BNPL was a booming theme in 2021. In the third quarter, Square acquired Afterpay for $ 29 billion as part of a deal reflecting the intensifying battlefield in the industry. Other developments include Amazon announcing a partnership with Affirm to offer BNPL as a payment option, PayPal increasing its own BNPL product with the acquisition of Paidy for $ 2.7 billion and Apple revealing it would work with Goldman Sachs to offer its service via Apple Pay. BNPL is a concept that has been around for decades, so what sparked the recent wave of enthusiasm? A handful of forward-thinking companies have adopted technology to streamline the process in a very simple and user-friendly format. For example, Afterpay makes an instant decision to approve a new customer based on six simple entries and without a credit check or proof of income. This has proven particularly popular with Millennials and Gen Z consumers, who view the format as a payment plan rather than debt.
BNPL’s business model is based on a merchant commission of between 2% and 6%, which is higher than the commissions received by credit card companies. Why are retailers happy to pay more for this service? The simple answer is that BNPL customers have higher conversion rates and significantly higher average order values. Afterpay was quick to spot the high turnout among millennials and made that argument a key selling point, given the difficulty in reaching the cohort through traditional marketing methods. It has worked well in Australia, and merchants such as Urban Outfitters have extended the payment method to the US and UK. The key is that BNPL companies are growth catalysts for their business partners, as well as a convenient, unconditional finance product for the end consumer; it has created a strong network effect, as more customers attract more retailers, which attracts more customers, and so on.
Retailers with greater e-commerce penetration, targeting fashion-conscious young consumers, have been enthusiastic early adopters with the payment option featured prominently on several fast fashion websites. Luxury brands, having been slower to embrace e-commerce, have been more reluctant to embrace the concept for fear of being associated with selling products to people who cannot afford it. Gucci is a rare example of a luxury brand offering BNPL through Affirm, but only in the United States, signaling that it is courting a younger demographic in this market. Online fashion retailers, such as Farfetch and Net-a-Porter, have started offering BNPL options but have so far limited availability to a narrow range of products and prices.
Accenture’s analysis suggests BNPL’s transactions have more than tripled in the United States since January 2020, and the Worldpay Global Payments 2021 report shows that its share of the US commerce market of $ 1.1 trillion is still only 2% (or $ 22 billion); there is therefore a long growth path ahead as the United States converges on more mature markets. As shown in Figure 1, Klarna is clearly the independent leader and due to its Swedish heritage, the Swedish market is penetrated to over 20% with BNPL as a percentage of e-commerce sales. This is an indicator of the opportunity defined globally.
Graph 1: Overview of BNPL providers, classified by size
Source: Fincog. Number of partners and gross value of goods in billions of USD. Data as of June 2021. For information only. All trademarks, logos and brand names are the property of their respective owners.
Graph 2: BNPL penetration as a percentage of e-commerce sales
Source: FIS Global Payments Report. Data as of September 30, 2021. For information only.
The moats of the dominant BNPL platforms are set to be tested as banks and card companies, which have so far been slow to get on board, have now announced their intention to offer the service. Mastercard, which has a network of 78 million merchants, has launched a suite of tools to facilitate BNPL in an effort to ensure transactions stay on its “rails.” PayPal offers the services to its merchants at no additional cost and adds the option to its new awesome app. This is likely to trigger a race to the bottom in merchant fees, which should converge to credit card levels. While the impending initial public offering (IPO) of Klarna will be an interesting data point, we see this development as an opportunity for card issuers to consolidate their positioning and with the network effect generated by Visa, Mastercard and PayPal. , it seems very likely that they will end up being the leaders in adding BNPL’s back-end processing as an attractive product for their card-issuing clients.
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