Admittedly I am not a regular listener of the Moneybox programme on BBC Radio 4 but when this radio channel is selected for me during car journeys I could not stop noticing the frequent discussions about growth and implications of Buy Now Pay Later (BNPL) products in the UK. In most instances these discussions centered around customer or consumer watchdog concerns about the impact that BNPL products might have on increasing the levels of indebtedness of potentially vulnerable individuals. Considering the existence of many other consumer financing solutions at the POS, and indeed the presence of credit cards, it is not immediately obvious where this particular focus on BNPL comes from but it is not difficult to assume that the growth of BNPL providers is a driver for increased public scrutiny.But to make the point. This is not just a UK issue. The POS Credit market in the UK is estimated to be around £10bn and growing at 20% p.a. but BNPL is just one element of it.
Globally, BNPL propositions have existed for many years; in fact you could argue that Latin America and especially Brazil is one of the earliest adopters of instalment payments going back to the 1950’s. According to ebanx, today 54% of Brazilians consumers have selected to split credit card payments into smaller chunks when buying online.
There are various different studies estimating the size of BNPL alone; for example Coherent Market Insights has estimated the BNPL market to be $7.3bn in 2019 and with growth rates of 21% this would equate to a global market of $13bn in 2022. A lot of this growth is driven by Millennials or Generation Z. The Worldpay Global Payments Report 2020 observed that “Generation Z are drawn to financial products and services that deliver practicality and convenience. Alternative financing options that emphasize short-term flexibility—such as “buy now pay later” services find themselves fitting with generational needs.
”So how does BNPL work? Simply speaking, it allows the consumer to split a payment into a pre-agreed number of instalment payments. So instead of making a $200 payment today, the consumer pays $50 today with three subsequent instalments of $50 to follow over the coming weeks or months. Usually customers do not pay interest and would only incur a charge in case of missed or late payments. The likes of Klarna and Afterpay, who will run a credit check on the consumer prior to approving BNPL payments, would charge a fee to the merchant. In return both providers claim that the existence of a BNPL product can increase cart conversion by 20-30% and lead to more repeat business.In the light of BNPL being a growing industry segment, in December we saw the announcement that US-based Affirm, itself one of the leading BNPL providers in the market, entered into a definitive agreement to acquire PayBright, one of the leading BNPL players in Canada for an alleged amount of CAD$340m. Based on the SEC filings for the proposed IPO Affirm generated revenues of $510m in its last financial year (93% up from previous year) but it has not generated a profit yet. It has partnered with 6,500 merchants and has served 6.2m customers in the US whereas PayBright offers its solutions to approx. 7,000 merchants. Whilst both companies have slightly different product solutions (Affirm provides loans with interest attached; PayBright charges no interest to the consumer but levies a fee to the merchant), the immediate benefit of this deal is that both merchant portfolios are said to be complementary; i.e. offering a slightly wider product portfolio but to a much larger customer base. Since a lot of the ‘credit decisions’ are data-driven, the increase in merchant and consumer numbers will add scale to the data analytics function that is a fundamental component of what all BNPL players provide. The ability to make instant and high-accuracy decisions is not a game changer itself but an essential part of BNPL propositions.
This deal appears to be the first sign of consolidation in the BNPL space.
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