The concept of “buy now, pay later” (BNPL) payment plans is nothing new. While layaway and installment plans popularized the practice during the Great Depression, the now digital payment solution has gained momentum in recent years due to an increase in online shopping and a slew of new providers. BNPL payment plans let customers pay for their order over a period of interest-free installments.
In a session at the annual Future of Fintech conference, which ran from Oct. 5 to Oct 6., CB Insights Senior Analyst Anisha Kothapa shared how the growth of BNPL providers is affecting credit card providers in a way similar to the impact digital banking had on branches. By providing a more efficient and cost-effective option to consumers, BNPL companies are stealing growth from traditional financial providers and elevating the customer experience.
BNPL is cheaper
A McKinsey study showed that mature BNPL providers spend about 70% of what a private-label credit card company does to acquire customers. Thus, providers like Afterpay and Klarna are able to acquire customers more quickly and efficiently than traditional payment methods, which has contributed to the industry’s rapid growth: according to CB Insights, the BNPL industry has grown at an annualized rate of 58% since 2015.
BNPL providers are also entering partnerships with well-known, large retailers and consequently acquiring users from their massive customer base. For example, Target and Sezzle, Macy’s and Klarna, and Amazon and Affirm have all formed exclusive partnerships, which benefits both the BNPL provider and retailer. Customers receive a seamless and transparent checkout experience, while retailers generate more sales from customers who prefer the payment method.
BNPL is more efficient and reaches more people
According to Kothapa, BNPL providers use alternative data, AI and machine learning to assess a customer’s credit more quickly and accurately. For example, Affirm uses over 200 consumer data points for risk management, while its seven million existing loans improve its AI algorithm. “Banks have transaction data, but BNPL providers have a more robust data set like stock keeping data,” she said.
BNPL providers are capitalizing on younger generations, including Millennials and Gen Z, who prefer credit card alternatives and are using BNPL solutions to make purchases that would otherwise not fit their budget. This group may also encounter barriers such as not being able to get approved for a credit card. The industry will continue to benefit from the aforementioned generations increasing share of retail spend: according to Afterpay, by 2030, their share of retail spend will grow from 30% to 50%.
“Buy now, pay later providers will continue their growth and infiltrate in-person shopping,” Kothapa said. Already, companies such as Klarna have begun to provide in-store BNPL solutions for customers. Expanding beyond business-to-customer retail is another opportunity for providers, as business-to-business transactions often carry a higher average order value and order frequency.
BNPL providers will also expand into other products and services. CB Insights predicts BNPL companies will implement debit cards, high yield savings accounts and loyalty programs as a way to innovate and attract more customers. This will not occur without pushback from traditional banking providers. Financial incumbents such as PayPal are already offering their own split payment plan options, while Goldman Sachs acquired BNPL provider GreenSky in 2021. Although BNPL payments only account for a fraction of global e-commerce spend (2.1% in 2020, according to Worldpay), its share of payments will only increase in the coming years as the technology expands in popularity and features.