In 2021, consumers in the US made $100 billion worth of purchases through Buy Now Pay Later (BNPL) channels, according to research by Cornerstone Advisors. There was a massive jump from $20 billion in 2019 to $24 billion in 2020. . It’s a trend primarily driven by younger Gen Z’s adoption, whose use of BNPL has grown from 6% in 2019 to 36% in 2021. Even in Asia, the simplicity and convenience of BNPL saw its usage explode among younger generations. According to the Q4 2021 BNPL Survey, the BNPL payment industry in the Asia Pacific region is expected to grow by 61.5% annually.
However, its meteoric rise hasn’t gone unnoticed. Apple’s announcement of its own BNPL service has shaken up the industry. The news comes when these companies face potentially increased regulation and inflation rate hikes eating into their margins. So how are BNPL providers adapting to these turbulent times? While announcing their latest partnership with Atome, CEO of Kilde, Radek Jezbera, shared how the BNPL industry is facing its most significant test yet.
The current state of the BNPL landscape
Previously, we explored how BNPL rose to prominence as a means of payment. As banks withdrew from consumer lending, fintech startups stepped in to fill the void. Lightly regulated and heavily tech-driven, they began taking on roles previously carried out by banks, such as payments and wealth management. Soon, they were solving old banking problems in a cost-effective and scalable way. As a result, BNPL providers delivered a superior experience for consumers and merchants alike. However, developments in recent months have presented the Buy Now Pay Later industry with its greatest challenges.
Impact of changing economic conditions
Previously, BNPL stocks benefited from the global surge in investment in technology stocks, which peaked in February 2021 with the Gamestop saga. However, the landscape has changed considerably since. With inflation on the rise globally, central banks are raising interest rates from record lows. As a result, BNPL companies are now grappling with higher costs in borrowing funds. In turn, their margins are shrinking while providing interest-free installment loans for consumers at the point of sale. Importantly, most Buy Now Pay Later providers are early-stage growth companies. As a result, such businesses need to invest continuously in marketing and technology for user acquisition, which is a multi-year path to profitability.
Increased regulation on the horizon
The rise of BNPL hasn’t gone unnoticed by regulators either. Recently, the UK announced it’d introduce a range of new regulatory requirements for BNPL providers. These measures include carrying out affordability checks, and gaining approval from the Financial Conduct Authority (FCA, and ensuring fair, transparent adverts). Similarly, Australia’s Minister for Financial Services, Stephen Jones, announced that there’d be increased regulation around financial services, including BNPL. Meanwhile, in Singapore, the Monetary Authority of Singapore (MAS), while closely monitoring the industry, has noted that effective industry self-regulation, through an industry code, should adequately mitigate the risks in the sector.
From these developments, one can observe that BNPL is facing increased global scrutiny from regulators. These initial regulations will focus on imposing reporting requirements for Buy Now Pay Later providers, including obligations to work with credit bureaus. Already, regional companies have begun responding to these trends by incorporating a hybrid model where both merchants and consumers are charged. While more financially sustainable, charging interest to consumers requires a consumer lending license and complying with corresponding consumer finance regulations.
Apple’s entry into the BNPL industry
In June, Apple announced its entry into the BNPL space with a new service called Apple Pay Later. It allows consumers to split payments over 6 weeks and is built on the Mastercard Installments technology platform. The same technology allows most banks to offer similar services to their customers. Commenting on Apple’s entry into BNPL, Radek shared, “With this move, Apple is moving deeper into financial services by opting to manage their own credit decisions, leveraging their vast cash balance sheet, instead of partnering with an institution like Goldman Sachs as they did on the Apple Card.”
The tech giant announcing its entry into the space validates the strong value proposition of BNPL and entrance into mainstream finance. Further, with the vast ecosystem Apple has built around its devices such as the iPhone and services like AppleID, the company is uniquely positioned to offer a BNPL service. Now other global tech companies with similar ecosystems, such as Amazon, Google, and Samsung, could potentially follow suit with their BNPL partnerships. Hence, for existing Buy Now Pay Later providers, Apple’s entry into the industry presents a severe challenge.
How leading BNPL providers are adapting to these changes
The BNPL sector will likely see greater consolidation across the board to face these heavy challenges. Even for larger companies, it could be crucial to their survival. Such consolidation would primarily be driven by banks and financial institutions looking to leverage the technological solutions of fintechs to enter the Buy Now Pay Later space. Meanwhile, for the fintechs, such partnerships would help them navigate any regulatory hurdles on the horizon.
Eventually, depending on the size and loyalty of their customer bases, Buy Now Pay Later providers will fall into one of two categories:
- BNPL providers with large customer bases with high levels of loyalty. These BNPL providers will likely pivot to become super apps for shopping and financial services by leveraging strong customer relationships and brand recognition.
- Those focused on supporting merchants. These providers can continue serving eCommerce merchants in the short and medium term. However, increased competition will exert greater pressure on them to increase merchant fees and margins in the long term.
Ultimately, the BNPL providers that thrive will be those with strong customer relationships. Radek explains, “Whoever owns the end customer relationship commands the greatest power in the value chain. For example, if the e-commerce business offers credit financing options to their customers at the checkout, the BNPL provider sells an easily replaceable commodity. Money is still fungible, after all. However, if the e-commerce business attracts the BNPL checkout financing because their customers already have that famous BNPL app on their phones, the power balance is very different. As a result, the large BNPL groups like Atome, Pace, and Kredivo are excellently establishing themselves as brands on their own.”
Despite the odds, the outlook for BNPL remains positive
Despite the severe challenges from increased competition, regulation, and interest rates, the promise of Buy Now Pay Later remains strong. It offers unrivaled convenience and simplicity to customers against credit cards and Point of Sales Finance. Radek illustrated this example with a comparison: “With a BNPL service, you only need to download an app and undergo basic identity checks. This convenience is in stark contrast with the credit card application process where she would need to supply income information, remember her credit limit, duration of the grace period, understand installment plans, late payment fees, etc.”
Further, since it allows merchants to pay the cost of financing while keeping the product free for customers, Buy Now Pay Later has flipped the credit interest formula. In times of inflation, this serves as an additional driver for its mass market adoption. Hence, many industry players are now tightening their credit scoring criteria while focusing on returning customers and moving to higher-income customers facing economic pressures. This rapid agility is made possible by large amounts of data and the technology to extract accurate insights. This data will eventually allow Buy Now Pay Later providers to move beyond payments into super apps offering a vast array of financial services ranging from savings to crypto investments.
In a Southeast Asian context, Radek notes, “BNPL is a near prime market; therefore, it naturally thrives in relatively more affluent countries of Singapore and Malaysia, but the growth in those markets will be limited. Thus, extensive growth will come from Indonesia, Thailand, and Vietnam. Moreover, prominent South East Asian BNPL brands are establishing strategic partnerships and opening offices in those regions.” Thus, despite the stiff resistance, the Buy Now Pay Later phenomenon still has excellent potential.
BNPL remains a strong investment
For investors seeking regular income, lending to selected consumer-focused BNPL providers remains attractive. Thanks to near-prime market customer segments, BNPL loans have fewer delinquencies. As such, they have greater repayment stability. To make this investment class accessible to a wide range of investors, Kilde is cooperating with leading BNPL companies in several regions.
Most recently, Kilde announced a partnership with Atome, a household name for BNPL in 10 Asian countries. The partnership will see Kilde facilitating fundraising activities, allowing qualified investors to participate in the growth of one of the most recognized brands in the Buy Now Pay Later industry. “I am excited about the partnership with Atome, the firm that has made Singaporean consumers familiar with the three installments, zero interest concept,” said Radek. As part of this partnership, Kilde is also collaborating with Fundnel, Southeast Asia’s largest licensed digital marketplace for alternative assets, to reach their network of investors. At the same time, Hg Exchange will support the tokenization and digital custody of alternative assets and the liquidity of the investment.
The Buy Now Pay Later industry offers better returns for a lower risk than traditional consumer loans. Its massive impact in record time has proven its status as an innovative technological challenger to conventional banks – one that offers unparalleled convenience, efficiency, and smooth experience to consumers. Even in the face of challenging odds, the industry remains resilient and adapts to changing times. While the potential consolidation of the industry isn’t without challenges, it’ll ultimately benefit consumers by giving them access to responsible, accessible, and affordable financing solutions. In overcoming the test it faces today, BNPL will rise and establish itself as a mainstream payment option available to most consumers in most markets.