how much. 

Incidentally, this reminds me of the debate around Robinhood and whether or not it’s taking advantage of “unsophisticated” investors. The question in both cases is whether it’s the company or the consumer’s responsibility if a transaction does not “turn out” as expected.

Meanwhile, BNPL promises merchants a boost in conversion rates, higher average order values, and increased repeat purchases, notes a recent Forrester report.

But there are also questions about whether the BNPL model is really good for merchants.

Brian Barth, CEO & founder of Uplift – a BNPL company in the travel space working with over 100 global travel brands – has his doubts.

Via email, he wrote that Affirm’s business model “is pulling customer loyalty away from enterprise merchants.”

“While BNPL is a great model for the consumer and becoming the new normal, not all BNPLs are acting in the merchant’s best interest. When it comes to Affirm specifically, they are redirecting customers to their platform and taking the customers’ loyalty share away from the merchant. As a result, the merchants are losing their high-value loyal customers without realizing it.”

Looking ahead

Not all BNPL is geared toward buying items such as Pelotons. And as we look to the future, we see more specialized players continuing to gain traction.

For example, Los Angeles-based BNPL company, Sunbit, is focused on helping thousands of local merchants like auto shops, eye doctors, dentists and vets, give customers an alternative way to pay for their services.

Sunbit says its success is built on “specific deployment of machine learning, technology services, and old-fashioned customer service.”

In a conversation with co-founder and CTO Ornit Maizel, she said the company’s goal is to provide “a fast, inclusive and transparent technology solution.”

“In the old world, it’s usually a painful process to apply for a loan,” Maizel added. “With our sophisticated back-end technology, we’ve developed a very simple user interface for the user experience. This allows us to approve those people very quickly and provide a personalized offer based on our algorithms.”

The company says it has achieved “2X” pandemic-fueled growth with regard to total transaction amount and revenue so far in 2020. 

Another fintech that is focused on a niche segment of the BNPL market is payments startup QuickFee. The company recently launched what it described as the first-ever BNPL solution for professional services called QuickFee Installments. The offering is designed for services companies such as accounting and law firms and allows a firm’s clients to pay invoices in four interest-free installments.

Using QuickFee, clients pay the installments using their credit cards, which means conventional credit checks and approvals aren’t needed while the professional services firm gets paid in full.  

Looking ahead, I expect we’ll see more of these niche players in an increasingly crowded and competitive “Buy Now, Pay Later” landscape.

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