BNPL is here to Stay
Buy Now Pay Later (BNPL) products like Klarna, Affirm, and AfterPay are revolutionizing consumer credit. They have captured meaningful market size and penetration in a short period of time, are extremely easy to use, and are investing in meaningful product scope expansion. BNPL is here to stay.
BNPL are digital alternatives to traditional consumer credit. Instead of using a credit or debit card to complete a purchase online, consumers now can apply for and secure installment-like credit right at checkout. To facilitate this transaction, BNPL firms partner with large retailers (e.g. Affirm with Target, Affirm with Peloton, Klarna with Saks) and effectively act as an intermediary accepting the consumer’s default risk in return for a payment from the retailer. This approach works well because it aligns incentives across all three parties — the BNPL firm underwrites a new loan, the retailer realizes a sale faster often for a larger dollar amount than otherwise, and the consumer secures the product he/she wanted at quite favorable loan terms.
BNPL has captured meaningful market share within the US and abroad and is still rapidly growing. According to a September 2021 BCG report, total BNPL transaction volume totaled $42 Billion in 2020 across the US, UK, Europe, UAE, and Indonesia. This volume is expected to grow. For example, in the UK, ~10% of digital transactions are expected to be facilitated by a BNPL player by 2024. And Investors are even more excited demonstrated by the lucrative valuations they have bestowed on top BNPL players. U.S.-based Affirm had a $12.4B market capitalization in March 2022, Australia’s AfterPay was acquired by Square for $29B in 2021, and Sweden’s Klarna was valued at $46B in 2021. Even traditional players are taking note and pivoting. American Express now offers a BNPL-like product Plan It for purchases greater than $100 and Chase offers a similar product called My Chase Plan. This momentum will be hard, if not impossible, to stop.
The product’s elegance and ease-of-use for both the consumer and retailer offers BNPL even more staying power. From a Consumer’s perspective, the product is seamless. Consumers can apply for, secure, and use credit all on the same platform and in one continuous motion. Compare that experience to the one of manually entering in one’s credit card information (let alone having to apply for one beforehand). It’s already hard to imagine how the latter outperforms the former. And BNPL players are taking note and going even further. Investments in single sign-on workflows, one-click payments, beautiful user interfaces, and consolidation of multiple loans are all either already available or in the works. This coupled with a digitally savvy consumer make the traditional credit card experience dead on arrival. And the loan terms can sometimes even be more favorable (e.g. interest-free) than those of a traditional credit card and not require a hard credit check. For the retailer, the product’s API-backed infrastructure allows for frictionless integration into the retailer’s checkout process. These digital capabilities, in addition to the lack of legacy tech systems, will enable BNPL players to attract new consumers, retain existing ones, and onboard retailers at ever increasing velocity.
And each firm’s product creativity is awe inspiring — from customer acquisition and retention to retailer onboarding and management every BNPL player is expanding is product suite to accelerate growth, diversify revenue streams, and squeeze traditional players. For example, Klarna now offers consumers a Chrome browser extension that allows them to use Klarna anywhere. On the retailer side, Klarna now maintains an app where stores can advertise products directly to Klarna consumers. And in its most creative push to retailer acquisition (in my opinion), Klarna has partnered with property manager Brookfield Properties to become the exclusive BNPL issuer across their US retail footprint. Affirm has built out a debit product that allows consumers to pay with Affirm debit anywhere and split purchases over four installments. And AfterPay is similarly launching savings tools in Australia targeted toward a younger consumer. What have traditional credit cards done recently? Offer an additional 1% on dining?
While the picture is rosy — there are some headwinds. From a credit risk and underwriting perspective, this model of forgoing traditional credit risk indicators using alternative data is still relatively new. That in addition to increasing interest rates might create a two-pronged attack on BNPLs. Will BNPL players still be able to secure low costs of capital to fund their interest-free loans? Will consumers still be as motivated to pay off their interest-free loans before their other interest-baring loans, especially variable rate ones? This is one spot traditional issuers might find an advantage — cheap loan funding backed by consumer deposits. And separate from the loan funding and payment problem, the CFPB started an inquiry into BNPL credit in late 2021. Are regulators starting to catch-up?
BNPLs have undoubtedly proven their concept and are continuing to do so. This is clear by their existing market share and growth and becomes even more so when one considers how quickly that capture happened (Klarna was founded in 2005, Affirm in 2012, and AfterPay in 2014). The product itself is frictionless. Does it get easier than selecting what you want, getting issued credit for the purchase, and completing the transaction within a handful of steps and on one platform? And finally, the strides in product scope are logical and attractive for all parties.
This is all to say that BNPL is here to stay.
