Buy Now, Pay Later: The “New” Payments Trend Generating $100 Billion In Sales

OBSERVATIONS FROM THE FINTECH SNARK TANK

Buy Now, Pay Later (BNPL) providers like Affirm, AfterPay, and Klarna generated a lot of press over the past year as consumers looked for ways to make it easier to buy what they wanted without incurring more credit card debt. Recent developments include:

• Amazon and Affirm partnered. Amazon shoppers will be able to split purchases of $50 or more into smaller, monthly installments. Affirm said some loans will come with 0% APR, while others will bear interest.
• PayPal will stop charging late fees on BNPL payments. Since its launch, more than 7 million consumers have used PayPal’s BNPL service, purchasing more than $3.5 billion of products.
• Square acquired AfterPay. The deal will bring AfterPay’s merchant relationships into Square’s seller ecosystem and help to convert AfterPay’s existing customer base into Cash App users.
• Apple announced a BNPL offering. Apple Pay users will be able to make interest-free BNPL purchases, choose any credit card to make the payments, and avoid late and processing fees with certain plans.

Buy Now, Pay Later to Reach $100 Billion in 2021

The percentage of Gen Zers in the US using BNPL has grown six-fold from 6% in 2019 to 36% in 2021. Millennials’ use of BNPL has more than doubled since 2019 to 41%. Gen Xers’ adoption more than tripled, and even Boomers are getting into the act.

Overall, consumers will make nearly $100 billion in retail purchases using BNPL programs in 2021—up from $24 billion in 2020, and $20 billion in 2019.

Buy Now, Pay Later Changes the Customer Experience

Observers on social media and blogosphere claim that “BNPL is here to stay.”

That’s an odd perspective because BNPL—also known as installment payments and point-of-sale financing (POSF)—has been around longer than some of the observers.

What’s different—and important—about today’s buy now, pay later service is its place in the customer journey.

Traditionally, installment payments, POSF, BNPL—whatever you call it—was an option at checkout (i.e, the end of the customer journey). Today, BNPL influences consumers’ choices of products and providers (i.e., earlier in the journey).

Payments: The 5th P of Marketing

Students of marketing learn about the 4 Ps of Marketing: product, place, price, and promotion. According to the 4 Ps creator Northwestern professor Philip Kotler:

“The marketing mix is the set of controllable variables that the firm can use to influence the buyer’s response. The four variables help a company develop a unique selling point as well as a brand image.”

Payments have become an important element of the selling proposition and should be considered the 5th P of marketing. or example, by varying payment terms—for example, spreading payments for a purchase over a period of time—marketers can influence consumers’ likelihood to buy.

As merchants experiment with surcharges on card-related payments, do they run the risk of decreasing sales or average transaction sizes? Do they risk losing sales to merchants who don’t surcharge on card transactions?

If the answer to these questions is yes (and BNPL providers claim it is), then BNPL (and payments overall) are an element of the marketing mix for marketers to leverage.

The Future of Buy Now, Pay Later

To succeed and differentiate, BNPL providers will:

• Become shopping destinations. Afterpay, for example, announced that it will enable its merchant partners to advertise on the BNPL firm’s app to boost their promotions, products, and offers. Brands will be able to choose the products they want to promote via sponsored listing formats, and pay only when a shopper engages with the ad.
• Sharpen their sales attribution claims. BNPL providers claim that they help merchants make sales that wouldn’t have been made otherwise. Sound familiar? Visa and MasterCard made the same claims about credit cards they were launched. Today’s merchants will demand accurate attribution statistics.
• Specialize. BNPL providers will need to be masters of the customer journey. Few (if any) will be able to do that in more than just a couple of product categories resulting in specialization by product category. This is already happening with BNPL specialists like LoanStar Technologies in home improvement and Prima Health Credit in elective medical procedures.

Standalone BNPL Providers Won’t Last Long

Why does Square need Afterpay’s app to enable merchants to advertise when it has broader reach than Afterpay does? Answer: It doesn’t. Expect Afterpay’s app to be embedded into and absorbed by the Square app after the acquisition is complete.

As Afterpay gets absorbed into Square, its payments will increasingly come from within the Square network, not the traditional payment rails. Other BNPL providers will have to find similar paths in order to keep up with the margin improvements Afterpay will realize.

Same with Amazon and Affirm. The giant retailer is partnering with Affirm—instead of acquiring the company—in order to test the impact that BNPL can have on sales. If it’s positive, they’ll acquire Affirm or build their own BNPL capability.

This is not to say that with their lofty valuations, some BNPL providers—Klarna is a good example—won’t be acquirers themselves. Why? Because a BNPL offering—by itself—is only part of the value chain (or customer journey).

To maximize the value of buy now, pay later, it must be integrated with the other elements of the marketing mix—that is, become the 5th P of marketing.

The Downside of Buy Now Pay Later?

BNPL has its detractors, however. Consumer advocates criticize BNPL programs for encouraging consumers to take on debt they might not be able to afford:

“There is a risk that BNPL schemes may attract people who are already in financial difficulties and may be struggling to make their existing bills and payments.”

There is evidence of that. Among BNPL users, 31% consider their financial health to be “dire” or “struggling” (versus “managing” and “thriving”). In contrast, of consumers who don’t use BNPL services, just 20% rate their financial health as dire or struggling.

Other warning signs support the critics’ claims:

• Over the past two years, 43% of BNPL users made late payments. Two-thirds of them, however, said it was because they lost track of when the bill was due—just a third blamed it on not having the money to pay the bill.
• More than half of BNPL users had their credit card limits decreased in 2020. This likely led to some consumers using BNPL programs.

Detractors’ warnings won’t slow the growth of BNPL any more than their warnings against the dangers of using credit cards have had on the growth of that product.

Can Banks Battle Back?

For now, the majority of BNPL purchases are paid with either a debit or credit card. So, if banks don’t get their money upfront (i.e., at the time of transaction), they get their interchange fee when the BNPL players get paid.

That won’t last.

Merchants have two things in common: 1) They’ll do anything to make a sale, and 2) They hate (with a passion) interchange.

If merchants can reduce interchange fees by driving purchases from debit and credit cards to other forms of payments, they’ll do what they can to make that happen.

As Buy Now, Pay Later providers collect more data about consumers’ shopping and buying behaviors, they will become better partners to merchants than the banks and payment networks are.

The long-term impact on banks: Less interchange revenue and customer engagement.

The clue to what banks can do to fight back comes from the number of BNPL users who were late on a payment because they lost track of when the bill was due. Banks can fight back by helping consumers better manage their money.

That will be a tough challenge for banks that see themselves as product (e.g., checking account, savings account, loan) providers and not service (i.e., advice, guidance, monitoring) providers.

My bet: Banks will fight back from a regulatory perspective focusing on the alleged downsides of BNPL and the “risks” it presents to consumers. I don’t think they’ll win that battle.