By now you might be familiar with the term “Buy Now, Pay Later” (commonly referred to as “BNPL”). Let’s explore some of the reasons for this trend.
So what is BNPL exactly?
“Buy Now, Pay Later” schemes are loan financing products which are somewhat similar to credit cards. Through partnerships with specific retailers, you can buy goods and services through installments (with APRs similar to mainstream credit cards / lines). These typically range from four bi-weekly payments to installments spread over 60 months.
It’s a fairly streamlined process: you don’t need to pull any physical “plastic”, enter your number, etc… Besides the convenience factor, most providers will only perform a “soft credit check” every time you make a purchase. Some retailers also run special offers such as 0% interest options if you pay the full balance within a relatively short period of time. This type of loan can be potentially interesting for consumers who either lack a conventional credit history or are not particularly interested in managing credit cards.
BNPL has been around for decades (I vividly remember my parents buying home appliances and electronics in the 80s and 90s through such means). As of July 2020, one third of U.S. consumers have used some form of BNPL service. Yet the expansion of ecommerce has accelerated the proliferation of new digital providers. Think of it more as a continuation or adaptation rather than a full-blown disruption.
The new kids on the block
While there are many new entrants on the market, four companies come to mind.
Klarna (which means “clear” in Swedish) was founded in 2005 in Stockholm. Overtime the company has grown tremendously, now serving 17 countries including the U.S. and U.K. I’m including more stats below (pulled from their official website at the time of writing):
.Total end-customers: 90 000 000
. Total number of merchants: 200 000
. Number of transactions per day: 1 000 000
. Number of employees: 3 500
Klarna is known for cultivating an offbeat, youthful image. Their commercials are always… unconventional to say the least.
Founded in 2015 and hailing from Australia; AfterPay has since experienced significant growth and expanded to the U.K., U.S., New Zealand and Canada.
There’s a fair amount of optimism around modern day BNPL.
A co-branded PYMNTS.com / AfterPay report released in May 2020 revealed that 87% of consumers aged 22 to 44 are interested in monthly installment plans. Moreover, 40% of millennials and 57% of Gen Xers have already used such services. Consequently, BNPL is often seen as a way to entice younger shoppers.
Of course, the amount of BNPL transactions remains small compared to credit and debit cards; however they are progressing rapidly within the ecommerce realm; and with the proportion of millennials becoming higher in many countries, such become even more interesting. Case in point, Klarna now boasts a significant market penetration in Northern Europe, holding 10% of the ecommerce market share in the region. In Australia, 8% of ecommerce transactions in 2019 were processed via BNPL services. In the U.K., online BNPL transactions are growing at an annual rate of 39%.
And the newer providers are maturing. AfterPay had a successful IPO in Australia in 2016, Affirm filed a S-1 last week and Klarna is eyeing its own listing after achieving a $10.65 billion valuation (becoming the highest-valued private fintech company in Europe in the process).
One concern that has surfaced in the media is “debt piling” among younger BNPL users.
Iona Bain, founder of the Young Money Blog, told The Guardian in 2018 that Klarna could well become “debt by another name for a new generation”. “It sounds ingenious but my experience tells me that young consumers aren’t great at focusing on the details when it comes to debt… Unless you’re keeping a very close eye on liabilities like these, the risk that they get out of hand is very high indeed.” she added.
Perhaps that is a sign providers should focus more on financial literacy awareness.
Despite global economic uncertainties and some ethical concerns, the future looks promising for BNPL.