Buy Now Pay Later disrupts payments landscape

7 July 2022

This article first appeared in Business Day on 7 July 2022

Buy Now Pay Later, a USD150 billion global opportunity

By Arun Varughese 

Consumer finance has long been around but gaining popularity post World War II when credit card finance was extended to Americans to spur the economy. Globally credit cards became a high margin product for lenders, as consumers lapped up easy credit to fuel improving lifestyles. 

However, consumers who did not manage their repayments, incurred higher rates of interest and missed payment fees. 

Buy Now Pay Later (BNPL) has recently exploded onto the scene as an alternative credit payment mechanism. Simply, BNPL allows customers to buy goods upfront, while paying for them in interest free instalments over time. It is predominately an alternative payment  ‘check out’ option on e-commerce websites to current payment options such as credit cards, EFTs and payment wallets. 

Millennials and Gen Z enjoy the simplicity of the product given that they don’t need to worry about interest and are able to purchase products without the need to have a credit card. The BNPL apps are also highly engaging with targeted sales offers, wish lists and budgeting tools. Internationally, they are limited to no credit checks and easy to use for the mobile savvy young person.   

Most purchases by this younger audience are skewed towards clothing and home furnishings rather than single emergency type purchases, like replacing a large appliance. They are also not afraid to hold multiple BNPL accounts however this can get complicated when tracking and managing different installment dates. 

If there is no interest how do these players make any money? 

The business model is predicated on a few revenue streams. BNPL companies charge the merchant a fee (c.2-6% of the total value) for utilising the payment option. This rate can vary (similar to other payment options) based on volumes or whether the sale was performed through the BNPL app. In addition, consumers pay late fees if an instalment payment is missed and there are further opportunities to cross sell additional financial products debit cards and advertising. Certain BNPL companies also offer traditional payment options with an interest rate payable as an alternative to the above. 

Merchants have eagerly signed up with various BNPL players such as Klarna and Affirm in Europe and the US given that their closed loop systems allow better data insights into customers, increases both the average order size and volumes, and often lowers customer acquisition costs as consumers are now being directed to the merchant from the BNPL app where the shopping experience is increasingly initiated. 

In 2020, BNPL only represented 2% of the global online market, with analysts predicting that the total addressable market could reach up to USD147bn in 2025. The adoption of BNPL has tripled in Australia and grown by five times in the UK. Given that only 20% of e-commerce merchants globally have BNPL options there is strong potential for growth in this space. 

With all this excitement, BNPL start-ups have mushroomed around the world. Traditional players, such as banks and payments companies, have also started offering BNPL services in order to maintain their relevance to consumers. 

Technology companies have also entered the space with Apple having recently announced its BNPL offering on its Apple Pay platform and Amazon having partnered with Affirm in offering the service to its customers.  

In South Africa we have local players that have launched products in the space such as Payflex, PayJustNow, Tyme Bank and ZeroPay. Market analysts expect the gross merchandise value (GMV) to grow from USD231 million in 2021 to over USD4.8 billion by 2028. In 2022, the total GMV is expected to grow by c.98%. This is reflected in Payflex and PayJustNow now having over 160,000 and 180,000 customers. With thousands of merchants offering the BNPL payment option, the penetration of the product is expected to keep growing rapidly in South Africa. 

There has been also been a high degree of M&A activity in the space, with deals such as Square acquiring AfterPay for USD29bn and PayPal acquiring Paidly for c.USD3bn. In South Africa, Payflex was recently acquired by Australian BNPL player Zip and PayJustNow was acquired by Homechoice. 

However, competition in the space is fast heating up and a deteriorating economic climate is already putting pressure on BNPL companies. Valuations of businesses like Affirm and Klarna have declined c.85% and c.67% over the past 12 months as investors worry on credit losses, slowing growth and rising interest rates impact the ability for these firms to operate profitably in the long run. Regulators pose a stiff challenge and have taken a closer look at the offering as they are wary of loose lending criteria and the impact on the consumer in the long run. 

With such a large addressable market and a secular shift to digital payments and e-commerce, BNPL players will certainly feel like they have the winds at their back. Only time will tell if this is a fundamental shift in how consumer finance works. 

Varughese is head of technology, media & telecoms advisory at RMB