Consumer use of Buy Now Pay Later (BNPL) is booming. It quadrupled in the UK in 2020, with transactions totalling £2.7 billion that year. The global leader in this space, 16 year-old Klarna, claims over 90 million customers in total, while its peer, the 6 year-old Australia-based Afterpay had 11 million customers when it was acquired by Block (Square) in 2021. 

But BNPL is not a new concept, it's been around for centuries. Merchants since the 16th Century have used "book credit" systems—where an amount and terms of payment are agreed with a customer, recorded, and collected at the end of an agreed period (thanks to my final year university professor for that nugget).

So why the sudden surge in popularity for the payment mechanism?

The future of BNPL

The success of BNPL companies' customer acquisition has enabled them to raise significant capital—which in turn allowed them to expand their offerings to the point where they function as a consumers' primary method of payment. Klarna is a licensed bank that comes with a debit card, offers cashback and rewards, and has a browser extension that means it can be used at merchants which aren't part of its network. Why would customers ever use anything else?

Not everything is rosy for BNPL providers, however. Many are not regulated as credit institutions — because they are not required to be — which has made it relatively resource-light to bring products to market. But regulators in Europe and the US are looking to change that situation, and in the UK have already brought in the first new requirements. The crux of the issue is that rulemakers are unhappy with providers making it easier than ever for consumers to acquire debt, without it being obvious to consumers that that's what they're doing.  

The market is also increasingly crowded as new startups join the fray and banks and payment companies launch their own versions of BNPL, making competition for transaction share harder. It should be noted that many banks' and credit institutions' offerings are different in construction from the big brand providers: They often require hard credit checks (which means different things for different customers), for example, but that's not always obvious to consumers.

In terms of what comes next:

We’ll see consolidation in the market. Afterpay was acquired by Square last year for $29 billion, "the largest takeover in Australian history", while fellow Aussie brand Zip has been on an acquisition spree. (Side note: I was in New Zealand three years ago and everyone under the age of 30 was using Afterpay for every purchase, they are trendsetters down there). This trend will continue as certain brands come to dominate in different geographies and acquire smaller rivals. That will create more obvious threats to existing payment providers, who will then also look to acquire smaller BNPL providers to quickly launch their own offerings. 

Banks and payment providers will continue rethinking and redesigning credit products to make them more appealing to the BNPL generation, who have opted for the payment mechanism at the expense of historically more popular offerings such as credit cards and overdrafts — negatively affecting traditional providers' revenue. (For more, Alex Johnson has a good take on BNPL providers' positioning in the landscape of existing credit tools.)

Ecommerce giants will seek to launch their own BNPL offerings, probably in partnership with some of the largest brands—Affirm works with Amazon in the US, for example. At the same time, acceptance of BNPL providers' at physical points of sale will increase thanks to their issuance of payment cards (Afterpay and Klarna) or their use of technology like QR codes (Affirm).

Regulation is also inevitable, but the biggest players will be ready for it. The regulators have signalled their intent and started to make incremental changes but it will take them time to implement any wholesale changes, which gives the BNPL providers ample time to develop strategies for how to make any required adjustments without damaging their businesses. As new rules arrive, they will reduce the flow of new startups leveraging existing BNPL models coming to market. 

The final thought

Today's instalment payment offerings are digitised versions of historic credit products, with value added services layered on top, that make shopping easier. But these are just version one—there is a lot more that can be done with the underlying concepts and technologies to make access to credit fairer and improve consumers' overall financial wellbeing.

And that's where companies looking to enter this space need to keep their focus—on their customers' wellbeing. If they do that, they will keep the right side of the regulators and the media, while creating a new generation of financial products and services that appeal to a new generation of shoppers.

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