In 2020, Buy Now Pay Later (BNPL) accounted for $97 billion of global eCommerce transactions. The data comes from a report by FIS, which expects the figure to double in the coming years. In particular, the APAC region shows strong promise as its large population of young tech-savvy consumers embraces digital payment solutions. So while the BNPL industry is still in its early stages, the industry has massive potential for growth, which presents a lucrative opportunity for investors.
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KILDE, a Singapore-based regulated investment platform for alternative assets, is helping individual accredited and institutional investors buy into the growth of BNPL. Given rising inflation and the volatility of public markets, investors are increasingly eyeing alternative assets. “Being an investor nowadays is exciting and scary at the same time. Everyone’s looking for income products not correlated with the public markets. So they’re increasingly turning to fintech platforms like ours to deliver these alternative assets,” says CEO of KILDE, Radek Jezbera. At a recently held webinar organized by Tokyo FinTech, Radek explored why BNPL is a promising asset for investors offering high returns for a relatively low level of risk.
The strong value proposition of BNPL
When we think about BNPL as a concept, historically, it’d be the banks playing this role as a lender. However, in 2008, they began withdrawing from the market of consumer lending. This phenomenon was driven by increasing regulations and their inability to capture and serve these consumers efficiently. Now a wave of fintech startups has seized on different roles previously carried out by banks, such as payments and wealth management. These fintech startups were lightly regulated and heavily tech-driven.
With this approach, fintechs can solve old banking problems in a cheaper and more scalable manner. The BNPL phenomenon, Radek points out, is one of the old problems to which fintechs have a new solution. On the surface, one could argue that it’s similar to previous banking mechanisms such as equal pay payment plans, merchant-offered installments, and credit cards. However, Radek further contends that such arguments miss what makes BNPL so decisive – it delivers a superior experience for consumers and merchants alike.
For merchants, BNPL promises an almost 30% increase in sales, no terminals required, payments settled in a few days, and all it takes is a 4% – 6% commission. Meanwhile, consumers can split their purchases into three equal interest-free payments. Most BNPL apps also help them discover products they like while offering a simple experience that boils down to just 2 – 3 steps. With all of these benefits, “It’s a no-brainer!” as Radek puts it. This simplicity drives the adoption of BNPL, especially in regions like South East Asia, where unlike in Western countries, credit cards aren’t viewed as default forms of payment.
BNPL as an asset class for investors
At its core, BNPL is a series of high-yield loans. By dissecting a $99 transaction paid over three months with a 4% merchant fee, Radek shares that the annual interest rate for this BNPL payment is a massive 50% For reference, in the United Kingdom, the credit card debt comes to approximately 20% per year for a consumer with a mid-range credit score. As such, it’s clear that BNPL is a profitable phenomenon for investors.
According to data from McKinsey, the average BNPL transaction is $136, vs. the average credit card transaction is $1,100 in the USA. But the same data shows that consumers utilize BNPL methods twice as much compared to credit cards. Further, a staggering 87% of them continued to use these methods compared to only 55% for credit cards. So while the individual transaction may be lower in value, consumers utilize BNPL exponentially more than traditional credit cards. Finally, when looking at the net credit loss rates to calculate risk, credit cards came at 4% to 7%, whereas BNPL is at 4% to 6%. Radek added, “In Southeast Asian markets such as Singapore and Hong Kong, the risk is lower with net credit loss between 3% to 4%.”
But the unique factor of BNPL for an investor is the returns they stand to gain potentially. For example, with private label credit card companies in the US, the return on assets is between 3% and 5%. On the other hand, a BNPL company can deliver returns between 25% to 30%. These returns are due to the nature of the BNPL product. It’s a high-yield product with a high asset turnover rate, which translates into high-profitability.”
BNPL companies guide customers to the retailers
The transaction-related revenues of BNPL companies are merely the tip of the iceberg. As we saw earlier, these companies also help consumers find products they want through their apps.
For any sale through these apps, merchants are also willing to share an additional percentage of that sale with BNPL providers. This experience gives the BNPL providers another revenue channel in the form of lead generation fees. Its effectiveness can be seen in Southeast Asia, where the biggest category of goods purchased via BNPL is fashion items. In the USA, fashion retailers are willing to pay a commission of 14% of the cost of goods for sales that come through.
The phenomenon illustrates how merchants are the biggest beneficiaries of the BNPL model. It also highlights the generational shift in consumer spending patterns. “Users of these apps are younger and tech-savvy. So they make more purchases even if, individually, these transactions are low in value. This younger generation also appreciates the simplicity and frictionless approach of Buy Now Pay Later, which is why it’s growing so fast. Particularly in Southeast Asia, there are large populations of young people in countries such as Indonesia, Malaysia, and The Philippines. So there’s room for massive growth.” In emerging markets, BNPL is often the first product that many consumers will use for banking.
How KILDE is helping to invest in BNPL debt
KILDE is a platform for alternative investments licensed by the Monetary Authority of Singapore (MAS). The platform helps individual accredited and institutional investors access alternative income assets with ease. These assets include consumer and SME loans, including BNPL. The company uses data science to identify the best loan originators that produce the highest-quality loans.
KILDE transforms these into investable assets in the form of private bonds with a fixed maturity and return. Investors purchase these bonds and receive monthly or quarterly coupons. In turn, the loan originators get liquidity to continue offering credit to consumers and SMEs. KILDE is already working with several leading loan originators in Southeast Asia.
The Buy Now Pay Later industry offers better returns for a lower risk than traditional consumer loans. Many of these providers are now eyeing riskier customer segments to ensure their continued growth. Yet, Radek remains optimistic, stating, “This risk would be marginal, and we do not think it would make the asset class any less attractive in the short term.”
