A deep dive into Europe’s fast-growing BNPL market

With over €900M being invested in European players in the past 2 months alone, there is a big bet on BNPL as the next development in payment solutions. But what is BNPL, and how is the European market developing? Within this article we dive deeper in the European BNPL market, it’s players, and the ecosystem being built around the booming industry.

What is “buy now, pay later”?

BNPL, also known as Point-of-Sale (POS) credit or POS financing, is a means to offer installment payments at low- or zero-interest. Whereas traditional personal credit models like credit cards rely on customer-facing charges in the form of interest over-borrowed amounts, companies like Klarna, Europe’s largest BNPL provider, offers solutions that charge the merchant a fee per transaction. The consumer carries no additional cost for the credit, and is only charged in case of late payments, decreasing the threshold to make purchases large or small.

How big is the market and how is it growing?

BNPL is rapidly increasing in popularity in Europe, driven in part by the media attention of high profile IPO’s, and increasingly larger investment rounds that provide BNPL companies like Klarna the funding to aggressively expand and acquire new customers in the region.

It should be no surprise then that the mood is optimistic, with Kaleido intelligence claiming the European BNPL market is set to grow to €300bn in Europe by 2025, or around 30% of the total eCommerce spent that year.

If we compare that number to Australia, the undisputed leader when it comes to BNPL adoption rate, that number seems a bit optimistic though. Around one-fifth of Australia’s 25 million citizens are using BNPL solutions on a regular basis, and although YoY growth remains strong, currently it accounts for just over 8% of all eCommerce transactions, with expectations to grow to around 17% by 2023.

The true BNPL growth in Europe likely lies somewhere in between, and the Worldpay report probably provides a more realistic outlook: around 9% of eCommerce spend will be handled through BNPL payment schemes by 2023 in EMEA (CAGR 11,3%), or at around 11% in 2025.

Whatever way you cut it, BNPL is gaining market share quickly and investors are following suit: investment in European BNPL players grew 118% YoY in 2020 to €1.08B. And with over €930M already raised in Q1 alone, 2021 is set to break that record.

What are the benefits for businesses and consumers?

Benefits for businesses:

Over 50% of small businesses fail after five years of doing business, and 70% do not make it to the 10 year mark. Not gaining enough traction, or large competitors swooping in with lower prices, are some of the major challenges SMB’s have to overcome to become part of the select group that makes it past the first decade.

With that in mind, BNPL options can help SMBs in a number of ways;

Firstly, it allows to create a stronger competitive positioning towards large competitive price fighters by decreasing the upfront cost for the end consumer without carrying any of the risk themselves: with most BNPL solutions the merchant receives the full amount immediately after purchase and the credit line (read: risk) lies with the BNPL partner. Especially in times of economic downturn, this helps resource-strapped SMBs in keeping consumers spending.

Secondly, many businesses are reporting that consumers spend upward of 55% when offered BNPL options. This means that even with additional cost — e.g. the BNPL fee — the benefits of including the service far outway the cost, making it a partnership worthwhile. A key benefit most BNPL players prominently point out to their prospective business partners.

Lastly, many BNPL providers have thousands of new app downloads on a daily basis and send millions of visitors to their partners on a monthly basis by integrating their offers in the app. This allows merchants to capture new traffic streams that otherwise would have heard of their brand. Combine that with simple integration of the payment method and it’s quick to see how this is an appealing service offering for the hundreds of thousands of eCommerce shops.

Benefits for consumers:

For consumers the benefit lies within the business model: rather than paying potentially crippling interest rates on credit card overdraft and filling out piles of paperwork before being approved, BNPL providers rarely charge consumers for using the flexibility of paying by installment, and credit approval is a matter of minutes.

That is not to say that through BNPL consumers have access to unlimited micro credits without any possible impact on credit scores. Most players have set limitations on basket value and provide personalised monthly credit limits based on the consumer's creditworthiness, determined by proprietary credit scoring algorithms. Late payments will in most cases infer a late fee, and depending on your provider will be reported to the credit authority.

What makes the model so appealing though is that most BNPL do not do a hard check on the consumer’s credit score when taking out a loan. This uniquely makes small credit available for consumers who are unable to take out loans due to their credit history, or functions as a great alternative for those who prefer to keep their credit scores ‘clean’, but wish payment flexibility.

BNPL players of course loudly promote this inclusive credit model, communicating their high acceptance rates of over 90% within the sign-up process.

It is worth mentioning that at first glance this inclusive credit system would seem like a red flag for investors, who count on official consumer scoring metrics like a credit score for guidance on potential default rates on bank loans and therefore, the cost for the organisation. However, whereas the credit card default rate hovers around 3%, companies like Klarna report an impressive default rate of <1%, indicating the system is working better than traditional models.

The mix of quick user growth with better than average performance indicators is what makes the BNPL so appealing for investors, which is why new players have been popping up all over Europe, trying to own a part of the growing space.

Who is competing in the market?

Europe’s largest independent BNPL player by far is Klarna, which recently got valued at just shy of €26B (or 31B USD) after a behemoth investment round of €830M in Q1 2021, just a couple of months after a PE round of €543M (September 2020). It is no secret that Klarna is the most known BNPL player in the European market, and with over 250.000 merchants integrated, available in most large markets worldwide, and value added services like a Klarna credit card, the company is on a fast track to becoming a one-stop shop for consumers.

In addition to Klarna, here are a couple of other notable players to keep an eye on;

Afterpay (Clearpay in UK)
EU markets: UK, Italy, France, Spain

Why keep an eye on it; Afterpay (not to be confused with the Dutch originated namesake), is a global leader in BNPL services that over 13 million people in the US, Canada, Australia, New Zealand and the UK have used. Afterpay acquired European BNPL player Pagantis in March ’21, increasing its European presence, and has plans to expand its service offering beyond BNPL into other banking services, raising 1.5B USD to do so.

Alma
EU markets: France

Why keep an eye on it: Co-founded by former Stripe executive Louis Chatriot, Alma has taken advantage of Klarna not being available in the French market by building strong relationships with prominent French retailers. It has recently closed a series B round of €49M in Q1 2021, and is planning to expand into other european markets, focussing on helping French firms reach a European audience.

Twisto
EU markets: Czech, Poland

Why keep an eye on it: With most players focussing on Western Europe — Twisto has set its sights on the CEE region and with lower competitive pressure, has a unique opportunity to firmly establish itself as the BNPL leader in the area. Notably, Twisto is one of the few players who has added ‘plans’ to their B2C service offering, which unlock value added services like insurance, google/apple pay integrations for those willing to pay a monthly fee.

Paypal — pay in 4
EU markets: UK, Germany, France, Spain

Why keep an eye on it: Paypal only stepped into the BNPL market in late September 2020, but has been catching up quickly with the market, spurred on by its nr 1 ranking in European Fintech app downloads for 2020. With strong integrations of the payment service into the likes of eBay, Paypal has set its sight on getting its share of the BNPL pie, most recently by announcing its plans to take on Afterpay on its home turf.

The BNPL business model

On the main, there are two distinct business models within the BNPL market: the multi-sided model used by players like Klarna and Afterpay, and the less common Matchmaker model used for instance by CreditClick.

Multi-sided model

The multi-sides model is by far the most common business model in BNPL. Here, the company provides different products or services to different customer groups. In the case of BNPL: payment flexibility to the consumer, and access to this community for the merchants. The potential for profitability in this model is high, as the company is able to monetize both sides whilst benefiting from the strong network effects.

Matchmaker model

In this model the company functions as a marketplace, bringing buyers and sellers together. The value proposition is simply transactional: to facilitate exchange. Platforms that function like this have an ability to scale quickly, but as they battle with low margins and high risk from copycats, it’s no wonder that only a few BNPL players have structured their business in this way.

What are best practices from different buy now, pay later offers?

In a recent PYMNT report, 87% of those aged 22–44 expressed interest in breaking down large purchases into monthly installments. This apparent need is not lost on the main players in the BNPL market, who make it no secret their focus is on getting young adults, living in urban areas, to shop via their portals.

The result, of course, is a dash for ‘color’ ownership within the category, and a barrage of imagery showcasing cool and stylish late 20’s millennials, living their best care-free life.

Apart from the color focussed brand positioning, true product differentiation is relatively low, and revolves mainly around how much convenience, or flexibility you require, rather than truly innovative product features. Examples of highly communicated benefits are;

• Amount of Installments: most players offer around 3–4 installments, spread out over 4–8 weeks. Some players, like Confidis and ratepay who offer white-label solutions for merchants, offer up to 24 installments.
• Delayed first payment: Providing even higher credit flexibility, some providers, like Paypal, offer a delay of the first payment.
• Online, and in-store: players like Twisto, Klarna, and Alma also offer the possibility to use their services in-store with (selected) merchants, capturing more “spur of the moment” purchases. This happens either by physical card, or digital wallet integration.
• Amount of merchants: availability of your favorite brand is of course a major selling point for BNPL players, and trusted logos of large retailers are visibly integrated throughout the customer journey.

Offers towards merchants revolve mainly around the size of the audience the BNPL provides access to, and the merchant fee structure. Below a quick overview of some of the player's fees towards merchants and consumers, where applicable;

Why should legacy companies care about it?

Largely as a result of COVID-19, online retail sales in Europe have skyrocketed by 26% in 2020. And whilst this growth trajectory is likely to re-adjust after offline retail stores are able to open their doors, the expectation is that growth in the e-commerce sector will be permanent, resulting from increased public trust and changes in consumer behaviour, rather than just a temporary result of the pandemic.

With digital spending increasing there is continued fuel for the BNPL market growth, which should come as a warning sign for traditional players who offer payment flexibility either through cumbersome application processes or by charging customers sky-high interest rates on credit cards.

It’s worth noting that various card issuers like VISA and Mastercard have already entered the BNPL market. Zilch was one of the first BNPL companies to reach a large scale marketing deal with Mastercard, and both VISA and Mastercard have not shied away from expanding on their partnerships, acquiring players in the market, or more recently releasing their own installment products.

BNPL future: our predictions

There is no question online shopping is becoming increasingly more integrated into the fabrics of society, and we expect 2021 to show a major uptick in companies embedding 3rd party financial services such as BNPL within their payment funnel as without it, they stand to lose 8–10% of revenues.

Here's a couple of our predictions for what’s coming;

1. Players will move ‘beyond BNPL’ and will start integrating banking services in their offering: insurance, saving spaces, and P2P money lending are a couple of logical next steps. So is the evolution into a digital wallet.
2. BNPL players will start moving from the ‘referrer’ to the ‘owner’ of the traffic (and more importantly: the owner of data) by deeper integrating the partner inventory into their applications.
3. We will see more BNPL players starting to capture more value by offering subscriptions, or bundles, that give users access to more features against a monthly fee. Long live the rundle.
4. Evolution of BNPL to more applications; you can already get your salary sooner, but what about taking advantage of low stock prices when you are low on cash? Buy shares now, pay later.
5. Regulations authorities will fight to increase oversight of this new digital payment product, and create stricter rules on how BNPL arrangements are marketed to protect the unwitting shopper.

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About Frontira

Frontira is a strategic design firm that empowers leaders to define, build, and scale digital business solutions. With offices in Berlin, Salzburg, and Budapest, Frontira is a proud partner of Mastercard, A1 Austria, and Alpha bank — amongst others.

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