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Buy Now Pay Later (BNPL) took the world by storm in 2021, and this trend is set to continue in 2022. BNPL allows consumers to purchase low-value goods on interest-free credit. It’s a simple business with the potential to make serious returns. Thus, BNPL is an increasingly attractive model for fintech companies and, therefore, investors.
The idea is not a new one. In times gone by, housewives would buy home appliances on payment plans. It’s also been part and parcel of the auto industry for decades. But now, consumers of any age and income bracket can use BNPL credit to make impulse buys on clothes, toys, make-up, gadgets and much more.
Apps like Klarna, Afterpay and Affirm integrate with payment processors so consumers can seamlessly use their services no matter which website or checkout they’re going through.
These services level the credit scoring playing field and allow consumers to better manage their own finances. But there’s no doubt letting many consumers loose in this way carries considerable risk. Indeed, regulators worldwide are growing concerned that BNPL is a ticking time bomb for credit default.
Nevertheless, the potential target market is enormous and when emerging market economies are brought into the fold, the investment case gets a lot more interesting.
Consumer credit in emerging markets is very new, but this gives BNPL firms reason to expand into these areas. Indeed, several private companies have already begun moving into Latin America, India and Saudi Arabia. Other trends to look out for include cross-border BNPL and payments-BNPL partnerships with emerging market economies.
How does BNPL work?
Companies such as Afterpay take a commission from the store the consumer is checking out through. The consumer pays 25% upfront and spreads the rest through four payments without additional credit cost. But if the consumer misses a payment, they’ll incur charges.
In the case of Afterpay, it charges merchants a flat fee of around 30 cents per transaction, along with a commission fee. The fee is based on the value and volume of transactions processed through Afterpay. Therefore, the more customers a merchant sends to Afterpay, the lower its commission rate will be. This fee ranges between 6% and 4%.
But what’s in it for the merchant? Having an additional payment option, particularly one as appealing as BNPL, attracts new customers to the store. It also increases the average order size, as consumers feel flush. Plus, merchants are used to paying payment processing fees. Mastercard and Visa’s fees are not cheap. So, this is not an entirely new concept to them.
BNPL hits its stride
The COVID pandemic has undoubtedly spurred demand as e-commerce adoption accelerates. More people are working and shopping from home, plus income uncertainty means anything that eases the financial burden is welcome. This is why BNPL has hit its stride.
Furthermore, younger generations turn to interest-free BNPL options rather than high-rate credit cards for smaller purchases.
Many people nowadays have irregular and erratic wage patterns. BNPL can help them budget and manage their purchases. But this depends on careful management. For many, it will quickly spiral into an expensive and unmanageable situation.
The total addressable market is enormous, particularly when considering the extensive reach of emerging markets.
According to GlobalData’s thematic research, the BNPL industry could be worth $166bn by 2023. Moreover, Allied Market Research projects a valuation of $3.98tn by 2030.
Who are the big players in BNPL?
Block (formerly Square) and PayPal are shaking up the BNPL space with their deep pockets and extensive reach. The biggest names are Afterpay, which Block now owns, Klarna, Affirm and Splitit, but many newcomers to the scene are also making themselves known.
Publicly-listed BNPL companies to invest in
Affirm (NASDAQ: AFRM): serves the United States. It was founded by ex-PayPal executives and partnered with Amazon (NASDAQ: AMZN).
Block (NASDAQ: SQ): formerly known as Square, Block acquired BNPL pioneer Afterpay in August 2021 for $29bn. This is expected to complete in early 2022 and will help Block become more entrenched in the small business and personal banking space. For instance, the addition of BNPL to Square Banking should help small-business owners manage their cash flow. Afterpay has 100,000 merchants already on board and serves the US, Australia, New Zealand and the UK.
Apple (NASDAQ: AAPL) is rumored to be bringing a BNPL option to Apple Pay. The company also has a partnership with Affirm.
Humm Group (ASX: HUM): humm by Flexifi claims to be the third-biggest BNPL provider in Australia.
Laybuy (ASX: LBY): based in New Zealand, it also serves the UK and Australia. Its share price plummeted 83% between January and early December 2021.
Mastercard (NYSE: MA): has launched a BNPL feature giving fintech businesses the chance to offer BNPL interest-free payment installments.
Moneylion (NYSE: ML) has a BNPL offering in beta mode. The company plans to IPO via a SPAC merger with Fusion Acquisition Corp. in a $2.4bn deal.
OpenPay (ASX: OPY) is an Australian BNPL business. It allows for larger purchases than rival BNPL services. The OPY share price has declined 18% in the past five years and 57% in 2021.
PayPal (NASDAQ: PYPL): the e-commerce payments giant has its own BNPL service it offers merchants, and it recently acquired Japanese BNPL company Paidy.
Sezzle (ASX: SZL) serves Australia, the US, Europe, and Canada and also plans to target emerging markets.
Splitit (ASX: SPT): A BNPL venture lets users pay with an existing credit card, holding the total amount on their card and paying it off with monthly installments. The SPT share price has plummeted 80% in 2021. It’s already inked partnerships with Visa, Mastercard and Stripe in the US and Tabby in the Middle East. It also works from Israel, London and Australia.
Zip (ASX: Z1P): is an Australian fintech with a BNPL offering. It serves markets in Australia, the US, the UK, New Zealand, South Africa, the Czech Republic and the UAE. Its share price has fallen 13% in 2021.
Zebit (ASX: ABT): is based in California and listed in Australia. Its share price has tumbled nearly 70% since its IPO in October 2020.
PE/VC-backed BNPL providers to watch for IPO
Biller: features AI-powered BNPL invoicing solution. It is another offering B2B BNPL services and was founded by ex-Mollie and Klarna staff.
Billie: Klarna is a Billie investor, and its founders came from Funding Circle. It has raised nearly $150m.
Klarna: Swedish BNPL company has a $45.6bn valuation. It serves North America, Asia, Australia and Europe. Klarna is aggressively expanding throughout the United States and the UK.
Kredivo: based in Indonesia, Kredivo has four million customers. It plans to go public via SPAC VPC Impact Acquisition Holdings II. Victory Park Capital sponsors the SPAC. It also plans to expand into Vietnam.
Kueski: a Mexican micro-loan start-up. Its BNPL service is proving popular and has signed up 1,000 merchant partnerships.
Limepay: this Australian BNPL company was rumored to be going public in early 2021, but this was later postponed. It offers white label BNPL partnerships allowing merchants to put their own branding on the Limepay BNPL service.
Monzo: The challenger bank launched its BNPL service in September 2021.
Nelo: is a Mexican BNPL provider. It has partnered with 45 merchants and has over 150,000 customers signed up.
Payl8r: is a UK BNPL provider on a mission to kill the credit card. It provides loans to pay for educational courses leading to job opportunities and regular consumer goods.
Tabby: is an early BNPL entrant into the Middle East. It achieved a $300m valuation in 2021.
ZestMoney is an Indian fintech business that raised $50m from BNPL provider Zip in September 2021.
Is BNPL profitable?
Revenue growth in the BNPL space is accelerating, and we’re still in the early innings of widespread adoption. But for the companies offering the services, the costs incurred are high, and most are not yet profitable. Plus, credit default is a mounting possibility.
Klarna, for instance, posted a pre-tax loss of 3.1 billion Swedish krona ($344m) in the first nine months of 2021. This was a jump from 801m Swedish krona year-over-year.
Nevertheless, Klarna is ambitious. It reportedly purchased shopping site PriceRunner for over a billion dollars in November 2021.
Interestingly, Klarna’s Black Friday and Cyber Monday report showed that one in two UK residents plans to use BNPL for their Christmas Shopping instead of a credit card. Meanwhile, a report from international management consultancy Bain said BNPL saved UK residents around £103m in interest and fees in 2020. Thanks to the interest-free option to budget, it is far preferable to credit cards as it leads to lower dependence on debt. This is a bullish signal for continued growth in the space.
However, BNPL is a high volume, low margin business and extremely sensitive to funding costs. The lack of profitability is a concern, and that coupled with regulatory risk may put investors off investing in the BNPL space.
What are the risks in BNPL?
One of the main risks to companies involved in BNPL are the costs associated with meeting regulatory changes which are sure to come.
It’s also seriously competitive, and the market could very quickly become saturated. This will affect profit margins.
Moreover, NBPL is a highly controversial practice because it bears a close resemblance to the traditional loan shark business model. By providing credit to consumers who struggle to manage their money, BNPL companies are encouraging a lifestyle debt trap.
Furthermore, legacy banks are beginning to follow the trend into BNPL, as are credit card giants Mastercard and Visa. With their gargantuan size and global network of issuers and merchants, they sport a clear competitive advantage in operational running costs.
This could push out the less successful or lead to further consolidation in the space.
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