Point-of-sale financing has been around for a while. From in-store layaway to store-branded credit cards, retailers have always used financing as a way to convert browsers to buyers.
But over the last several years, a cohort of fintechs have cropped up offering a new way for retailers to boost sales: buy now, pay later. From no-interest, two-week installment plans to longer-term financing, fintechs like Affirm, Afterpay, and Klarna, to name a few, have won over millions of consumers and tens of thousands of retailers with their alternatives to credit cards.
And competition is only heating up in the space as these players come of age.
Affirm went public in January. Following a listing-day pop, its shares are still trading at roughly double its IPO price. In February, Klarna announced it reached 15 million customers in the US, adding one million new customers each month since last October.
After several years chasing scale, buy now, pay later players are now competing for consumer loyalty and upping advertising spend. It’s an effort to become a shopper’s go-to credit option, as opposed to just another button at checkout.
The Swedish fintech will make its Super Bowl debut with a $5.5 million 30-second ad featuring four iterations of comedian Maya Rudolph, a reference to Klarna’s pay-in-four offering. Today, Klarna is investing 10 times more in marketing in the US versus two years ago, Insider has reported.
Watch the Four Quarter-Sized Cowboys on an adventure to pay in four, small, teeny weeny, lil’ payments in our super exclusive extended cut. #4SmallPaymentspic.twitter.com/wd5kMmCPdt
The popularity of buy now, pay later is largely due to the surge in online shopping fueled by the coronavirus pandemic.
In 2019, e-commerce accounted for 11% of total retail sales in the US. In 2020, total retail sales were down. But in the third quarter last year year, e-commerce grew to 14% of total retail sales, reflecting a 37% increase quarter-over-quarter, according to the US Census Bureau.
As consumers get used to doing more of their shopping online, they’re also coming around to BNPL products.
“Credit availability actually closed a great deal under pandemic conditions. So that accelerated buy now, pay later, which has emerged as the new thing at the point-of-sale, as an alternative way to actually get credit, which was important,” Ben Savage, partner at Clocktower Technology Ventures, told Business Insider.
At the same time, consumer behavior, especially among younger consumers, has shifted away from credit to debit, Savage added. And these trends have proven to be tailwinds for BNPL providers, many of which have seen traction with Millennial and Gen Z consumers.
In 2019, online shoppers at retailers like Asos or Casper were likely to see some version of “pay-in-four installments” as an option at checkout. Today, BNPL players have established their offerings as a must-have for online retailers.
In 2020, BNPL fintechs saw explosive growth. In May, Afterpay hit five million active shoppers in the US after just two years in the market, which is now a larger market than its native Australia. The coronavirus, no doubt, has played a significant role. Afterpay nabbed one million new customers in just a ten-week span in the second quarter, when the pandemic was at its height.
Having spent years acquiring customers, these fintechs are now looking to build brand stickiness with their own apps and loyalty programs.
All the while, incumbents like PayPal and American Express, well-equipped with brand awareness and loyalty, are leaning in with their own versions of point-of-sale financing. While products from fintechs and incumbents vary slightly on interest, fees, and credit decisioning, one thing is clear: consumers are looking for ways to stretch payments over time, even on small purchases.
Merchants are paying the bulk of the fees, for now
What remains to be seen is where the industry will go next. For now, retailers are entering into exclusive deals with BNPL fintechs, paying them fees around 3% to 6% for each transaction. The promise of BNPL is to increase order values and the likelihood an online shopper actually buys. Those economics may be compelling in a time when total retail spending is down and advertising budgets are tight.
But traditional players like PayPal are offering buy now, pay later features at no additional cost to retailers. And with many credit-card companies, like Citi and American Express, installment financing options happen post-transaction, so merchants are just paying the typical payments processing fees.
“The economics shifted a bit,” Savage said.
With many BNPL players, offering point-of-sale financing becomes a cost to merchants. Merchants could offer their own financing options like branded credit cards, but the cost to build and maintain that financing could be prohibitive for smaller retailers, even if they earned revenue from the book of credit.
“The merchants are essentially now paying in a way that really was not part of point-of sale finance 10 years ago. Or, to the extent merchants paid for it 10 years ago, it was all done through a promotional discount,” Savage said.
As point-of-sale financing grows in popularity in the way credit cards did, merchants may not longer be willing to pay those fees.
Be it through higher prices on the goods sold or a surcharge at the point of sale for using a BNPL solution, merchants could start to reconsider the way they manage the cost of offering these services.
“If you play the movie forward five years and everything goes to buy now pay later, and let’s say it all still looks to the consumer like a roughly zero interest rate thing, someone is paying the cost of the money. If it’s the merchants paying the cost of the money, it’s going to show up in higher prices someway,” Savage said.
Here’s a look at some of the key moments in the BNPL space over the past year:
Tencent buys a 5% stake in Afterpay, signaling the Australian fintech’s ambitions in China. E-commerce is forecasted to account for around 40% of total retail sales in China in 2020, according to eMarketer.
Mastercard’s Vyze, which offers retailers the ability to provide point-of-sale financing from multiple sources, adds Ally Bank and QuadPay as lending partners.
Splitit raises $100 million in post-IPO equity from investors including Woodson Capital Management.
Affirm raises a $500 million Series G led by GIC, a returning investor, and Durable Capital Partners LP. It also launches an interest-free bi-weekly financing option.
QuadPay raises a $200 million line of credit from Goldman Sachs.
October
Klarna signs 5-year contract with Macy’s as its exclusive buy now, pay later partner. Macy’s also invested in Klarna.
Affirm announces it had confidentially filed with regulators for an initial public offering.
Etsy adds Klarna as its buy now, pay later partner for purchases between $50 and $10,000.
November
JPMorgan Chase launches a buy now, pay later option for its credit card customers.
Affirm becomes payments giant Adyen’s buy now, pay later partner.
