Usually, forcing changes into the payment systems and consumer habits takes decades.
But today, we live in a particularly interesting time where the shift to mobile and online has brought various alternate payment options.
The latest, and perhaps the most disruptive, is Buy Now, Pay Later (BNPL). At first look, the name suggests a simple credit alternative. But that misses the trees for the bush. The nature of merchant and consumer agreements under BNPL and the usage pattern are particularly unique.
What is so unique about BNPL?
Even though BNPL isn’t a new concept, it has proliferated at a furious pace in the past couple of years with a surge in e-commerce transactions worldwide.
In 2021, the main Buy Now Pay Later companies have financed around $300 billion of sales globally. While seemingly large, compared with the $10 trillion credit spend that passed through the pipes of Visa, Mastercard, American Express and Discover, that’s a drop in the ocean.
However, one has to start somewhere.
This massive upsurge is primarily attributable to two key reasons:
Firstly, the relatively easy credit availability for New-To-Credit (NTC) customers (albeit with lower credit limits). This is because BNPL players’ credit assessment relies on several parameters beyond bureau score, and the credit limits are fairly dynamic (based on spending and repayment history).
Secondly, and the most significant value proposition of BNPL over other payment modes (including credit cards) is the seamless user experience. Most BNPL players provide for onboarding of new customers during checkout (online as well as offline) with a turnaround time of a few minutes.
Further, payments for online purchases are made with a single click (choosing the BNPL option). Low fees for the customer (0% interest products, low subscription fees etc.) and end-to-end digitisation are some other features that are lucrative, particularly for the younger generation and NTC cohorts driving BNPL euphoria.
A win-win proposition
As one can see, while customer benefits are well laid out, the biggest beneficiaries of the entire deal seem to be the merchants.
With the incentive of a better customer checkout experience, reduced cart abandonment increased sales, and higher frequency of repeat purchases – merchants have been quick to adopt BNPL schemes and to pay high commissions on sales (4-6%) as compared to the Credit card (1.5-2.5%).
Merchants are also building brand loyalty using BNPL since customers are more likely to purchase from the same merchant with the instalment option.
A space that has witnessed a rollercoaster ride globally
BNPL as a concept isn’t new. Across the world, several companies have been building BNPL services for nearly two decades now. While some players have scaled across regions, BNPL remains a ‘balkanised’ service, with several local players emerging in different countries/regions.
Since BNPL relies heavily on being present at the check-out page on the merchant website, a good indicator of a BNPL player’s scale is the share of merchant partners and the GMV contribution enabled by each player.
Leading the pack is Klarna, a Swedish player and one of the earliest entrants in the market.
Starting in 2005, the company primarily served Europe and US markets, with a dominant presence in Scandinavia. Spurred by the spike in online sales, Klarna registered strong growth, with GMV on the platform going from $35 billion to $80 billion in just two years. To keep the growth engine going, the company raised $639 million from SoftBank in 2021 at a valuation of $45.6 billion.
However, a year later, post-COVID, the company’s valuation has been marked down by as much as 85%, mainly due to slower growth and a broader shift in investor sentiment away from high-growth tech stocks.
Affirm and Afterpay, the second and third largest BNPL players in the market, respectively, have turned to other strategic options to sustain their growth rate.
Affirm, a publicly traded BNPL service provider based in the Valley, is best known amongst customers for being Amazon’s exclusive BNPL partner. The company also partnered with Walmart, Stripe and Shopify, increasing its active merchant base from 8,000 to 168,000.
However, despite solid growth in GMV, the firm has taken a beating in public markets, with shares falling nearly 6x, from a high of 164 USD/share in Nov 2021 to 23 USD/share in July 2022, due to concerns over long-term profitability.
Afterpay, the leading BNPL player in Australia and NZ and the third largest player globally, was acquired by Block (previously Square) in an all-stock deal earlier this year.
Post the acquisition, the firm has seen strong sales growth, with synergies between their payments and BNPL businesses helping them cater to a more extensive user base.
Cues for local SEA players
Closer home, in SEA, competition in the BNPL place is stiff, with several players in each market.
BNPL in SEA has played out uniquely.
On the one hand, there are several standalone players. These include the likes of Kredivo, Akulaku, Atome, Pace and others. While Kredivo started as a standalone BNPL service, others have spun out of entirely different businesses.
Atome, a spin-off from Singapore’s AI-based startup Advance.ai, decided to enter all regional markets simultaneously. Atome has partnered with popular brands across the region, like Charles & Keith, Zara and SHEIN, to expand their footprint.
Recently, they teamed up with Mastercard to offer a BNPL card in the Philippines, giving customers a new credit-based payment option. Akulaku, on the other hand, has grown to become a full-blown digital financial service provider with the majority stake acquisition of Bank Neo Commerce.
However, it is not just these upstarts making waves.
Prominent super apps like Shopee and Grab have integrated BNPL as a service into their in-house payment platforms, given the logical extension of BNPL boosting their other services. SeaMoney and Grab PayLater offerings are essential levers for these companies, seen as essential pieces of their super app ambitions.
Apart from the convenience and size of the merchant base, BNPL players in SEA differentiate their offering basis by three main criteria – the eligible basket size for a BNPL order, the repayment tenure and the interest rate.
For instance, Atome chooses to increase its transaction volume and restrict the basket size – their average order value is around $100 with a 3-month repayment tenure and zero interest fee. Kredivo, on the other hand, has an average order value of nearly $300, with an option to avail of a longer payment term for a nominal interest of 2.6%.
Cash guzzler or sustainable model?
High merchant service fees remain the most critical revenue driver for BNPL providers, with a small contribution from late fees (~10-15% of revenues).
However, the profitability remains elusive as the marketing and promotion expenses, along with higher-tech and employee expenses, are yet to normalise.
Leading players are now gradually diversifying into other products such as bank accounts in partnership with banks, issuing virtual debit cards, buying out loan portfolios etc, for higher customer engagement and profitability.
Way Forward
2022 has been a brutal year for BNPL. Multiples for public companies have compressed from 40-80%, and private players like Klarna have raised at severe down rounds.
This poses the question if we have seen a permanent impairment in valuations, or are some going to emerge from this stronger?
It seems clear that in a higher interest rate environment, only the ones going about it sustainably are likely to win out. Credit scoring via proprietary risk assessment models, partnering with strong merchants and offering sustainable options remain critical for long-term success.
It is hard to estimate if and when BNPL will be back in favour to investors, both public and private.
However, it is clear that given the value proposition at play, it remains a long-term model that rewards those that execute the best.