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Buy now, pay later (BNPL) mergers and acquisitions are expected to continue to surge as the market matures; however, payments insiders are split on whether it has proved too late for the banks to get involved.
BNPL has transformed from a nascent industry into a mature, fully-fledged component of retail payments.
At London’s Pay360 event recently, one payments leader even suggested that it could bring about the end of the credit card industry.
As the industry has matured, that age-old question of whether to build, partner or buy has been raised to the forefront as companies look to position themselves in the market.
“Everybody is trying to jump onto the bandwagon,” said Volker Schloenvoigt, director at Edgar, Dunn & Company.
Consolidation will become a key topic, noted Erik Howell, partner at Flagship Advisory Services. “At the moment, the market is becoming unsustainable, and the industry requires scale to go to market, so M&A will continue to be a trend for BNPL. Being bigger with scale will allow more ease when dealing with the upcoming new regulation of the industry."
2021 was notable for some high-profile BNPL acquisitions. Square, or as it is now known Block, raised more than a few eyebrows when it made an all-stock acquisition of Australian BNPL firm Afterpay for $29bn.
As well as this, PayPal acquired Paidy, a Japanese BNPL firm, and Klarna, the Swedish-based fintech that has become synonymous with BNPL in Europe, made a total of six acquisitions throughout the year.
These have been done to strengthen its overall customer proposition and market positioning, including a mobile wallet company, Stocard, and price comparison website PriceRunner. It also acquired online trip planner Inspirock, and software as a service platform APPRL, which accommodates connections between creators and retailers.
The international card schemes have also wanted to get involved, in part, as an attempt to ensure their bank customers do not get left behind.
In October, Visa said that it was “helping fuel” BNPL around the world with its Visa Installments Solution, as well as announcing a global partnership deal with Klarna.
In September, Mastercard announced its own technical platform that allows banks to create their own BNPL solutions, launching in the United States, Australia and the UK. It has striked partnerships with banks and firms, including Barclays and Marqueta.
The question now, according to Schloenvoigt, is whether it is feasible that so many players are going to have a sustainable business model. “People like to get into areas where there is scale. So, are we going to see consolidation among existing BNPL players or will we see payment schemes, merchants and acquirers making acquisitions?"
Banking on BNPL
For Howell, BNPL being a success for the banking world appeared unlikely.
"Banks have been out of the game and have really fallen behind,” he said. “They may have even missed the BNPL opportunity.”
Rather, the market has been captured by fintech, he suggested. “It is shocking to me how far behind banks are."
Others disagree and think that banks' involvement with BNPL may have only just begun.
"It is absolutely not too late for banks to get involved in BNPL,” said Richard Holling, client delivery director at Illuminet Solutions. “The new product from NatWest shows where they think the world is going.”
Last month, NatWest made headlines as the first high street bank in the UK to confirm a BNPL launch. Arriving later this summer, the bank has said that customers can pre-register, with applications subject to a full credit assessment.
Firms such as Klarna, in comparison, do not always do credit checks on their customers.
“Once regulation hits, current providers will be looking to exit,” said Holling. “They are not used to this, but banks are, such as dealing with credit checks and vulnerable customers. Some are doing what NatWest have done, while others are waiting to make acquisitions."
Banks' involvement in BNPL is interesting, said Schloenvoigt. “On the one hand, banks can provide loans and working capital to merchants. Yet, they are already running big card portfolios.”
“From what I understand, BNPL cannibalises the credit business and is also replacing card transactions,” he pointed out. “If you are a bank with a credit portfolio and were to offer BNPL, you're potentially cannibalising another part of your business. So, I'm not quite sure that BNPL is a huge opportunity for this type of financial institution."
In spite of the market’s maturity, the payments consultant predicted that there are still going to be players raising funds, with external funds flowing into BNPL that will almost by default create higher valuations. “If those valuations get too high, it might get to a point where the business is no longer attractive anymore for external funding."
And another element of the sector’s sustainability to look for is the scale aspect, he suggested. “A lot of the players start at a local level with one particular merchant vertical or one market and there is only a handful of players with a regional or global footprint.”
“A large driver for M&A will be regional expansion, and we may end up with a scenario where various smaller players, such as the ones backed by private equity, are encouraged to consolidate and become the next Afterpay,” he said.
The industry requires scale to go to market so M&A will continue to be a trend for BNPL, agreed Howell. “Being bigger with scale will allow more ease when dealing with the upcoming new regulation of the industry."
"Pressure will be put on BNPL firms because of the effects of new regulation,” he said, commenting on markets, such as the UK, which are in the process of introducing new compliance requirements for the sector.
Most agree that a framework for regulating BNPL will be in place by the end of the year in the UK.
"I think that the market is maturing naturally,” said Howell. “The wheels won't fall off the bus but we should expect less of the wild west going forward."
