The BNPL Phenomenon

As buy now, pay later payments continue to garner consumer and merchant attention, what is driving the trend? And does it have staying power?

Buy now, pay later services may have gotten a huge boost from the boom in e-commerce sales because of the Covid-19 pandemic, but as these effects begin to dissipate, BNPL shows no sign of retreat.

The very opposite is happening. More merchants are adding BNPL as a payment option. And BNPL is spreading beyond apparel and general retail to travel, home furnishings, pets, and more. And consumers continue to try it.

In one example, 12.8% of consumers surveyed by DealAid, a Toronto-based online shopping tool, said they used BNPL during the 2020 holiday-shopping period, with 13.7% indicating they intended to use it in 2021. Their average spend also is expected to increase to $279 for the same period this year, up from $260 last year.

Buy now, pay later typically splits a transaction into four equal payments, usually at no interest, though some providers assess interest and may offer longer payment terms.

Here’s a rundown of what’s happened just in the past year: Visa Inc.’s integrated code for BNPL launched; Amazon.com Inc. signed Affirm Inc. to provide a BNPL option on its site; Discover Network invested in Sezzle Inc.; a new player, Zilch Ltd., from the United Kingdom, entered the U.S. market; and commerce platform Shopify Inc. made Affirm available to its merchants. Apple Inc. has even been rumored to be considering a BNPL option. This is just a sample of the BNPL activity. There are no signs it is slowing down.

In the past year, the biggest change is the number of providers, coupled with how quickly consolidation happens, according to Sheridan Trent, research analyst at The Strawhecker Group. Strawhecker is an Omaha, Neb.-based payments advisory firm.

Affirm acquired rival PayBright Inc. in December and Alliance Data Systems Inc., long known for private-label credit card programs, purchased Lon Inc., which did business as Bread. And in August, Square Inc. said it would shell out $29 billion for Afterpay Ltd.

Investors also like BNPL prospects. Klarna AB solicited $1 billion in funding this spring. It says more than 250,000 merchants offer Klarna and it has 90 million active customers.

‘Consumers Love It’

How big could BNPL become? Very big. The installment-payment option for online and in-store payments could reach $1 trillion in U.S. volume by 2025, or between 10 and 15 times the current level, according to a report released by CBInsights, a New York City-based financial-services research firm.

Though BNPL is a relatively new payment option, it is maturing quickly, Trent says. New players need to have some infrastructure or something unique to distinguish themselves, she says.

That’s where incumbents, such as PayPal Holdings Inc., may have an edge. Its Pay in 4 product launched in 2020, and already has processed more than $3.5 billion in total payment volume, with more than $1.5 billion of that in the second quarter alone, says Greg Lisiewski, PayPal’s vice president of global pay later. “More than 7 million consumers have transacted more than 20 million times with our buy now, pay later product,” Lisiewski says.

“PayPal is an interesting case,” Trent says. In 2008, PayPal acquired BillMeLater, a similar BNPL service that extended credit lines, and later rebranded it as PayPal Credit.

“As with anything, timing is everything, and BNPL met the perfect timing with the pandemic as consumers wanted to spread out purchases into predictable payments, while merchants sought new ways to convert sales,” Lisiewski says. “Once that habituation was created, consumers became very comfortable with this way to pay and now expect it wherever they shop.”

Others echo that. “Consumers love it because it’s completely free when they pay on time, and unlike traditional credit products, they can never revolve a payment or fall into extended debt,” says Zahir Khoja, general manager of Afterpay North America. Square’s acquisition of Afterpay is expected to close in the first quarter of 2022.

“Afterpay also is a clear win for merchants,” Khoja adds, “as they can offer their customers payment flexibility without requiring them to enter into a traditional loan or pay interest.”

Merchants are adding the payment option fast. As various BNPL providers tout the number of merchants coming onboard—Afterpay counts approximately 100,000 globally and PayPal says 650,000 merchants have customers that use its BNPL service—the ways to capture the attention of consumers is evolving.

Fine-Tuning BNPL

One key area is how BNPL providers reach consumers. “All retailers want access to this demographic,” says Conor Ryan, chief information officer and cofounder of StitcherAds. StitcherAds specializes in advertising programs on four social media networks. Its ads for retailers include a product and can promote a BNPL option.

“We sit at the point of convergence,” Ryan says, “where we enable the retailer to automatically communicate the buy now, pay later installment options in their ads.” Of StitcherAds’ four offices, two are in the United States, with one is Ireland and another in London.

Retailers are scrambling to get their products in front of consumers. That’s especially important as the value of instant gratification has increased. A consumer may use Google to search for a restaurant that offers a vindaloo curry dish, learn one is a quarter-mile away, order the dish, and walk over to get it, Ryan says. “That kind of instant gratification has been enabled by technology.”

These kinds of expectations are bubbling into other purchasing behaviors.

It’s something StitcherAds is trying to achieve in its ads for retailers to get to frictionless buying. A Google search may produce a retailer’s Web page that could include a BNPL option. A consumer may be able to determine from the product page that he can afford the purchase spread over four installments. Can the consumer afford that day’s installment amount? If the answer is yes, “I [can] worry about the … the next installment in two-week’s time,” Ryan says.

Like so many matters pertaining to e-commerce, personalization is key in BNPL advertising. StitcherAds can fine-tune the presentation of an ad to the point of distinguishing whether a consumer has used a BNPL option, which is especially beneficial if a retailer offers more than one such option.

“We’re being extra specific in our audience segmentation,” Ryan says, “where somebody who previously paid with Afterpay on the site, they would see the Afterpay installment option and vice versa for a Klarna customer.”

One Is Not Enough

In the long run, advertising may prove vital to the success of a BNPL provider, suggests Dan Perlin, managing director of RBC Capital Markets’ coverage of payments processing and IT services. RBC Capital Markets is the equity research arm of the Royal Bank of Canada, Toronto.

“Whoever has the best advertising and lead-generation algorithm will be the one that can drive continued incrementality,” Perlin says. The good news for the business is that Perlin suspects many retailers may want more than one BNPL provider. “I don’t think retailers will want five of these things on their landing pages, but they may want two of them. Exclusivity is not where this goes in five years.”

The BNPL payment option may evolve and perform like a store card traditionally has, with the credit add-ons, he says. “My view of BNPL as an overarching start is, it is a good substitute product for private-label credit,” Perlin says.

The logic behind that point of view starts with acknowledging that traditional private-label credit is not too dissimilar from general purpose credit, which can be used at any merchant, and not just one particular store. With the private-label option, the retailer creates a cycle where it goes after the consumer who has an affinity to that store, enjoys the loyalty program, and may not have good enough credit for a general-purpose card, he says.

“The point being, [private-label credit] drove incrementality and had a marketing and lead-generation angle to it,” Perlin says. “The BNPL providers are saying a lot of the same things.” With BNPL, he says, merchants can increase basket size and get SKU-level data. “It’s all about lead generation for the merchant,” he adds.

It’s not surprising merchants are using BNPL to target consumers with a specific affinity or product ambition, he says. What BNPL brings to bear that private-label card programs do not is ubiquity. Purchases made with a BNPL option are spread across the retail spectrum with an improved consumer interface, Perlin says.

BNPL provides an opportunity to open the purchase funnel, expanding the ways different consumers can complete transactions. Longer term, lead generation and advertising will grow in importance, Perlin says. “They will have to be very sophisticated with their advertising. That level of sophistication will ultimately start to steer the consumer.”

As an example, Afterpay in August launched Afterpay Ads, a suite of products to help brands reach high-intent and loyal shoppers in the Afterpay network. Merchants can place ads in the Afterpay app.

As for Square’s pending Afterpay acquisition, Perlin says it is a competitive necessity. “They needed something that would enable them to connect the seller and Cash App ecosystem,” he says. In September, Square took the first step with the debut of Cash App Pay, a service that enables consumers to pay merchants in person and online using their Cash App balances.

‘A Subscription Lifestyle’

BNPL providers are banking on younger consumers who may sidestep traditional credit products. “Generation Z and Millennials are increasingly credit averse—wary of high interest and revolving debt cycles—and favor debit cards,” Afterpay’s Khoja says. “They want to use their own money instead of turning to expensive loans or credit cards, but still want and need the flexibility of being able to pay over time afforded by traditional credit.”

Already, consumers expect to have BNPL options when they shop. “Additionally, younger consumers like Millennials and Gen Z are used to a subscription lifestyle, where they pay $10 a month to access their music or $15 a month to access movies,” PayPal’s Lisiewski says. “BNPL is very similar in that each payment is a fixed amount over a fixed period of time, so younger shoppers are accustomed to this way to pay.”

Though PayPal doesn’t disclose how its users split Pay in 4 transactions between credit, debit, and bank account, Afterpay says nearly 90% of its transactions are made with debit cards globally. Consumers currently cannot use a PayPal balance for Pay in 4 repayments.

BNPL providers also expect younger consumers as they age to continue to favor the payment method. “It’s the preferred way to pay for Gen Z and Millennials, and as this generation matures and their spending power grows, so will the use of BNPL as a primary form of payment,” Khoja says.

“Considering that BNPL has been around in a digital form for more than 10 years already—and longer if you consider non-digital forms of buy now, pay later programs—there is a long road ahead for pay-later offerings,” Lisiewski says. “This is especially true when you consider companies that are adding BNPL to their core competency, as we are at PayPal. We are a payment processor that offers pay-later solutions. We don’t charge merchants for that service as it is built into our processing contract with the merchant.”

But will BNPL eat into traditional credit card transactions?

“The BNPL solution can very much survive and live freely in the wild with revolving credit,” Perlin says. “There may be some cannibalization, but that will be more prevalent around private label at least in the early days.”

The upshot is that buy now, pay later is now a fixture of the payments industry, Trent says. In a Strawhecker survey from earlier this year, the 60% to 70% who said they had used a BNPL service also said they used credit cards, she says. “A lot of them said they were using credit cards concurrently with BNPL. There’s been a real gravitation to it for consumers,” she adds.

“You can already see a lot of specialization,” now, Trent says, recounting how her veterinarian offers it as an option and travel companies have adopted it.