Overview: Utilised by thousands of customers everyday, and now available on many of the most commonly visited marketplaces, “Buy Now Pay Later” services allow users to pay for their purchases over a short time, with no interest and only a small down payment.
The solution, whose popularity surged tremendously during the Covid-19 Pandemic, is particularly appreciated by Gen Z and Millenials, who combined accounted for 75% of the total users in 2021.
By reducing the number of incomplete transactions, increasing conversion rates, boosting average order values, and facilitating repeat purchases from consumers, Merchants can now exploit BNPL to offer a wider range of payment-related, value-added services at the point of sale, further preparing the ground for a fully integrated and enhanced retail experience. The most relevant areas to which these services are applied are lending, loyalty and insurance.
Even considering the substantially higher fees ( average of 4.8%) when compared to a traditional credit card (average 1.7%), the adoption of BNPL led to an average order value increase of 20-30% in comparison to conventional means of payment, together with a 50% higher basket conversion rate.
Recently, a significant amount of BNPL solutions were made available to Businesses, opening up new opportunities for financing and cash management, consequently allowing to maintain higher working capitals. At the same time, suppliers do not need to run the same credit checks on buyers, as they would need if they bought it directly from them. The checks that still need to be run are streamlined online, and can be conducted much faster.
As a statement of the attractiveness of the market, even Apple, after acquiring Credit Kudos, will release its proprietary Pay Later service in September. It is interesting to note how the Cupertino company took matters into its own hands, and differently from the past partnerships with Mastercard for its Pay-related services, Apple will manage loans, risk management and credit checks itself through an ad-hoc subsidiary.
While this may look like a tardive move, the potential impact that an embedded, built-in solution may have has to be carefully considered, especially since it will not require external downloads and will be available on any payment device that supports their Pay service.
Recent market development: Following a couple of golden years characterised by soaring popularity -and valuations- the recent events that affected the market may have finally disenthralled investors and financial institutions from the spell, bringing valuations back to pre-pandemic levels. Klarna, the most renowned BNPL platform, lost in a single year the 85% of its worth, plummeting from $45B to $6B.
This, though, is not an isolated case: the majority of the biggest players saw their valuations and stock prices being significantly reduced in Q2 2022.
The blame for this could be partially attributed to the saturation of the market, which in 2021 counted more than 170 players. In addition, Apple’s entry will force companies to lower their margins even more to remain competitive against the Tech Giant.
Another major challenge that BNPLs have to face, especially when it comes to B2B, is the relatively low amount of business transactions that are completed online. While these solutions are generally plugged in at the “point-of-sale”, many industries are lagging behind in digitalisation and still invoicing via email and fax, procedures that eliminate the possibility to apply such services. With time this issue will fade but, at the time this article is being written, the problem is relevant and worth mentioning.
As if the current market conditions were not enough of a challenge for BNPL, that up to this moment has managed to avoid the regulatory hammer in many of its major markets , will now have to face additional layers of transparency in EU due to the new proposal to further regulate consumer credit and should expect new regulations in the UK, where companies are leveraging an exemption in the Consumer Credit Act and FCA rulings.
Meanwhile, the United States are currently not planning on any regulation for the market.
Nevertheless, BNPL remains one of the fastest growing e-commerce related markets, with a global size expected to reach an impressive $39 billion by 2030, growing at a compound annual growth rate of 26% between 2022 and 2030.
While companies will surely have to face numerous hardships in the upcoming years, it is also true that many will be the available opportunities.
Many are already the strategic collaborations between BNPL companies and retail marketplaces, like in the case of Affirm and Amazon or Klarna and Global-e. These partnerships will allow for a systemic product distribution thanks to the worldwide reach of these platforms, while giving to sellers the possibility to improve their sales by gaining access to new customer tiers.
Together with a market diffusion and a wider acceptance of the product, it is plausible to expect an expansion of the offering, with companies starting to provide more variegated options and services: BNPL enterprises may add to their table insurance, recommended retail products, fidelity programs and discounts. Some of the biggest players also demonstrated relevant interest in the cryptocurrencies space, hinting at a possible expansion towards retail investments and wealth management services.
Another important opportunity is represented by new markets, such as emerging countries and the gig economy. The first ones will see protagonists micro-crediting and open-loop payment systems, with the goal of hastening credit card diffusions through collaborations with local partners.
The second one is instead playing a role of growing importance in the post pandemic economy: gig workers which undertake food deliveries and car ride services receive irregular and fragmented retribution, which could be uniformed through the use of ad-hoc platforms like Gigwage and Cappi. It remains unseen if the driving force for this change will be employers or employees.
Conclusive considerations: In a society dictated by consumerism and afflicted by growing inflation and high consumer rates, companies offering a solution for people to acquire goods that are becoming more expensive every day are surely here to stay. This, though, does not imply they will have an easy way to success, as fierce competition, new regulations and lowering margins will deeply impact many providers.
While the battle now moved to American soil, where no specific regulations have been planned, it will be interesting to assist to the evolution of the current market, which will undoubtedly be disrupted in the last quarter of the year.
About Alfredo Gomez Soria
Alfredo leads Plug and Play flagship Corporate Partnerships for Financial Services in continental Europe. Based out of Frankfurt, Germany, connects leading corporations with startups in order to obtain pilots, contracts, and explore strategic investment opportunities.
About Plug and Play
Headquartered in Silicon Valley, Plug and Play has built the largest innovation platform on earth, with the goal to connect corporations, startups, and investors. Plug and Play not only supercharges the innovation strategies of over 500 industry-leading corporations, it also runs over 60 industry-focused accelerator programs in over 35 cities globally and invests in more than 250 startups on an annual basis.
