BNPL: why all the buzz?

The idea behind Buy Now Pay Later (BNPL) – allowing consumers at the point of sale to split the payments into smaller, more “affordable” instalments –?isn’t?really a new one. So why all the?buzz??

Well, BNPL is now revolutionising the customer journey by being seamlessly integrated into e-commerce as a checkout?option.?Basically, it’s?making it?really easy,?and adoption from merchants and consumers is booming. But this?isn’t?just about easy?credit. BNPL?startups?are taking on more than credit cards, and VCs have clearly spotted the opportunity, with funding surging to billions in 2021, from near nothing just five years ago. There are now?170+?startups?competing in the BNPL space, with?new players?being born every month. From investors to regulators,?it’s?growth that?can’t?be ignored.?

Adoption that can’t be ignored!?

BNPL leaders have been around for a while,?Klarna?launched in 2005,?Affirm?in 2012,?Zip?in 2013,?Afterpay?in 2014, but their business really took off with the pandemic. Covid-19 made online sales conversion a priority for all merchants.?In the US alone, the volume of BNPL payments will reach?$100B in 2021, a 4.3x increase from 2020.?As?expected,?the growth is led by Gen Z and Millennials, but Gen X and Baby Boomers are rapidly joining in.?

Merchants love it too, as it means a boost to sales, improved conversion at checkout and even savings on interchange fees.?

Funding trends?

VC funding in BNPL has gone from €150M in 2016 to €3.5B in 2021 YTD, a 23x increase. The increase has been led by?Klarna,?Pine Labs,?Scalapay,?Sunbit,?Paidy, but the early-stage scene is also booming, with the number of rounds at an all-time high.??

Most of the funding so far has gone into the consumer facing space, but?BNPL is a scale game. The core elements are merchant acceptance and customer acquisition. Unsurprisingly, consolidation is already underway.?

2021 has seen?€67B of exit value across 9 events.?AfterPay?was acquired by Square for $29B,?Paidy?by?Paypal?for $2.7B, Zip?acquired?Czech?startup?Twisto?Payments, Dubai’s?Spotii?and South Africa’s?Payflex.?

The major players

Klarna the BNPL behemoth:?

Klarna is the most valuable BNPL?startup, after raising $639M at a $45.6B valuation in June. It has?a whopping?87 million global customers and 18 million monthly active users and over 250K merchants onboarded.??However, Klarna also understands that?BNPL is a feature not a product. In their journey to becoming an all-in-one shopping destination, Klarna has been on an?acquisition spree in 2021, snapping up:?Hero, Stocard, Toplooks?and?APPRL.?

Paypal, the BNPL killer:?

Even the scale of Klarna is orders of magnitude smaller than the payment giant?Paypal.?Paypal?can boast 28M merchants, 80 of the top 100 retailers already offer customers PayPal as a checkout option, and nearly 70% of?online buyers have a PayPal account.?Paypal?developed its in-house solution to compete in the BNPL space, launching it in France in Q2 2020 launching and then expanding in the US and UK, and last week it acquired Japan based?Paidy.?

Regulatory risks?

One of the main risks the BNPL sector could face is a?regulatory crackdown. BNPL has yet to see true regulatory scrutiny, while the credit card industry is heavily regulated (licenses, credit checks, credit reporting). Now that the sector is reaching a critical scale, this is slowly changing. The UK FCA published the?Woolard Review?in February to understand how to regulate the market. The aftermath of the pay-day lending crisis is still in the air.?

BNPL is also heavily dependent on low interest rates, which are unlikely to last forever.?

Summary

BNPL services rose nearly 78 percent in 2020—the biggest leap of all payment types and is projected to account for 4 percent of global eCommerce spend by 2024.????

A?surge?of?megarounds, feature cloning, consolidation and media headlines about consumer credit health has led to talk of a Buy Now, Pay Later bubble. But with so much market still left to grow into, and the diverse?opportunities new market share creates, it’s likely the real hype cycle has yet to begin.??

So that’s it, my take on the BNPL movement, it is without a doubt having its moment right now and only looks set to grow and grow.??