A payments trend that has taken off in recent years is buy now, pay later (BNPL). Some well-known BNPL services include PayPal’s Pay in 4, Klarna, Affirm, Afterpay, Quadpay and SplitIt, with the number of competitors growing rapidly. Bank of America estimates that the industry segment will reach transaction processing volumes of between $650 billion and $1 trillion by 2025. The most established BNPL service, Klarna, even recently became Europe’s most valuable startup with a funding round that valued it at $45.6 billion. Meanwhile, just this week Afterpay was acquired by payments giant Square for $29 billion.
Also known as point-of-sale installment loans, BNPL is actually an update on the old practice of layaway. The difference is that buyers get immediate access to the product before they have finished paying it off instead of waiting until all the payments are made.
The installments are paid using the customer's bank account, debit or credit card. Payments can be scheduled to be deducted automatically.
Among BNPL providers there are a number of small but important differences. Program features that vary include the length of the loan, payment frequency and the use of credit checks.
There are a number of clear benefits of BNPL to merchants that are fostering its rapid adoption:
The last benefit doesn’t mean that merchants can avoid investing in pre-sale fraud prevention technology and chargeback mitigation solutions. This is because when it comes to “true fraud,” merchants will still suffer reputational damage with customers if the fraud occurs with a transaction at their store. That means merchants may still want to screen BNPL orders for fraud. Separately, there will be the majority of orders that come in that aren’t BNPL and will require robust systems to deal with fraud and chargebacks.
For merchants, the primary downside of BNPL is the cost. While consumers typically pay no interest when they repay their BNPL loans on-time, the loan providers make their money by charging a fee to merchants. That commission usually comes to between 4 percent and 6 percent of transaction value as compared to the 2-3 percent fee charged by payment service providers to process Visa and MasterCard cards. That is a significant difference for merchants’ profit margins!
Despite the high cost of processing BNPL payments, one in three eCommerce retailers are expected to offer some type of BNPL payment plan by the end of 2021. With customers expressing strong interest in point-of-sale financing options it is hard for retailers to ignore the trend in the area altogether.
Right now, there is an ongoing proliferation in the number of BNPL providers with new companies claiming specific niche markets. A great example would be art financing BNPL Art Money.
However, to be successful BNPL services need to attract a critical mass of both merchants and customers. That is why many in the payments industry are predicting that the increase in the number BNPL services will end as a handful establish dominance in the market through merger and acquisitions alongside organic growth.
There have been a number of indications that the market is moving in this direction. For example, Discover’s recent partnership and $30 million investment in Minnesota-based BNPL startup Sezzle. But this week’s $29 billion acquisition of Afterpay by Square, is a key indicator that this is the way forward in this industry.