Money and credit go back almost as far as one can remember – it’s inherent in our financial systems. When one’s purchasing power is lower than their expenses, personal loans are usually the best option for most people who qualify. However, these are too large and come with high-interest rates, a ton of credit checks and documentation, and additional fees. The next best option? Credit cards. At the same time, not everyone qualifies for a credit card, and even if they do, not everyone applies. Enter Buy Now, Pay Later (BNPL) as a medium to extend instant, unsecured, interest-free, short-term, low-ticket, and embedded credit in customer journeys to enable convenient shopping experiences and more business for merchants.
Although the notion finds its roots back in the 19th century, the last decade is where BNPL has truly flexed its muscle. By allowing an interest-free, alternate financing option to consumers for their purchasing journeys, the BNPL sector promised to build a fertile ground for payment-related experiences to breed on. Estimated to reach $680B in transaction volume worldwide by 2025, the segment has accelerated point-of-sale financing through the various discoverable platforms and card-linked installment offerings.
We have cautiously and comprehensively tracked the rumblings and roars in the BNPL sector in the ,Future of Finance newsletter and reckoned it would be worthwhile to look back and do a sector roundup.
Nose-diving valuations both in public and private markets, delayed funding rounds, nervous investors, rising interest rates, circumspect regulators, disillusioned customers, worthy competitors – a ton of headwinds have come to the fore in the BNPL sector lately. At first glance, the space seems to be going through a short to medium-term turmoil, which might just as well prove to be a worthwhile transition in the long run. The excruciating transition phase may enable the sector to rid itself of unsustainable business models and devious firms while inviting larger participation from a variety of players such as traditional banks, neobanks, digital platforms, and BigTechs.
Lending A Hand Across Activities
Owing to the momentum the BNPL sector witnessed, regulators across various geographies have responded to the risks and challenges that the new business models in the sector present. The BNPL sector which enjoyed regulatory arbitrage in the beginning is under the regulatory microscope facing intense scrutiny, directives, and guidelines to ensure customer protection and financial stability.
The Reserve Bank of India’s recent directive of barring non-bank wallets and prepaid cards from receiving lines of credit serves to be just one of the many steps taken in regulating the sphere. Indian BNPL providers, such as LazyPay and Slice, have since then temporarily suspended their BNPL services to comply with the latest order. The Monetary Authority of Singapore (MAS) also called for a code of conduct that aims to ensure BNPL providers will include safeguards against over-indebtedness by consumers. Not only that, but industry giants Grab, Atome, and Hoolah co-established the “Buy Now, Pay Later Working Group” under the guidance of MAS to develop a BNPL framework for the local market. The UK isn’t far behind on enforcing appropriate terms – with the Financial Conduct Authority asking BNPL firms Klarna, Laybuy, Clearpay, and Openpay to make amends in their consumer contracts to incorporate the fairness and transparency requirements with respect to the lending practice. Klarna took this a step further by deciding to report BNPL information to credit reference agencies Experian and Transunion during the regulatory clampdown in the region.
BNPL providers who aimed to disrupt the banking industry, are facing intense competition from new entrants such as traditional banks, neobanks, and BigTechs. Availability of credit-focused FinTech infrastructures, regulatory setups, and participation from card networks and credit bureaus is expected to further ease the way for players to launch their own set of BNPL services.
Apple’s Apple Pay Later feature takes the cake for BigTech’s move into the core banking realm, and may lead the way for creative destruction in the sector given the clout Apple enjoys both with consumers and merchants.
Several traditional banks such as NatWest in the UK, Deutsche Bank in Germany, and National Australia Bank in Australia have launched their own version of BNPL services to consumers and merchants. In 2021, several neobanks launched BNPL, such as Monzo and N26 in the UK and Europe, Marcus and MoneyLion in the US, Nubank in Latin America, and Tymebank in Africa. In 2022 we saw this trend extend further with challenger banks Revolut and Zopa launching BNPL in Ireland and the UK respectively.
2022 also witnessed key initiatives from FinTech infrastructure platforms such as Finastra and Fiserv, who have also joined the BNPL race by offering enabling technologies to banks and merchants. Traditional credit bureaus such as TransUnion, Experian, and Equifax have extended their data and analytics services to ensure the BNPL sector goes through the transformation towards responsible lending under the watchful maneuvers of the regulated and experienced credit reference agencies.
The year 2022 has seen BNPL service providers team up with banks, FinTechs, and tech firms on multiple projects to introduce more flexible payment options for a seamless checkout experience. Some noteworthy collaborations include:
- BNPL platform Klarna announced its partnership with legendary NBA franchise, the Chicago Bulls to promote its all-in-one shopping service and interest-free 4-month payment plan to Chicago Bulls fans, by offering them unique co-branded experiences in the stadium, limited edition merch, and more.
- Verifone announced a new partnership with BNPL service provider Affirm that enabled merchants to offer customers the flexibility of paying at their own pace, meeting the needs of merchants and consumers. With this, consumers will have instant installment approval at checkout up to a pre-approved credit limit and flexible installment repayment periods.
- In Singapore, Mastercard, DBS Bank, and Pine Labs formed a trio and partnered to launch ‘Mastercard Installments with Pine Labs”, letting DBS/POSB cardholders get exciting BNPL deals. With this, consumers will have instant installment approval at checkout up to a pre-approved credit limit and flexible installment repayment periods.
BNPL funding rounds and multi-billion dollar valuations are a thing of the past. In fact, several industry commentators and experts attribute the errors of the BNPL sector to the availability of excessive and low-cost venture funds. 2022 has witnessed a limited number of BNPL funding rounds and investors are circumspect and somber.
Scalapay, a BNPL provider, raised $497M in Series B investment funding that boosted its valuation above $1B, making it Italy’s first unicorn. New York-based FinTech Walnut, which enables users to pay for healthcare costs via BNPL offering, raised $110M in a Series A round that will make it easier for patients to afford and access medical care by paying in monthly installments. The story doesn’t end there – Danish BNPL company ViaBill also secured $120M in debt and equity. With the help of MasterCard, the firm has developed a solution that can be used online or in-store to fill the gap present in brick-and-mortar BNPL solutions.
It hasn’t been all rainbows and sunshine in the BNPL environment, however. BNPL behemoth Klarna, which was just riding the high of reaching a possible $60B price tag in February from courting new investors months after its $639M raise, saw a great plummet of its valuation at $6.7B when it confirmed its new $800M raise in July. Although the plunge still paints a positive picture against the firm’s 2018 valuation of $5.5B, the 85% slash speaks volumes about how investors are ‘voting in the opposite direction’ in such turbulent times.
Another firm whose activities have been making for some talk-of-the-town headlines is Zip, an Aussie BNPL firm, who announced its plans to acquire US-based rival Sezzle in February, valuing the latter at $491M based on a 22% premium to its then share price. However, market uncertainty and a negative debt scenario have since then had the Australian company call it quits on the acquisition, instead turning its attention towards its profitability goals. As compensation for the costs associated with the deal, Zip is to pay Sezzle $11M.
Extending Services Across Geographies
BNPL’s ultimate goal remains to be consumer-focused and beneficial no matter where it is adapted. Although BNPL finds its strongest base in Europe, new economies in the Middle East, Asia Pacific, and South America are looking for ways to get involved.
The developed first-worlds like Europe and North America are leading the way when it comes to the BNPL market, where consumer demand has led to verticalized solutions through partnerships, funding rounds, and the launch of new offerings.
London-based BNPL unicorn Zilch announced a partnership with Mastercard to expand its BNPL digital card program to Europe and support deferred purchases in the EU. US-based Affirm Holdings Inc joined forces with Verifone to bring its BNPL option to millions of payment devices and online checkout systems.
Mondu, a B2B BNPL startup based in Berlin, is bringing its service across Europe after raising $43M in a Series A round led by Valar Ventures. British FinTech company Fly Now Pay Later also closed a $75M debt financing round to support its expansion plans in the US. With such rapid adoption across industries, the BNPL sphere has developed a sturdy base amongst these global leaders, with homegrown giants that are driving its agenda forward.
Nations in emerging markets stand to gain significantly from a strong BNPL business thanks to lower penetration rates of such trends. In an effort to boost the economy, many of these countries have taken small but vital steps.
BillEase, a major BNPL provider in the Philippines, closed a $20M loan with emerging market credit provider Lendable. Mastercard also set sail to the other side of the world by offering its BNPL program in Saudi Arabia and the UAE that attends to the consumer expectations of flexibility and choice above all else. The offering, under the name of ‘MasterCard Installments’, gives customers the option of paying when and where they wish.
The Way Forward For BNPL: Purge or Perish
The BNPL bubble seems under severe pressure both internally as well externally. The need for seamless payment experiences for consumers and the quest for higher purchase volumes for merchants is a worthy goal for BNPL providers to continue pursuing. At the same time, a business model that makes it easier for consumers to pay and accrue debt also has to protect them and mitigate risks to the larger ecosystem. The size of the sector along with the market dynamics necessitates the next evolution of BNPL providers’ operating models, value propositions, and business models to ensure overall financial stability and consumer protection.
In the next 12-18 months, the clouds surrounding BNPL may show a silver lining after all – for it will compel the incumbent BNPL providers to go through a cycle of purge and reassess their business models, balance growth with profitability objectives, embrace regulatory scrutiny, and ensure ecosystem welfare. Whatever the next evolution entails, it’ll be sure to teach and reinforce the value of change in shaping better experiences once we progress through the transition phase.