A battle is brewing in the buy now, pay later space between Affirm, Klarna, and Afterpay and big players like Apple and PayPal

• Competition among buy now, pay later players continues to grow.
• Apple is reportedly planning an installment product offered through Apple Pay.
• Fintechs like Affirm, Afterpay, and Klarna are fighting for consumer loyalty as incumbents step in.

Buy now, pay later, the point-of-sale financing option popularized by fintechs like Affirm, Afterpay, and Klarna, has become table stakes for payments players.

As these fintechs have amassed millions of users, incumbents have been forced to the table, offering their own versions of no-fee installments.

PayPal launched its own buy now, pay later product for its merchants in September 2020. Barclays is partnering with white-label buy now, pay later provider Amount, and co-branded card leader Alliance Data acquired its own white-label solution, Bread. Goldman Sachs is hiring for multiple positions focused on BNPL.

Apple is the latest, reportedly working with Goldman Sachs to add point-of-sale installments to its digital wallet, Apple Pay, as first reported by Bloomberg on Tuesday.

Affirm and Afterpay’s shares were both down roughly 12% since the news of Apple’s reported buy now, pay later plans broke, as of Thursday afternoon.

Now, there’s a race between fintechs and incumbents to win consumers’ BNPL business. For fintechs, that’s meant launching rewards programs and ad campaigns to stand apart. Incumbents like Apple, PayPal, and big banks, meanwhile, are building on existing relationships with consumers.

And while BNPLs enjoyed record growth in 2020, it’s unclear if they can solidify their own relationships with customers or risk losing them to their new, larger competitors.

Roughly 30% of Affirm’s volume originates from its own app and website, according to its most recent earnings report. And Afterpay generates 30 million leads per month for its merchant partners from its shop directory, a spokesperson told Insider.

Afterpay “has never been about merely offering a transaction solution” and has “seen significant growth” despite the uptick in competitors, the spokesperson added.

A spokesperson for Klarna declined to comment.

But experts are unsure of the fintechs’ ability to win those consumers long term, especially from long-standing brands like PayPal.

“The buy now pay later space has a difficult time with loyalty,” Demitry Estrin, founder and CEO of payments research firm The Futurist Group, told Insider.

“When we talk to consumers, it’s less about a given provider,” Estrin added.

Increased competition is putting pressure on fees

Affirm, Afterpay, and Klarna boast their ability to boost average order values and convert online browsers to buyers. It’s how they justify the fees they charge merchants per transaction, which are typically higher than an average credit-card transaction.

But big private-label card players, like Alliance Data and Barclays, could pose a threat through their own buy now, pay later options that build on existing deals with merchants.

“The private-label players do have a right to play in this market,” Nichols said.

The challenge will be figuring out how to weave installments into their existing credit-card business, Nichols added.

PayPal and Shopify, too, are contenders, especially given their existing networks of merchants, Nichols said. And while both charge fees for the service, increased competition is likely to drive down prices.

“Pure-play models that, at least historically, have relied entirely on buy now, pay later as the revenue stream, I think, could see both margin compression and more price pressure,” Ysbrant Marcelis, a partner at Commerce Ventures, told Insider.

Affirm, which went public in January, is making an effort to diversify its revenue in new verticals like travel.

Regulatory scrutiny, which is already underway in the UK, where players like Klarna (Europe’s most valuable startup) have a major presence, could also eventually play a factor, Estrin said.

Even with pricing and regulatory pressure, these players are likely to stick around.

“It’s a difficult moment for the Affirm’s and Afterpay’s and Klarna’s of the world, but I don’t think that they’re going anywhere anytime soon,” Marcelis said.