How do you BNPL?
Saugata Ghosh
Vice President | Financial Services Client Partner | Delivering what's next with strategy, technology, data and creative design
BNPL in Australia
Buy Now Pay Later to split online payments into 4 equal interest free instalments have become a household word for all ages, taking away market share from the likes of PayPal, BPay/Bank Transfer, Credit Cards and Debit cards. Globally, BNPL is estimated to have taken US$8-10B in annual revenue away from banks.
With more than $10B of spend in Australia in 2020 and over 80,000 active merchants, it’s more than likely that you are one of the 6m+ customers who have used a BNPL service over the last year. The pandemic has helped grow online shopping, and that of BNPL with it, which now makes up more than 3% of all online payments.
After growing by 55% in 2020, the BNPL market in Australia is expected to reach a staggering A$40B in 2028. Valuation of the BNPL FinTechs have grown exponentially with Square buying Afterpay for $39B, paying a 30% premium over the stock price that was already trading at over 3 times its price just before the pandemic hit.
It’s not the only POS Finance innovation
Although BNPL gets the most attention, it’s not the only form of Point of Sale (POS) financing business model that have grown over the last 2-3 years. Globally, there are several other business models for smaller purchases (upto US$3,000).
Australian banks are making various strategic moves
Major Australian banks have made various strategic moves to counter the challenge of BNPL over the last 18 months. Commonwealth Bank of Australia invested US$300m to take 5% share in Swedish global player Klarna in Jan’20 and to launch in Australia. Westpac partnered with Afterpay to offer Afterpay-branded savings and deposit accounts. NAB launched Australia’s first zero interest ‘Straightup’ credit card for upto A$3000 credit limit. ANZ Bank has shrugged off the threat of BNPL to credit cards despite a continued decrease in circulation of credit cards.
What’s ahead for BNPL
Not everything is cosy for BNPL. It costs the merchants upto 6% while some of the other alternative POS financing options cost as little as 0.5% in card fees. Moreover, BNPL providers currently prevent the sellers from passing on the cost to the buyers. This is in contrast to card payments where the Reserve Bank of Australia has previously introduced requirements that prevent card schemes from imposing ‘no-surcharge’ rules on merchants – this is on RBA’s watch as a public interest case.
These market forces will play out over time, in the meantime, don’t assume for a moment that BNPL companies will be short-lived. BNPL companies aren’t a pure finance offering, they are building integrated shopping platforms engaging customers in all stages of their buying journey, something the merchants really value to drive traffic, increase the size of the shopping cart and reduce abandonment rates. Their ultra-low acquisition cost, positioning and technical prowess would be a steep challenge for banks to overcome.
References
Photo by cottonbro from Pexels.