I think it is safe to say that August was the biggest month ever in the short history of the Buy Now Pay Later (BNPL) industry.
We started the month with the huge news that Square was acquiring Afterpay and we ended with Amazon’s deal with Affirm. It seems like every day there is more news coming out of this sector, it is white-hot right now.
But is this a fad that will fade away or are we seeing payment behavior really shifting away from credit and debit cards?
Before we go any further let’s do a primer on the big three BNPL players (in alphabetical order):
Started by Max Levchin, the PayPal co-founder, and several others in 2012 they decided right off the bat that they were going up against credit cards. Levchin famously compared credit card companies to payday lenders in his LendIt Fintech USA 2019 keynote, excoriating them for allowing consumers to refinance their debt in perpetuity.
Affirm is focused on simple, fixed loan terms and has the largest variety of installment options from six weeks up to 39 months (for their Peloton product). They have also penned some really big partnerships: Walmart, Shopify, Apple, Adyen and now, of course, Amazon.
The Australian company Afterpay was the first to create a standard, simple offering for consumers and really invented the “pay in four installments” movement. Afterpay grew its business to become a dominant player in the retail industry down under before tackling the US and European markets.
Now, with their acquisition by Square, Afterpay is set to enter a new chapter. It will become integrated with Square’s other offerings on both the SME and consumer side of their business. Cash App has 40 million users who will soon all have Afterpay as a payment offering. And the millions of Square merchants will soon be able to seamlessly offer Afterpay as a payment option. That is going to be very bullish for the growth of Afterpay’s business.
The oldest of the big three and the only one still a private company, Klarna is also the most valuable. In its last funding round in June, the Stockholm-based company was valued at $46 billion. Klarna also has the greatest number of customers, said to number 90 million across 17 countries.
While little known in this country before the pandemic Klarna was said to be adding one million customers a month even before they aired their Superbowl ad in February. Klarna’s app is a little different in that you can pay in four installments but you can also pay in full in 30 days for no interest, a bit like a credit card and they also offer longer installment plans.
Beyond the Big Three
Now, there are far more than the big three playing in the BNPL space. I didn’t mention PayPal yet and they have the biggest customer base of all. Their Pay in 4 product is already available at millions of online merchants. Then there are many others in the space such as Sezzle, SplitIt, Zip and ViaBill to name just a few.
You also have major fintech companies like Revolut who is looking to get in on the space. Revolut is allowing its customers to convert any debit card purchase into three equal installments with the tap of a button.
Not to mention the big credit card companies. Chase has My Chase Plan which allows existing customers to choose to pay larger purchases (over $100) over time, between three and eighteen months. American Express has Plan It, a similar product that allows existing customers to choose up to 10 existing charges to convert to this payment plan. It is important to point out that both these offerings charge fees or interest.
Then, of course, we have Visa and Mastercard. Visa started piloting its Visa Installment product last year in the U.S. and just last month announced its partnership with i2c to launch BNPL more widely to credit card issuers. Mastercard has partnered with TSYS on their BNPL program as they also recognize that consumers want more options to pay.
The Lurking Giant
I don’t think enough people are talking about Apple when it comes to BNPL. Affirm signed a deal with them in Canada but we found out earlier in the summer that Apple is working on a new BNPL offering with Goldman Sachs. This will reportedly allow iPhone users to convert any Apple Pay purchase into an installment payments plan.
This new service, known as Apple Pay Later, will not be tied to the Apple Card but will use Goldman Sachs to provide the financing for these purchases. With no app to download this could drive adoption of Apple Pay as millions of consumers are already used to using their phones to pay for purchases, particularly in physical stores.
The Tail Winds Are Strong
One thing is for certain. Consumers the world over are flocking to BNPL as they like the flexibility of being able to split purchases into multiple installments. As the phone becomes more the payment method of choice, as we have seen in Europe and Asia and increasingly so in the U.S., then it becomes just as easy to use a BNPL app as it does a credit or debit card.
Now, I don’t want to dismiss the risks of this increasingly popular form of credit. There are more articles like this (see also this and this) warning of the perils of consumers getting in over their heads. Regulators are paying attention and we will likely see more movement on the consumer protection front there.
But I don’t see consumer preferences changing despite the risks. So, we will continue to see more innovation in this niche of fintech. Soon, every credit card will come with an installment plan offering. Every merchant will offer installment plans for their consumers through a BNPL platform as well as via credit cards.
In the future, we will see more BNPL options for small businesses, too. I have been surprised that the business-to-business sector has been pretty much ignored amid the hoopla over consumer BNPL. Just last week we saw Funding Circle in the UK launch a short-term installment offering for their customers there. I expect more options for businesses to materialize in the coming months and years.
In the long term, I see Visa and Mastercard becoming more dominant and the rest of the market consolidating into two or possibly three large BNPL platforms. Apple will also be a major player and we haven’t even mentioned Google yet, but I expect the two leading digital wallets to play a significant role. And there will be more innovation around the edges with entire ecosystems emerging to help consumers and merchants manage their BNPL programs.
It has been fascinating watching the rise of BNPL over the last 18 months. And we are still in the early innings here. Now, I have no idea what will happen to valuations (that is a topic for another time) but I am quite certain the industry is going to get much larger from here.