The Fintech Briefing: The future of Buy Now Pay Later
The Fintech Briefing: The future of Buy Now Pay Later
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?
What’s driving BNPL popularity?
There are a number of factors that have created a propitious environment for BNPL companies.
The aforementioned companies used technologies such as the internet and APIs to enable customers to spread the cost of a purchase over days or months, interest-free, with a single click. That compares to manually filling in forms to hand over the required reams of data that was historically the process to acquire store credit.
This development also made it worthwhile for more merchants to offer instalment payments on a wider range of purchases — consumers can now use them to pay for everything from socks to designer bikes. That's in contrast to when they were typically only offered on big ticket purchases such as furniture and white goods, where the admin was worth it for the seller.
In the world of online-only shopping, the ability to buy something in multiple sizes and colours, try it on and send it back if you don't like it, all without paying, was hugely attractive. It should be noted this factor mostly applies in countries such as the US, UK and Australia — in parts of the EU and Asia this purchasing process was already normal.
The biggest providers have spent significant amounts on marketing campaigns featuring celebrity influencers and promoting BNPL as "better" than credit cards, a payment mechanism younger consumers were already wary of.
All-in-one shopping solutions
Most BNPL providers have moved beyond merely being an option at checkout into offering holistic ecommerce apps where consumers can search for products from any merchant (not just those in the provider's network), monitor products for the price to drop, and make purchases.
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?
"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 ."
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.
Opportunities for founders in BNPL
Consumers have a taste for instalment payments thanks to their flexibility and ease of use. But there is still a way to go before BNPL offerings provide the best possible shopping experience, and that creates opportunities for companies looking to create new features, products, and services.
At the moment, there's no easy way for consumers to view all their instalment payments from multiple providers in one place. That makes it hard for people to track what payments are owed to who and when, and can result in them accidentally ending up owing fees and with a dinged credit score. One way to help resolve this issue is for a company to use open banking APIs to pull details on any payments due to major BNPL providers, provide the customer with a consolidated view, and help them ensure they have enough money in the right account to avoid missed payments.
✍️ BNPL debt management
As BNPL makes it easier for consumers to accrue debt, attention is increasingly turning to how that debt is managed. That creates an opportunity for companies to adopt the same technologies as BNPL providers, in order to build up-to-date tools that help customers with problem debt track and pay off what they owe — in a way that best suits their personal circumstances.
💰 BNPL savings
If BNPL is considered to be encouraging unhealthy financial behaviour, there's an opportunity to turn the concept on its head and do the opposite. Companies are starting to take the advantages of BNPL — holistic shopping experiences with flexible payment options — and reshape them into propositions that encourage savings tied toward a specific purchase. This concept is also not new (Christmas savings clubs are a traditional version), but accessing it through an app linked to ecommerce sites, with personalised savings goals, is.
📈 Account-to-account payment infrastructure
There are also opportunities to improve the experience of BNPL for merchants. Most BNPL providers charge merchants a fee per transaction in order to be able to offer customers instalment payments. Those fees (outside of the US) are higher than it costs the merchant to accept a credit card payment. Accepting credit card payments is more expensive than accepting account-to-account (A2A) payments—where money moves directly from a customer's account to a merchant's, bypassing any other payment mechanism. That creates opportunities for the provision of A2A-based instalment payment infrastructure.
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.
Read previous Fintech Briefings:
News from the Factory Floor
Scaling & exiting my second business by 27, and what I’ve learned along the way: Fanbytes co-founder & CEO Timothy Armoo
Timothy Armoo, on the back of his second exit, shares some of the most important lessons he's learned along the way
Lessons for founders & CEOs on climate tech & disrupting the energy industry, with Juliet Davenport OBE, Good Energy founder
We asked the Good Energy founder for her main lessons learned about changing consumer behaviour and launching a truly disruptive supplier
COVID, CAT Scans, and Cover: Our view on insurtech and preventative healthcare
FF investor Edward Kandel dives into our latest investments around the healthcare and insurtech space