Just as the UK summer started, Edgar, Dunn & Company looked at how the ‘Buy Now Pay later’ (BNPL) market had developed in Europe. In this latest article, we wanted to share an update of the recent developments in the BNPL market and try to forecast the next 12 months for one of the most dynamic and most rapidly recognised alternative payment methods.
At the start of the year, Kaleido, the research company, had predicted that 30% of total e-commerce spending would be via BNPL by 2025. Today, Edgar, Dunn & Company (EDC) believe BNPL still only represents 2% to 2.5% of e-commerce globally. However, just over the summer months, the BNPL market has been undergoing a brisk change. We will expect further announcements over the next 12 months that are expected to shape the BNPL market dynamically.
Who are the BNPL providers?
Around the globe, the list from “A” to “Z” of BNPL providers continues to grow. Affirm, AfterPay, Ant Financial, Atome, Billie, Blispay, Bread, Bundll, ClearPay, CreditClick, Divido, EasyPay, Flava, Flexi (aka humm), Fly now Pay later, Hoolah, Kiva, Klarna, Laybuy, Nelo, OpenPay, Payl8r, PayPal, Sezzle, Splitit, Spotii, Tymit, Uplift, Zilch, and Zip is still not an exhaustive list. We are not sure anyone has a comprehensive global list of BNPL providers or even an accurate picture of where they are operating today. There is an announcement of a new BNPL participant or a new BNPL partnership almost weekly and there does not seem to be any corner of the world where BNPL is not offered.
The full-stack merchant acquirers wishing to increase their range of services are also forming strategic partnerships with BNPL providers. Adyen announced a partnership with Zip just in September 2021. Whereas the merchant and marketplace platform, Amazon, has partnered with Affirm to offer a BNPL payment method to its customers. Even the neobanks, Revolut and Monzo, are both dipping their toes into this growing market by offering their BNPL-like propositions.
To top it all, Jack Dorsey’s payment company Square acquired Afterpay for $29 billion in August 2021 (see EDC’s M&A article about this acquisition). It has been said that this is the largest acquisition in Australian M&A history and illustrates the buzz that exists around the BNPL market. It is only a matter of time when the 800-pound gorilla that is Apple wishes to leverage its technological prowess and consumer payments reach and offer its BNPL solution.
As BNPL transactions grow, there is a rise in criticism of some business practices
There are upsides of BNPL for both shoppers and merchants and we have not seen any change. However, there are not only upsides to BNPL, but there are also some growing concerns amongst the consumer protection groups and the financial service regulators. As we saw in February 2021, the UK’s Financial Conduct Authority (FCA) regulator conducted a review of the BNPL market and published the ‘Woolard Review’. It said that BNPL deals offered via Fintech companies such as Klarna, must be covered by its rules ‘as a matter of urgency’ because of a ‘significant potential for consumer harm’. In July 2020, Edgar, Dunn & Company asked the question ‘Are we heading for a new consumer debt crisis following the COVID-19 pandemic?’. In a pre-pandemic world, Edgar, Dunn & Company already saw a significant growth of instalment payments and BNPL payment options appearing across a wide range of retail sectors, from fashion to airline tickets.
The Woolard Review sets out 26 recommendations for the FCA that are designed to make the BNPL unsecured credit market fit for the future. It will be sometime for all these recommendations to be implemented, but by 2022 BNBL providers will have a new regulatory environment in the UK for BNPL providers. Consequently, there is no doubt these regulatory controls will be in place in the UK which will include affordability and the systemic sustainability of the credit market. BNPL providers will have to change the way they recruit consumers and monitor their line of credit across the market. This is expected to impact who can access BNPL and how much they can borrow. These regulatory implications will be felt beyond the UK as other national regulators and competent authorities follow suit. Klarna UK has already recently announced some operational measures to help control the potential build-up of consumer hidden debt on BNPL products.
What next for BNPL?
It is hard to believe that there is room for more BNPL providers to enter the market based on the aforementioned list. Edgar, Dunn & Company believes that there will be continued growth in the short term and some mergers and acquisitions in 2022. We also expect to see further innovation in the BNPL market, both online and in-store. We will see new propositions which will be merchant led, like Amazon, that are likely to be unpinned or ‘powered by’ existing BNPL providers as they continue to grow their different routes to market.
The tremendous growth of cashless payments, including BNPL, presents a massive opportunity for Fintech companies. As we have seen with Alipay in China, Super-apps are expected to be functionally-rich e-wallets offering access to a variety of alternative payment methods and other financial services products – such as account to account payments BNPL, refund and returns supervision, insurance, merchant loyalty or cashback. The digital payment ecosystem is undergoing some exciting changes. We expect to see more BNPL providers offering broader propositions, moving away from being a single-product provider in their aim to become profitable.
The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).