BNPL…What all the Hype About?!
“Buy now pay later” is a type of consumer credit that really got going in the 19th century when Singer – the renounced sewing machines – were sold for a “dollar down, dollar a week.” But the modern fintech twist in “BNPL” is that it’s aimed at people making impulse purchases of fashion or jewelry or electronics rather than what may be deemed necessary as a sofa or a refrigerator.
It’s delivered through apps that are wildly popular, leading to dizzying valuations of startups such as Klarna, Affirm, and Afterpay. Regulators from the U.K. to Singapore worry that young borrowers are getting in over their heads…
1. How did it originate?
The “installment plan” is the precursor to today’s BNPL craze. Paying off purchases weekly or monthly evolved from 1840 onward, as makers of furniture, pianos, and farm equipment looked to make products more attainable.
2. So how is it different from credit cards?
Nowadays, young shoppers are wary of providers that profit when customers don’t pay their balances. They prefer the feeling of control they get from fast BNPL payment schedules, often spread over four to six weeks. Because of these, and because purchases are generally cheap, they’re usually interest-free.
3. What’s new here?
Most BNPL isn’t about buying big-ticket items; it’s about using an app to snap up that must-have jacket or earrings in the expectation that you’ll pay it off quickly. For example, the average spend on a transaction in the U.K. using Klarna Bank AB’s app is about 75 pounds.
4. Why is it so popular?
The apps are simple and typically involve only minimal credit checks, or none at all with Afterpay Ltd., a Melbourne-based firm that offers payments spread over six weeks. Retailers — which pay the BNPL provider a small percentage of the transaction value, as they do with credit cards — frequently tell shoppers there’s “no need to wait until payday.”
5. What about late payments?
San Francisco-based Affirm Holdings Inc. doesn’t charge late fees, nor does Klarna on its “Pay in 30 days” product, though many of their peers do. BNPL customers who don’t pay bills are blocked from further purchases and may be passed on to debt collectors.
6. Who dominates?
Stockholm-based Klarna is the BNPL beast: With a $45.6 billion valuation, based on a June 2021 fundraising round, and 90 million users, there are huge expectations about an initial public offering, possibly within the next couple of years. Klarna’s biggest rivals, Affirm and Afterpay, have millions of customers, too, and the competition is intensifying as banks, credit card companies, fintech, and shopping sites team up to go after the business. U.S. tech entrepreneur Jack Dorsey’s Square Inc., a mobile payment company, agreed in August to acquire Afterpay for $29 billion. PayPal Holdings Inc. agreed to buy Japanese BNPL provider Paidy Inc. for $2.7 billion in September.
7. How big is BNPL?
Global sales using BNPL were $93 billion in 2020 and could top $181 billion by 2022, according to Bloomberg Intelligence. That’s still a small percentage of online retail — 1.6% in 2020 — but the share was growing fast. The U.S. is a juicy prospect because of the lower BNPL penetration of the market there. Lifting that to levels seen in Australia and the U.K., among the most developed markets, would push yearly BNPL sales in the U.S. from about $20 billion to $100 billion.
8. What’s the worry?
That it could be a form of irresponsible lending. Some regulators worry that painless borrowing is a “gamification” of shopping similar to Robinhood Markets Inc.’s stock trading app, creating a sense that spending isn’t real. Consumers could load up on debt using different apps and then overdraw their bank accounts or take on credit card debt to service their BNPL accounts. The possibility that BNPL leads people into a chain of borrowing elsewhere could create hidden risks for the banking system. The Australian Securities and Investments Commission found that, over a year, 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 cut back on buying essentials. Britain’s FCA says the sector must be regulated, Australia has a new code of practice designed to prevent customers from borrowing more if they’re having difficulty with repayments, and California has fined unlicensed lenders.
9. How about African Market?
BNPL payment industry in Africa & Middle East has recorded strong growth over the last four quarters, supported by increased ecommerce penetration along with impact of economic slowdown due to disruption caused by Covid-19 outbreak.
According to the Q4 2021 BNPL Survey conducted by ResearchAndMarkets.com, BNPL payment industry in the region is expected to grow by 99.8% on annual basis to reach US$ 7187.8 million in 2022.
Medium to long term growth story of BNPL industry in Africa & Middle East remains strong. The BNPL payment adoption is expected to grow steadily over the forecast period, recording a CAGR of 49.2% during 2022-2028. The BNPL Gross Merchandise Value in the country will increase from US$ 3598.0 million in 2021 to reach US$ 79398.1 million by 2028.
The adoption of the buy now, pay later (BNPL) products and services has been on a constant rise in the Africa & Middle East region over the last four to eight quarters. Several startups and global BNPL players are offering their innovative products and deferred payment services for consumers in the region. Moreover, the adoption from merchants is also on the rise as more and more consumers are demanding the BNPL payment method for both in-store as well as online purchases.
In the UAE, the global pandemic has resulted in a shift in consumer spending habits and accelerated adoption of online shopping platforms. This shift in the overall consumer behavior, along with the rise of digital payment solutions, is resulting in BNPL becoming one of the fastest-growing payments methods in the country. Moreover, as the digital payments landscape continues to evolve in the UAE, BNPL firms along with global payment giants are launching innovative, first-of-its-kind shop anywhere BNPL schemes.
10. Need for strong technology platforms
As we’ve embarked upon the history, appeal, and challenges, how are companies interested in BNPL are supposed to actually tackle it, from a technology perspective, what pieces of technology do they need to deploy, especially with the correction of deviation in “intellectual property ownership”, as companies are getting more aware of the importance of investing in operations, marketing and customer retention, more than the staggering amounts to build a piece of technology that could be easily acquired from the correct, reliable sources.
About CIT Vericash
CIT VERICASH is a division of CIT GLOBAL, an international leading provider of innovative eCommerce and mCommerce software solutions and services with solid expertise spanning 25 years, since its establishment in Toronto, Canada in 1993. By applying CIT Global’s dedicated centers of excellence and its specialized leading products, in cooperation with its strategic partners, the company has delivered innovative and award-winning solutions to its clients in more than 48 countries, serving leading brands from North America, Europe, Asia Pacific, the Middle East, and Africa.
References:
- Bloomberg Businessweek
- PayPal Earnings Call
- Researchandmarkets.com