The Evolution of BNPL

Buy Now, Pay Later (BNPL) is reshaping how consumers transact and businesses operate. It’s illuminating benefits and challenges in the financial realm, transforming the credit landscape, and offering new perspectives on payment solutions. At the same time, questions remain:

• Is BNPL really a loan??
• Could BNPL translate to business financing as well??
• When does it make more sense to do BNPL in-house rather than use a partner, such as Affirm or Klarna??
• What is the true risk of BNPL from a credit perspective?

I have some thoughts.?

A Loan in Disguise

BNPL is an alternative payment solution that surpasses the rigidity of credit or debit cards. It offers consumers more flexibility right at the point-of-sale (POS) with deferred payment options.

Key players like Affirm and Klarna have carved their niches by providing interest-free payment structures and distributing the payment burden over a specified period. This installment model raises pertinent questions about dollar amounts, timeframes, and interest rates – all of which challenge traditional financial norms.

At its core, BNPL represents an installment loan.

Despite its seemingly mystical aura, it involves paying off a transaction over time, highlighting the underlying financial risk that is taken on by someone. That could be by entities like Affirm, or the collaboration of merchants, borrowers, and banks.?

This is one of the main reasons regulators, such as the Consumer Financial Protection Bureau (CFPB) have been keeping a close eye on the space and watching out for ways that consumers may be getting taken advantage of.?

BNPL’s Problem-Solving Nature

BNPL simplifies the payment process for everyday consumers. Think transparent payment timelines, flexibility, and promotional pricing on items somebody has shown interest in.?

Merchants also stand to gain significantly by offering a secure BNPL option within their checkout process. According to data from Affirm, 29% of customers would have abandoned their purchase had the financing option not been available.

This option also leads to an embedded customer experience, enhanced brand loyalty, and increased sales through simplified transactions. All of this leads to a significant boost in merchants' long-term cash flow, fostering their growth.

At the same time though, merchants are sacrificing a portion of their sales in each of these transactions. At what point does it make more sense to build a BNPL or installment option in-house rather than outsourcing that capability?

Is that 20-30% increase in sales worth the 10-15% take rate? If I were running Peloton and struggling with cash flow, I’d argue it’s wiser to build in-house.

The Business Angle and B2B Dynamics

In 2018, global B2B payments hit $125 trillion, while global consumer payments held steady at $52 trillion. Meanwhile, most B2B purchases are made with net 30, 60, or 90-day terms and the understanding that services rendered will be paid within the contracted payment window. Sounds a bit like BNPL.

With data more readily available than ever before, especially for vertical SaaS businesses, offering an installment plan makes a lot of sense.

A perfect example is Toast, the darling point-of-sale system for restaurants, which recently entered this arena. With their Toast Capital product, they now offer loans ranging from $5,000 to $300,000 to the restaurants on its platform. This feels like a natural evolution for a business that's already captured the trust of its audience, and where they can use the data from each restaurant’s POS system to gauge creditworthiness. Genius.

Which companies will be next to offer installment loans to business owners?

What makes BNPL great for the consumer space spills over into the business realm. Streamlined onboarding, underwriting, and payment complexities all benefit business owners just as well, if not more than consumers with relatively smaller one-off purchases.?

Companies that offer flexible payment options to a business owner to finance something like an expensive piece of equipment or operating costs are also likely to see improved cash flow, shortened sales cycles, and repeat use of their lending products.?

In fact, this relationship benefit may be even greater for companies that offer financing options to business owners. After all, those partnerships tend to carry more weight than one of a merchant offering a passive consumer a financing option.

B2B transactions also have a greater chance of larger, recurring order values than B2C. Flexibility in longer or non-traditional payment terms can be attractive to buyers, and by understanding their cash flows, sellers/lenders often reduce repayment risk.

The Road Ahead for BNPL

The success of Affirm and Klarna underscores the importance of a customer-focused approach and streamlined service execution. It also shows how automation, diversified product offerings, and technological innovation lower service costs and improve borrower experiences.

As we saw with Amazon unveiling a new BNPL option with Affirm for small business lending earlier this month, there’s clearly momentum here. This move is sure to increase Affirm’s TAM while offering added value to the supply side of their ‘lending marketplace.’?

And we would agree: the future of fintech is multi-product, with commercial lending offering a widely untapped blue ocean.

BNPL’s evolution has demonstrated its versatility in addressing various financial pain points for both consumers and businesses. Its trajectory suggests continued innovation and refinement, possibly leading to further integration into traditional financial systems and expanded adoption across diverse industries.

The journey of BNPL, from addressing credit score disparities to becoming a pivotal solution for consumer and business transactions, showcases its transformative power. As it continues to evolve, its trajectory promises greater convenience, financial empowerment, and operational efficiency for all stakeholders involved.

The future of BNPL seems promising, standing at the intersection of financial innovation and consumer demand. Embracing its potential and learning from its evolution will undoubtedly shape the future of payment solutions, fostering a more inclusive and adaptable financial landscape.

Ultimately, I think over the next five years, we’ll see many more business use cases for BNPL and installment plans, with continued growth in the consumer space.

About This Edition

The Lending Innovator is a biweekly series with insights from leaders in the credit, lending, and BNPL space. This edition was written by Matt Bivons, Founder and CEO of Canopy.

Want to chat directly with Matt or a member of our team? Drop a comment below or let us know what you're building here and how we can help.