Buy Now Pay Later: The Latest FinTech Disruption in Payments

BNPL is a FinTech option that allows buyers to buy now and pay over a period of time. Unlike the regular loans, BNPL does not involve paperwork ­– customers can access it almost instantly using their smartphones. Besides helping customers raise credit easily and boosting the sales of consumer goods and other white goods, BNPL helps merchants to explore new borrowers. Accessing credit via BNPL is easy and hassle-free compared to a traditional loan; however, consumers must exercise utmost caution before using the BNPL facility as it is also a type of loan which must be repaid. The sector has faced intense scrutiny from regulators recently over awareness concerns. Nonetheless, BNPL’s future appears very bright.

Today, online shopping is a regular activity undertaken by a large number of consumers. Earlier, retailers would publish and distribute shopping catalogs enlisting the items on offer for consumers to browse through. Consumers would order the required items via mail and make payments via bank transfers or cheques. Another option (in some cases) included paying in installments (usually with an added fee component or some interest).

E-commerce transformed the entire process and brought about significant changes in customers’ behavior and expectations regarding the shopping experience. The yesteryear catalogues were replaced by interactive websites providing a 360-degree view of the products as well as their features. Subsequently, credit cards, net banking, and digital payment services such as PayPal emerged.

Growth in e-commerce has been closely linked to innovation and disruption in FinTech, especially digital payments. Consumers now have the luxury of buying goods and paying for them online. The latest innovation in the payments space is the digitization of paying in installments, also known as “buy now pay later” (BNPL).

What is BNPL?

BNPL is a financing option that allows customers to purchase items online in flexible installments, instead of paying the entire amount up front. Thus, it provides customers with a seamless purchasing experience as well as the flexibility to raise credit, often interest-free.

Moreover, BNPL helps merchants increase the value of online orders as well as sales conversions while keeping the user acquisition costs in check.

BNPL as a financial product has attracted millions in investment around the world, leading to the success of startups such as Afterpay, Affirm, and Klarna. PayPal has launched its own BNPL offering in the US.

Growing Popularity

One of the direct effects of the pandemic has been the surge in online shopping coupled with the acceleration of e-commerce, thereby boosting the demand for BNPL companies. The momentum of boom in consumer spending is set to continue with consumers receiving goods at their doorstep on the click of the mouse.

BNPL companies have positioned themselves as a viable alternative to credit card issuers, banks, and consumer lending institutions. They have been able to quickly acquire customers in recent years by offering services with a differentiated value proposition, in a manner where the incumbents fell short.

The funding activity and number of deals closed in the BNPL domain reflect the rise in interest in this sector. BNPL companies witnessed consistent momentum in deal activity throughout 2020, despite the onset of the pandemic.

Source: CB Insights, Aranca Analysis

The sector has been gaining momentum within the corporate circle as well. During earnings calls in 2020, BNPL and related terms were mentioned a record number of times, implying the skyrocketing focus of executives on the sector.

Source: CB Insights, Aranca Analysis

As per CB Insights, BNPL accounts for a small portion of the overall spending on payment cards (credit, debit, and prepaid), an industry recording nearly $8 trillion in annual spend volume in the US.

However, there is growing consensus and evidence that BNPL is at an inflection point. In terms of volume, the global BNPL industry is expected to grow 10–15x by 2025, recording $1 trillion in annual gross merchandise volume (GMV), as per estimates.

BNPL can be classified into two, as given below:

Source: Aranca Analysis

Consumers and merchants are increasingly adopting BNPL solutions to reduce financial pressure and meet online shopping demand, respectively.

The Point of Sale (POS) system has been at the core of many business operations and is widely available (from local grocery stores to malls, high-end shops, food establishments, and beyond).

POS lending is a convenient tool which allows the customers to make purchases in incremental payments. 

Advantages of BNPL:

Source: Aranca Analysis

How Do BNPL Companies Make Money?

The BNPL revenue model includes collecting money from both merchants and consumers.

If the customer uses BNPL service, the merchant needs to pay the service provider a fee ranging between 2% and 8% of the purchase price. The service offerings of the BNPL are positioned as a marketing or promotional spend, provided the merchant can increase conversion or traffic.

BNPL allows customers to make payments through flexible installments, helping them to raise interest-free credit. However, if customers are unable to repay the amount by the due date, a late fee is charged. This fee adds to the revenue of the BNPL company. If the customer repays on time, no interest is charged.

Is the Future Really Bright?

The outlook for BNPL appears bright as it is expected to encourage more customers to purchase a product of their choice on the go. Many lenders providing this facility allow repayment at no-cost EMIs; this feature is likely to appeal to the youth the most.

The BNPL market is expected to grow to ~USD 700 billion by 2023, with penetration reaching 12%, led by North America and the APAC region.

Source: Deutsche Bank, JP Morgan, BCG Analysis, Aranca Analysis
Note: 1. Excluding LATAM; 2. BNPL market penetration % represented as percentage of total e-commerce

Notably, BNPL is also a kind of loan that customers are required to repay. BNPL companies need to be vigilant while offering the service as all customers may not be able to repay the amount within the stipulated time. Ideally, the companies should perform due diligence to verify the borrower's creditworthiness. However, the BNPL business model allows customers to purchase a product of their choice instantly. At the same time, the customers need to understand that any failure to repay the amount on time will lead to penalty charges, most likely in the form of interest and/or significantly high late fees, and a drop in their respective credit scores. 

BNPL services claim to provide consumers with control over their finances and help them avoid falling into a vicious circle of unsustainable debt; nonetheless, consumers could face the risk of getting into debt. As BNPL makes purchasing easy, it may encourage consumers to spend beyond their means, leading to impulse buying; this may promote a hyper-consumerist culture.

BNPL’s popularity surged exponentially during the pandemic as it created an opportunity for users to pay in flexible installments. However, consumers’ purchasing power is likely to reduce, given the current macroeconomic environment, rising inflation, and slowing economic growth; moreover, higher interest rates may tighten BNPL providers’ margins.

Recently, the sector has faced intense scrutiny from regulators over concerns that users are not being well educated about the fact they are actually getting into debt to finance their purchases; this has been creating more caution than interest among people.