- Buy now, pay later, also known as point-of-sale financing, has been surging as consumers shift their spending online.
- Fintechs like Affirm, Afterpay, and Klarna have amassed several million customers. They’re now looking to expand beyond their installment-lending roots.
- Affirm is exploring more financial products with the launch of a high-yield savings account, and Klarna just rolled out a loyalty program for its users.
- With growth comes new challenges, like managing consumer credit at scale. The fintechs could start looking for partnerships with banks, or find themselves to be acquisition bait.
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The ability to buy something and pay over a period of weeks or months isn’t new. But a cohort of startups has put a fresh coat of paint and a tech-y spin on this way to pay, and they’re growing fast.
Buy now, pay later — also known as point-of-sale financing, installment lending, or, simply, alternative credit — is booming. Banks and fintechs alike are giving consumers the option to break out of monthly credit-card billing and stretch their purchases over time.
Players like Affirm, Afterpay, and Klarna each have several million customers in the US and thousands of partner retailers ranging from H&M to KitchenAid to Walmart.
“They are a disruptor in this space, and they’re making traction,” Zachary Aron, US payments leader at Deloitte Consulting, told Business Insider regarding the startups.
And as they’ve scaled, these buy now, pay later (BNPL) startups are eyeing opportunities to become more than just buy buttons in e-commerce checkout windows.
“It’s hard to envision a mono-line buy now, pay later, ‘this is all that we do,'” Aron said. “That doesn’t feel like the natural ending point of this.”
And the space is crowded, with players like QuadPay, Splitit, and Sezzle also competing for shoppers and merchant partnerships. While AfterPay, Sezzle, and Splitit are all publicly traded in Australia, Affirm and Klarna have together raised over $2 billion in funding from investors like Ashton Kutcher, Snoop Dogg, and Visa.
But with growth comes new challenges. Managing consumer credit at scale leads to increased risk. And the desire to maintain growth could lead these fintechs to seek partnerships with incumbents, or find an exit through an acquisition.
The adoption of buy now, pay later is part of a broader shift in consumer credit
Across the board, consumer credit is shifting toward more bespoke options for borrowers. Fintech lenders and banks are using more than just FICO scores to measure creditworthiness, meaning they’re able to differentiate more between different consumers.
“If you think about some of the tech advances around how credit is being managed you’re seeing a lot more parameterized choices,” Aron said. “There’s a goal here to enable greater personalization and allow people more control of how they manage and use their money.”
BNPL players are a part of this shift, enabling shoppers to take out small-value installment loans, often without interest, to break up purchases over several weeks. These installment products give consumers more flexibility than a typical credit-card provider, which bills monthly and often charges interest and fees on late payments.
What’s more, US consumers are increasingly turning to debit cards in lieu of credit. Card network Visa, for one, saw US credit-card volumes decline by 21% in May year-over-year, while debit card volumes grew 12%.
“The fintechs caught onto a consumer preference of moving away from credit and moving more towards a debit or direct debit-type payment or installment-type loan,” Sara Elinson, Americas fintech and payments M&A leader at EY, told Business Insider.
Buy now, pay later startups are already moving beyond the point-of-sale
Players like Affirm, Afterpay, and Klarna started as merchant-facing fintechs offering a new way to pay online. The business model is pretty straightforward: Merchants embed a BNPL option at checkout, and when a shopper uses it, merchants pay the BNPL provider a fee (typically between 4% and 6%).
Merchants are willing to pay these fees if having the BNPL option at checkout drives sales — and, according to the fintechs, they do. Affirm says it can help increase average purchase sizes by upwards of 85%, Afterpay says merchants see a 20% to 30% increase, and Klarna says it can increase order values by upwards of 45%.
But as the fintechs acquired more customers through these merchant partnerships, they’ve started looking for ways to reach consumers directly.
“You start off on the merchant side, but then if you can get to the consumer side, now you’ve got a little more stickiness,” Aron said.
In BNPL apps, users can browse partner retailers and request an installment loan on purchases anywhere (the fintechs issue single-use digital cards that shoppers can use to checkout).
And some of these players are exploring more financial products to expand beyond their BNPL roots. Affirm launched a high-yield savings account in June, and Klarna rolled out a loyalty program for its users.
By offering shoppers the ability to use the product anywhere, these BNPL players can grow their user bases without having to partner with individual merchants.
“What everyone’s trying to do is get as seamless as possible, not just for the consumer, but for the merchant,” said Elinson.
Achieving massive scale poses new challenges
To be sure, there are challenges to rapid growth. The more shoppers who use a BNPL product, the more credit risk these fintechs have to manage.
And the impact of the coronavirus pandemic, which has left a record number of Americans unemployed, could force these fintechs to shift their focus from growth to managing risk.
“In the short term, nine to 12 months, it’s going to be an aspect of evaluating and managing the risk models,” Aron said. “I think we all understand the recovery aspects could be challenged for a bit.”
The payment space, in particular, has been an area of focus as millions of Americans are missing credit-card payments amid the coronavirus pandemic.
On Tuesday, The New York Times’ reported that small businesses said Jack Dorsey’s Square was holding up to 30% of its customers payments to protect against chargeback, or when a merchant needs to return money to a customer.
Banks, meanwhile, have been rolling out assistance programs, like waiving late fees, for customers impacted by the pandemic.
“Any player, regardless of whether it’s buy now, pay later or a traditional one, is going to be highly motivated to be on the side of the consumer right now,” Aron said. “The sentiment will be pretty negative if it was on the side of debt accumulation, as opposed to, say, being able to help people manage money in a sensible manner.”
A majority of US consumers cut back on spending during the coronavirus pandemic, according to EY’s Future Consumer Index.
And while on the surface that might seem like it would negatively impact BNPL players, Elinson said with more sensitivity around spend, flexible financing products could prove more attractive.
“When you have that environment, combined with some of these products that allow you to be a little bit more prudent with your current spend, I think this continues to be a market that will be attractive,” Elinson said.
Point-of-sale financing is likely not an end game, be it through M&A or partnerships
While players like Affirm, Afterpay, and Klarna have attracted millions of users, their scale still pales in comparison to major credit-card providers like American Express and JPMorgan Chase. Sustaining growth could involve seeking partnerships with larger incumbents, or finding exits through acquisitions.
“I do tend to think that these buy buttons and fintechs, they’re getting to a really nice scale,” Elinson said, “but I do think that they could be better served being within a portfolio of products within a larger financial services offering.”
But for incumbents, it’s not necessarily the user base that’s attractive compared to the tech and their position in the market.
“It may not be about the book of business as much as the technology,” Aron said.
Their ability to make instant credit decisions at the point of sale could prove attractive. And the BNPL players have established themselves as viable players in context, especially at the point of sale, which could be valuable to incumbents, Aron said.
Partnerships with incumbents, too, could be the next step for these BNPL players to keep scaling, Aron said.
Elinson echoed a similar sentiment.
“If you think about some of the models where they’re providing just the technology but not any of the underlying capital for the lending, there are probably economies to be had in terms of vertical integration that could be had by those being owned by a bank, or somebody with bank-like funding,” Elinson said.
“So I do think that we could see some M&A in that regard,” he added.
Read more:
- Buy now, pay later startups are ‘having a moment’ — here’s why retailers like Walmart and Target are betting on installment payments to keep consumers spending
- Buy now, pay later startups are surging. But Affirm CEO Max Levchin says the industry will see a shakeout as the pandemic hits borrowers.
- 4 startups are changing the way millennials pay for brands like Casper and Warby Parker and have attracted investors including Andreessen Horowitz and Snoop Dogg
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