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What’s next for BNPL?

There has been a lot of news recently around Buy Now Pay Later (BNPL), such as Apple’s announcement of a BNPL solution, Revolut rolling out its ‘Pay Later’ product in Ireland, as well as proposed regulations in the UK. BNPL is certainly a hot topic in many markets, but some service providers have been struggling with issues such as valuation, while reports around the dangers to consumers continue to make headlines, both of which have prevented BNPL from shedding its controversial status.

Rapid growth on the back of challenging profitability

While the BNPL market has been growing very quickly over the last few years – evidenced by a CAGR of 89% between 2019-2021 and firms such as Klarna reaching over 150 million users – industry estimates suggest that BNPL only accounted for 2% of the global e-commerce sector in 2021. The growth in the number of firms offering BNPL services, even before Apple’s announcement, is a sign that the space is becoming increasingly competitive while recent economic downturns have led to issues around low valuations. Many BNPL firms are having trouble reaching profitability and announced lay-offs earlier this year, further harming the industry’s reputation. Rising interest rates and the effects they will have on consumer spending to the increased cost to fund debt and you get an interesting cocktail that may not taste exactly as the mixologist had thought just two years ago. That said, Apple entering the space provides some positive signals for the BNPL market.

Digging a bit deeper into the BNPL business model, many firms offer this short-term loan service to consumers with no additional fees. This contrasts sharply with credit cards, which the consumer could also use to make a purchase. However, credit cards typically charge annual recurring fees, interest beyond 30 days, and punishing late fees when payments are missed. Not charging interest to consumers makes profitability and covering losses more difficult for BNPL services. Increased competition for BNPL in the US and Europe means that transitioning to a fee-based service is more difficult and differentiating oneself from the competition is also challenging. One interesting differentiation method is in the types of payments that firms allow consumers to pay with, such as account-to-account (A2A) payments (whether based on the real-time rails or batch) combined with services like request-to-pay. It remains to be seen, however, how attractive this will be to consumers, BNPL providers, and merchants, despite the fact that A2A payments may be cheaper than card payments. Consumers base their payment behaviors on a number of factors: loyalty points, refund and dispute rights, positive credit scores, trust, and user experience. BNPL scores well on some of these factors, but so do cards.

Increased regulation in the UK, US, and BNPL market leader: Sweden

The recently proposed regulations around BNPL services in the UK requiring lenders to ensure that consumers can afford short-term loans and that advertisements do not mislead consumers are likely to be the first of many new regulatory actions to come. Movement in this area can also be seen in the US, as evidenced by the Consumer Financial Protection Bureau’s (CFPB) discussions with the US Senate and the corresponding requests for information from the largest BNPL firms active in the US. 

Sweden’s regulator was an early mover in terms of implementing controls on BNPL and other credit-based solutions, and yet current estimates show that Sweden is the leading market in terms of BNPL’s share for e-commerce purchases. The so-called “no debt first” payment rule in Sweden requires payment service providers to prioritize payment types that do not involve the accumulation of debt, such as A2A payments or debit cards versus credit cards or BNPL. In Australia BNPL providers were forced to remove their no-surcharge rules imposed on merchants, further demonstrating that BNPL is increasingly getting the attention of regulators around the world. Each market is likely to have different regulations, which causes uncertainty and makes expanding into new markets a bit more challenging. Accordingly, growth should slow.

The future of Apple Pay Later and BNPL firms

Going back to Apple, the “Apple Pay Later” service will first be integrated into Apple Pay in September in the US. This move will likely be met with success given Apple’s large user base (including merchants) in a wealthy market that widely uses credit card-based payment options. This also fits neatly into Apple’s wider efforts to enhance its wallet’s capabilities and position Apple Pay in the wider payment space. Apple Pay Later will allow consumers to split a purchase made online whenever Apple Pay is used – without any interest or additional fees.

BNPL firms need to look into offering both card-based and A2A-based payment methods to capitalize on the benefits of real-time payments, open banking, request-to-pay, and big data. The use of real-time payments for recurring payments is a great way to build a relationship with a customer, offer cheaper payment methods to merchants, and ensure that consumers have a variety of payment options. We expect the BNPL landscape to continue to grow, but growth will slow because expanded regulation, increased competition, and economic factors will provide plenty of friction for BNPL solution providers moving forward.

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Comments: (3)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 July, 2022, 16:31Be the first to give this comment the thumbs up 0 likes

I'm amazed how this article makes gloomy predictions about BNPL's profits without making any reference to MDR, which is the single largest source of revenues for BNPL. At 4-6%, BNPL makes twice what credit card does - 2-3% in unregulated markets.

Among VC-backed businesses, BNPL happens to have one of the best unit economics.

Leo Lipis
Leo Lipis - Lipis Advisors - Berlin 05 July, 2022, 17:33Be the first to give this comment the thumbs up 0 likes

 Hi Ketharaman,
Thanks for your comment. I welcome the debate and respectfully disagree. At least three of the big BNPL companies (Klarna, Affirm, AfterPay) made a loss in 2021 and I don’t think an MDR of 4-6% is sustainable in any case. Many of the business cases around BNPL services were created in a 0% or, at the very least, a low interest rate environment. Given how quickly interest rates and inflation are now rising in advanced economies, I am skeptical that business models that were built on these assumptions can survive without serious changes.

Moreover, high inflation is squeezing both consumers and merchants, and the very target audience for BNPL services are also more likely than other target groups to be hit hard by inflation and are therefore more likely to struggle to make repayment. Add in the lack of regulation (and indeed looming regulation as the example of the UK shows) and the trend of consumers having multiple open BNPL accounts adds complicating factors. While I do think BNPL has a place in the future marketplace, I don’t think it will achieve the dominance that some predict.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 06 July, 2022, 11:32Be the first to give this comment the thumbs up 0 likes

Despite tectonic changes in technology, consumer behavior, alternative payments, blah blah blah, credit card industry has maintained its 3-4% MDR (in unregulated markets) through its entire 70 year history.

Why won't BNPLs be able to sustain their 4-6% MDR for a similar period?

I'm not among those who predict that BNPL will achieve dominance. That said, through the last 35 years of observing emerging competition to credit card, BNPL is the only credit card competitor that I think has some chance of putting a slight dent on credit card volumes.

Leo Lipis

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