As popular as 'buy now/pay later' is, there's much room to grow

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Investors are flocking to point of sale credit firms, which have emerged as a popular option during a time of economic stress. And market dynamics suggest more upside even as traditional payment competitors enter the fray.

For example, Worldpay estimates BNPL as a percentage of overall e-commerce has more than doubled in the past two years, but is still less than 2% of the e-commerce market. Additionally, the three fastest growing countries for BNPL — the U.S., U.K. and Australia — are all huge e-commerce markets, but each owns less than a 10% share of the global BNPL market.

That market momentum comes as Affirm plans an IPO that could be worth more than $10 billion, and rival Klarna is also reportedly prepping a public listing. Klarna would not comment on its potential IPO, but spokesperson Naomi Pickens said the service has added "hundreds" of retailers in recent months.

"Many consumers today, particularly Gen Z and millennials, want more flexible payment options beyond traditional credit cards," Pickens said in an email. "They're also more digitally minded and prefer to shop online or via mobile. Customers can shop through the Klarna app at any online store, and it can also be used to make payments."

About one-fifth of consumers in Germany and Australia use BNPL, but only 1% of e-commerce payments in the U.S. use BNPL, according to Worldpay.Klarna has recently drawn investment from Ant, and faces increased competition from not only Affirm, but also banks such as Australia's NAB and Commonwealth banks, which have introduced no-interest credit cards to counter BNPL. Mastercard has also recently partnered with TSYS to offer installment payments, and PayPal this fall introduced its own service, called Pay in 4.

These moves have increased competition for the product, and it comes as demand for alternative credit increases. Klarna commissioned research from OnePoll that found that nearly three quarters of shoppers have become more budget-conscious during 2020.

BNPL services usually include fixed installment payments without compounding interest, which is often easier for consumers to understand. That said, BNPL is still debt, and has drawn the attention of regulators in Sweden who sought to encourage other payment options.

"The growth of [BNPL] is driven by consumer demand to obtain financing for larger purchases instead of using their payment cards and also by the advent of technology that enables near-real-time authentication and authorization of a credit transaction on the fly," said Thad Peterson, a senior analyst at Aite Group, adding there is some anecdotal evidence that the increase in BNPL over payment cards during the pandemic was driven at least in part by consumers’ desire to keep their credit cards' outstanding balances low in case they needed the funds for an emergency.

In an earlier interview with PaymentsSource, Alex Fisher, vice president of retail for POS credit firm Afterpay, said BNPL has become a budgeting tool, and that repeat customers are increasing, suggesting faster growth as more users come into the market and subsequently boost their usage of BNPL.

"We're seeing accelerated momentum of this trend as consumers have shifted more to online shopping, and retailers have also pivoted to their e-commerce channels, during the course of the pandemic," Klarna's Pickens said. "As more consumers expect more choice and flexibility in how they pay, it's more important for retailers to include BNPL options."

There are different models for BNPL, including deferred payments or Splitit's model, which is more closely tied to the credit card. Splitit takes the installment payments from the consumer and a fee from the merchant. The different model "provides unique value to consumers based on their appetite to use credit and the value of the transaction," Peterson said.

While BNPL is a product of the current financial crisis, the economic downturn does carry potential downside for BNPL, as it does for any product.

"The only risk to the category would be a significant economic downturn," Peterson said. "Historically, consumer lending has been one of the first types of credit to encounter problems in a significant downturn. It remains to be seen if the latest crop of BNPL providers encounter the same challenges."

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