Buy now, pay later: digital innovation in payments

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In the last two years, we have seen a significant adoption of contactless payments and an important move towards omni-channel commerce, both driven by the COVID-19 pandemic. We also saw the impressive rise of a new kid on the block: ‘Buy Now, Pay Later’ (BNPL).

As the name suggests, BNPL is a payment method that allows the consumer to purchase something and to pay for it later, in various instalments. There are two general categories of BNPLs: the first category, and the most popular of the two, focuses on instalments repaid over a relatively short period of time (a few weeks) without interest costs. The more common forms of instalments in this category are the Pay in 4 and Pay in 3. Its main players here are Klarna and Afterpay. The second category offers instalments repaid over a longer duration (a few months). This second category is very similar to the traditional credit business and customers do incur interest charges. The main players in this space are Klarna and Affirm.

Compared to credit cards, the main difference of BNPL is the absence of interest costs on their deferred payment. In addition, customers will not have their credit score impacted by what remains a short-term loan. Indeed, BNPL companies usually do not perform credit checks with credit bureaus to authorise the financing. Instead of using formal credit checks, BNPL companies manage their credit risk by making the user earn the ability to use the platform to a greater extent. In fact, the consumer is first granted a credit authorisation for a small amount. This authorisation can increase at a later stage if he repays the instalments in time. This light approach on credit checks is facilitated by the lax regulation that currently covers the industry.

BNPL brings a very interesting and disruptive approach to the short-term consumer credit space.
Eros Portillo Spetaliere

Eros Portillo Spetaliere,  Buy Side Equity Analyst,  DPAM

‘Credit without interest’ – Where’s the catch?

Merchants pay a direct fee to the BNPL provider to accept this payment method at their point of sale (like the merchant discount rate paid in a traditional card payment). With BNPL, that fee ranges between 2% and 6%, somewhat higher than the fee the merchant would pay to accept a credit card or debit card payment. Those fees represent 70-85% of the revenue of most traditional BNPL companies. For the merchant, it is still an interesting proposition despite the higher fees, as consumers using BNPL as their checkout option tend to purchase larger baskets. The conversion rate of BNPL transactions is also higher than with traditional payment methods. This is crucial, as, in the e-commerce space, conversion rate is a key driver of success for merchants. There are also indications of more repeat purchases, increased traffic and lower customer acquisition costs. Merchants tend to use BNPL platforms as an effective promotion tool to advertise their product suite.

The key to BNPL’s success

BNPL is a very fast-growing checkout category, moving from 1.6% of the global e-commerce transactions in 2019 to 2.4% in 2020 according to the «Global Payments Report» from Worldpay. By 2024, it is expected to practically double to 4.2% of global e-commerce volumes, which implies a CAGR of >30% compared to 2020.

In some areas, it is worth noting that BNPL is already much larger than 2.4% of e-commerce volumes. This is the case in Australia, Sweden and Germany, where BNPL respectively represents 10%, 23% and 19% of e-commerce checkouts. Sweden is the home country of Klarna, while Australia is the home domicile of Afterpay, which could explain the success of BNPL. Meanwhile, Germany has historically been more reluctant to use credit cards in general. These countries show that BNPL could cover a large proportion of online checkouts in due time, supporting the growth prospects of the market.

In the offline world, BNPL also exists as a payment method, but currently only covers a minor portion of checkouts today.

Still, despite its strong growth, BNPL only represents 0.2% of total payment volumes and therefore remains a niche segment in the massive payment market (USD 37 trillion in 2020).

If we look at the strong value proposition that BNPL offers to customers, the current traction of these platforms does not come as a major surprise. In fact, on top of no interest costs, BNPL is considered to be a very simple and transparent solution compared to credit cards, with no hidden fees.

BNPL has clearly become a checkout option within the online payment space that we can no longer ignore.
Pieter-Jan De Meyer

Pieter-Jan De Meyer,  Buy Side Equity Analyst ,  DPAM

The market participants clearly believe that this industry will continue to grow strongly and profitably in the future.

BNPL has clearly become a checkout option within the online payment space that we can no longer ignore. It brings a very interesting and disruptive approach to the short-term consumer credit space. In due time, BNPL could (at least in theory) be a negative for the established payment ecosystem if they decide to go ‘closed-loop’. However, for the time being, they work together with the networks and merchant acquirers to grow the market and therefore represent a total-available-market increase more than a threat.