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Buy now, pay later (BNPL) has grown to be one of the biggest trends in payments in 2021. Although the interest-free instalment loans have been around for decades in various different guises, their adoption has reached new heights after fintechs entered the scene and disrupted established forms of credit.
Data shows that an estimated 10.1m people in the UK and 45m people in the US in 2020 were using BNPL, a sharp jump compared with previous years.
In addition to the widespread adoption, recent Black Friday data reveals those who used BNPL spent 25 percent more than others using retailer-based payment methods.
With an almost 300 percent growth between 2018 and 2020, the value of e-commerce BNPL transactions is estimated to reach $258bn in e-commerce spending by 2025. Although a large number, this would still represent only around 4 percent of forecast consumer-based e-commerce transactions, which means businesses have a huge opportunity to grow in the sector.
BNPL became a competitive must-have
As demand for BNPL has increased, the market has accelerated in 2021. For payment facilitators it has quickly become a must have product offering to enable them to compete for merchant customers. As a result, there has been a surge in market activity as payment firms decided whether to build, buy or partner their way to success.
In October, Klarna and Stripe, the two highest valued fintechs in the world, announced a strategic partnership that will enable retailers with any kind of Stripe integration to accept Klarna’s BNPL feature.
Fintech giant Square chose a more aggressive route to BNPL, agreeing to pay an eye-watering $29bn to acquire the Australian BNPL provider Afterpay in August.
One of the largest BNPL providers, PayPal, chose a mixture of strategies. In October, it acquired Japanese outfit Paidy to expand its propositions in the country. Earlier in June, it introduced its instalment credit product called Pay in 4 in Australia, following the successful launch in the US in August 2020.
Although BNPL has innovatively changed how many people view consumer finance, it has also disrupted many existing market arrangements. Noting loopholes in existing regulations for BNPL, some established credit providers have begun to fight back by promoting regulatory-friendly BNPL. For example, Mastercard announced in September a new BNPL platform that will enable its issuing bank partners to offer instalment purchases through an established, and therefore regulated, line of credit. Visa also offers a similar service.
Taking the moral high ground, Barclays, one of the largest credit card issuers and consumer finance providers in the UK, was able to highlight its regulated credentials with a recent survey, claiming: “Barclays reveals pitfalls of unregulated BNPL agreements for Christmas shoppers, with two in five users unclear what they’re signing up to.”
Expanding capabilities
As BNPL continues to grow, embedding into everyday lives is becoming an increasing trend.
Earlier in December, Microsoft partnered with Zip to embed a BNPL option on its Edge browser, a move that received a mixed response from customers.
Following this announcement, Klarna also announced the launch of its own BNPL browser extension. Supported by its acquisition the previous month of a company called Piggy, the service enables consumers to purchase with interest-free instalments from their desktop at any online store.
The potential to bring BNPL closer to the consumer shopping experience was also evident in Klarna’s announcement in November that it has acquired shopping comparison site PriceRunner. According to David Fock, Klarna’s chief product officer, the deal “further cements that Klarna will not be a marketplace but a viable and competitive alternative for retail partners vs Amazon, Google and Facebook”.
By combining a consumer ad platform with a payments service, the fintech could create a comprehensive commerce platform, offering a seamless experience from finding the right product at the right price to the choice of ways to pay at checkout. This would enable consumers to consolidate the whole shopping experience into a single ecosystem.
This followed rumours at the time that PayPal was mulling a bid for Pintrest. Although this eventually came to nothing, it is a trend that is expected to continue in 2022.
Regulatory backlash
An increasingly popular product encouraging consumers to spend money they might not necessarily have could not carry on without catching the eyes of the regulators. In many countries, BNPL is exempt from traditional loan and credit regulations, which means consumers do not have the same level of protection as they have when using other forms of credit.
“Consumers don’t realise that unlike other forms of credit, there is no regulation on these loans,” Stella Creasy, UK Labour Party MP, said recently.
Noting the large boom in BNPL use during Black Friday, politicians fear the new form of credit could lead to real poverty and destitution for many should the same trend occur throughout Christmas.
In late October, the UK’s HM Treasury opened a consultation seeking public input on how to bring the product into the scope of regulation in line with the recommendations of the Woolard Review, which described the potential benefits and harms of BNPL products.
Australia has been one of the fastest growing and successful countries for BNPL. However, these products largely fall outside its regulatory perimeter. In March, the Australian Finance Industry Association (AFIA) released a voluntary code of conduct, signed by eight BNPL providers that cover almost all of the Australian market.
Although the industry lobby group claims the code negates the need for further regulation, the Australian government has committed to determining the changes necessary to modernise payments system legislation by mid-2022. This includes plans to accommodate new and emerging payment systems, including consideration of BNPL and digital wallets.
Discussions on how to improve the existing regulatory framework are also underway in New Zealand, Ireland and the United States, among others.
Speaking with VIXIO about potential regulatory changes in Ireland and the UK, a Klarna spokesperson said they agree with the proposed protections.
When Klarna first entered the market in 2014, it effectively created the concept of BNPL.
“At the time it was very simple to understand what the BNPL offer was”.
But the BNPL market has come a long way in a short time. As the market has evolved, new players have entered the market with different business models, including traditional banks, which according to the Klarna spokesperson is becoming confusing for consumers.
Consumers are not the only ones that could be exposed to risks associated with the use of BNPL. In a typical BNPL business model, consumers only pay a fee if they miss a payment but it is the merchant that pays the BNPL provider when a purchase is made.
Although BNPL allows consumers to make higher purchases, and make them more frequently, BNPL payments may cost the merchant double the amount it would pay in case of a debit or credit card payment, according to research in the US.
In a November paper, the Kansas Federal Reserve estimates that the cost of a BNPL transaction for merchants ranges from 1.5 to 7 percent of the purchase value, including tax, while the cost of a typical debit or credit card transaction ranges from 1 to 3 percent.
“Long-term effects could include lasting shifts in payments that result in the cost of accepting BNPL outweighing the value,” the Kansas Fed warned.
Although it is “uncommon” in the U.S. for regulators to step in to reduce merchants’ costs, some countries have already started to address this issue.
For instance, in October, the Reserve Bank of Australia (RBA) said that BNPL operators should no longer be allowed to bar retailers from passing on the cost of participating in the schemes to customers.
“BNPL services are often free or inexpensive for consumers to use if payments are made on time, but tend to be expensive for merchants to accept. Despite this, providers of BNPL services typically have ‘no-surcharge’ rules that prevent merchants from passing on these costs to the consumers who benefit from using the BNPL service,” the RBA said.
If 2021 has been the year in which BNPL has started to hit the mainstream, this continuing trend could see the product become a standard option at checkout. As regulators look to address this phenomenon, 2022 could in turn be the year when regulators act upon their previous statements and bring the product under greater supervision to better address potential risks.
