Buy Now, Pay Later (BNPL) is an industry which has seen an unfathomably meteoric rise, buoyed by the explosion in e-commerce sales during the pandemic as well as record-low interest rates.
The option to split payments for purchase is one that has proven extremely popular with consumers as a way to manage money, and investments poured into the big players in the BNPL space. This was, and is, one of fintech’s biggest success stories.
As they say: “what goes up, must come down”, and the BNPL industry has hit a rough patch with valuations tumbling and mergers abandoned. It is also not without its controversies. BNPL is currently the fastest growing form of debt and has benefitted from lax regulation thus far. Additionally, as a young industry it has yet to be tested through an economic downturn – and many predict that one is imminent.
To get a better understanding of where BNPL is going next, we must first create an overview of the current situation. Once this has been done it becomes clear that, while there is cause for concern, the underlying product is solid, and there are opportunities for all types of providers.
As with all things in financial services; the ability to adapt and innovate will be key to competing.
Popping the Buy Now, Pay Later bubble
The current plight of Buy Now, Pay Later industries has come as a result of multiple factors:
- Rising interest rates
- Increasing competition
- Incoming regulation
Rising interest rates
BNPL is an industry that was born in the era of record-low interest rates. With rates now rising, so too increases the borrowing costs for BNPL players.
Additionally, higher interest rates have caused investors to step back from speculative loss-making tech stocks.
Given the massive rise in BNPL usage, it was only a matter of time before incumbent institutions began to make their own play.
Banks, and even some big tech companies, are entering the market with increased frequency. There have also been a number of new upstarts in the BNPL space, bringing a further challenge to the hegemony of the largest BNPL players. Some notable examples include Apple, Deutsche Bank, and Monzo.
BNPL companies have benefitted from a lax regulatory environment, but signals from regulators in multiple jurisdictions suggest that this is about to change. It seems likely that BNPL providers will be compelled to report to credit ratings agencies, which until now has not been the case.
However, some argue that this may be a net positive for the leaders in BNPL, as it will increase trust and curb some anti-ethical practices by more marginal providers.
This trifecta has certainly left the industry feeling bruised, and has led to a sharemarket catastrophe. It could be argued that the very concept of BNPL is in danger, but this is not the case.
BNPL is here to stay
Although it may be tempting to consider recent developments as a bad omen for Buy Now, Pay Later as a whole, it is important to differentiate between the value of these share prices and the usefulness of the product itself.
There is a plethora of evidence to suggest that consumers, particularly younger generations, like to have the option to split payments. Compared to high-interest credit cards, it’s easy to see why this form of payment has enjoyed such widespread popularity.
Clearly, BNPL is here to stay, and will become more common as banks roll out their own products. The concept in and of itself is not in any danger – the competition is simply heating up.
Building a Lending Ecosystem
With banks and big tech companies now allowing customers to ‘pay in four’, the question arises as to whether BNPL deserves to be a standalone industry worth billions. Perhaps, as banks and big tech move into this space, BNPL will simply be an attractive product that makes up a wider lending portfolio. This is the view taken by payments analyst Grant Halverson:
“It will be a feature, but it’s not a separate industry. It’s not an innovation, it’s just another lending product.”
For banks, the inclusion of BNPL products as part of a wider lending ecosystem is likely to be a convenient way to boost revenues and compete with fintechs.
Our recently published report found that consumer demands are spread across a broad spectrum of traditional and modern services. As such, by adding ‘Pay in Four’ and other BNPL products to their portfolio, banks can placate their customers’ demands for convenient modern services.
For BNPL firms themselves, the threat of competition brings with it the need to innovate. Sceptics of the industry argue that simply offering BNPL is not enough, and that these firms will need to innovate and roll out new offerings, or face obsoletion.
With that being said, companies such as Afterpay and Klarna have grown so widespread that the skills and revenues are there for them to adapt to the changing market. An optimistic view is that they can leverage their networks which connect a huge number of customers with merchants to add value beyond their core BNPL operations. To illustrate, despite their valuation collapse, Klarna has still been able to grow their market share in the US and make strides towards profitability in the EU.
To discover which services consumers are demanding and how financial institutions are adapating, download our industry report.