How "Buy Now Pay Later" Companies are Reinventing Consumer Credit

Person holding a phone making an online payment

Buy now pay later companies, a niche within the fintech space, are emerging as a red hot target for investors — and a lucrative opportunity for existing financial incumbents. 

The concept behind buy now pay later (BNPL) is simple: giving e-commerce shoppers an alternative way to purchase goods without having to rely on credit card debt. BNPL companies allow consumers to pay for goods in installments. For instance, a consumer might use a BNPL service to pay for a $400 television over several months, paying in $100 tranches. The mechanism is similar to paying a mortgage or over time, but on smaller-ticket items and without bruising interest rates. 

The pandemic and widespread pivot to online shopping have hastened the growth of BNPL. Affirm (AFRM), a U.S.-based BNPL company founded by PayPal (PYPL) alum Max Levchin, nearly doubled its revenue last year from $264.4 million in 2019 to $509.5 million in 2020. The company went public in January and today is valued at around $20 billion. Earlier this week, Klarna, the leading BNPL company in Europe, raised $1 billion in private funding at a $31 billion valuation, becoming Europe’s most valuable startup.

“BNPL is broadening financial inclusion by providing meaningful benefits to consumers and businesses accepting these forms of payment,” said Brad Paterson, CEO of Splitit (STTTF), a smaller player in the BNPL space. According to a recent news release, Splitit’s revenue grew 300% last year to $8.4 million, and the company entered into partnership agreements with high-profile companies like Stripe, Visa (V) and Mastercard (MA).

Splitit’s gangbusters 2020 mirrors the extraordinary growth of other lesser-known BNPL providers, such as Australia’s Afterpay (AFTPY), Minneapolis-based Sezzle, and New York-based Quadpay. “For businesses, offering a BNPL option increases cart conversion as well as average order value,” said Paterson. “For consumers, it’s a great way to purchase the items you need, to manage surprises and also obtain the things you aspire to own by paying over time.”

Indeed, the advantages of BNPL over credit are many and compelling.

First, most BNPL service providers make money by charging a commission to merchants they partner with, rather than tacking on costs to the consumer. Consumers are sick of drowning in credit card debt and compounding interest; BNPL’s focus on low-interest or interest-free installments is a viable and attractive alternative. In fact, nearly 40% of BNPL shoppers said that avoiding credit card interest payments drove them to try BNPL, according to a recent survey conducted by Motley Fool.

Second, BNPL is geared around online shopping, which increasingly looks like the future of commerce. BNPL service providers appear as little widgets next to online shopping carts and on checkout pages, offering consumers an easy, one-click option. In a world where e-commerce is dominant, BNPL is well suited to thrive.

Third, younger Millennials and Gen Z shoppers are reluctant to spend on credit. Only 30% of Gen Zers have a credit card, according to a recent Experian study. Further, the fact that young consumers are so accustomed to digital-native experiences means they’re likely to take to BNPL’s sleek widgets like fish to water.

With industry momentum and demographic trends behind them, BNPL upstarts’ biggest concern may be the financial giants with their own BNPL initiatives. In 2020, PayPal introduced its new “Pay in 4” BNPL product. American Express rolled out its “Plan It” installment service. And both Mastercard and Visa formed partnerships with payments companies to introduce BNPL services.

Amid the fintech frenzy, BNPL companies have carved their own space. But they will need to double down on innovation to fend off the incumbents.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

John Hyatt

John Hyatt is a freelance journalist covering financial services, market structure, stocks and IPOs, and private equity. Prior to entering journalism, John worked in public relations for clients in financial services, investment management, fintech and cryptocurrency. John is currently receiving his M.A. in business and economic reporting from NYU as a Marjorie Deane fellow.

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