[August] 3rd-party BNPL and the Race for the US Market

Happy August! This month, 3rd-party Buy Now, Pay Later (BNPL) providers report high performances as they make major moves in anticipation of holiday season, with Klarna introducing a “savings account”, Afterpay launching on the Cash App Card, and Zip exploring a partnership with Apple. Meanwhile, the Consumer Financial Protection Bureau (CFPB) assures them that there will be no penalties for violations as they transition to comply with new regulatory guidelines.

– Jazzy Zhu, editor in chief

Industry at a Glance

Believe it or not, holiday shopping is just around the corner. That’s why we’re already seeing ramped up activity from BNPL providers as they prepare for another highly profitable season. But this year, we have several more takeaways:

• The US market has been a primary driver of BNPL growth
• Prime Day drove 3rd-party BNPL use (a precursor for the holidays) to all-time highs
• Everybody wants a piece of the holiday shopping pie in the US BNPL market

International 3rd-party BNPL providers like Affirm, Klarna, Afterpay, and Zip are all gearing up to stake their claim in the robust US BNPL market. Meanwhile, more US financial institutions than ever have been exploring and launching their own BNPL services. Financial Plus Credit Union - Michigan , DuPage Credit Union , and Foothill Credit Union are bringing their own programs to Michigian, Illinois, and California.

Klarna Challenges Banks with Savings Account

Klarna has issued a challenge to financial institutions: it intends to “disrupt retail banking” and become the neobank for next gen consumers. Klarna Balance is a “personal account” that allows users to store money by transferring funds directly from their bank accounts. Users can also earn money in their account through cash back rewards when shopping from participating merchants in the Klarna app, and when receiving refunds from returned items.

?This is an extension of a trend where 3rd-party BNPL providers try to become a wallet, and now claim to displace functions of financial institutions. Klarna states that by adding a savings function to what is currently a spending app, it can take a “bite out of banks’ lunch”. Skeptics of the program claim that Klarna Balance, which is limited to use in the Klarna app, functions more like an “allowance” consumers give themselves to spend in the app. Affirm, meanwhile, has a savings account called Affirm Money which is not only FDIC insured but also offers 4.35% APY.??

The CFPB Offers Leniency to 3rd-Party Lenders

In ongoing development in the regulatory world for BNPL, the CFPB announced that it will issue a set of FAQs for 3rd-party BNPL lenders. Director Chopra acknowledged in his blog post that BNPL lenders are “working diligently and in good faith to come into compliance”, and that the FAQ should help them in this endeavor. Director Chopra also assured 3rd-party BNPL providers that during this time of transition into compliance, “the CFPB does not intend to seek penalties for violations of the rules addressed in the interpretative rule”, and that “other federal and state regulators will follow the same path”.

This will come as a relief to 3rd-party BNPL providers, many of which submitted a letter asking Director Chopra for a five month extension, citing the complexity of business models and “differences in the levels of preexisting compliance”. The stricter and more immediate regulations implied in previous CFPB rulings have favored big banks and financial institutions who are coming in later to the game with their own BNPL programs, but are doing so in compliance with the regulatory guardrails they already fall into. Financial Plus Credit Union, for example, launched their own BNPL program on the debit card to their members in Michigan.

BNPL Usage at All Time High and Will Sustain

3rd-party BNPL providers are seeing record levels of usage and profits for their companies. Affirm reported that it saw “31% year-over-year growth in gross merchandise volume (GMV), reaching $7.2 billion, and a 48% surge in revenue, reaching $659 million.” Klarna also reported “strong revenue growth in the US in particular, where sales jumped 38%.”?

These 3rd-party BNPL wins come at the heel of a record breaking Prime Day, with a notable increase of shoppers using BNPL during Amazon Prime Day and Walmart+ Week. Now, with interest rate cuts on the horizon, BNPL is projected to see even more sustained growth this holiday shopping season. Affirm CEO, Max Levchin, notes that reductions will mean “more active users” and “more repeat users, because we’ll be able to approve more people.”

Zip Co , an Australian BNPL firm, has reported a “40% increase in the value of its US transactions” and a “46% rise in revenue from the country”. Zip is currently exploring a partnership with Apple to further access the US market. Zip also recently partnered with Stripe to integrate with merchants in the US. An additional partnership with Apple will provide increased consumer-side access to the US BNPL market. This news comes while another 3rd-party BNPL provider, Affirm , is expanding its partnership with Apple.?

Multiple 3rd-party BNPL providers have hit notable growth benchmarks in the past quarter and cited their business activity in the US market as the main contributor. With the largest shopping season of the year fast approaching, all BNPL providers have been leveling up their technology and offerings to maximize profit in anticipation of reaching even higher milestones.?

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