How “Buy Now Pay Later” Companies are Reinventing Consumer Credit
Buy now pay later companies 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 consumers, the appeal of BNPL arrangements is obvious: users are able to buy what they need without having to shell out the entire cost upfront, and instead, pay in installments over a certain period of time.
These payment options are designed to be super convenient with streamlined sign-up and checkout processes to minimize friction. In Southeast Asia, where smartphone penetration is high and the population young, providing superior digital-first experiences has become an imperative for merchants.
By leveraging the huge amount of data they collect from customers, BNPL providers are able to not only give merchants the ability to run marketing campaigns that are more effective, but they also help customers to filter through the noise, really focusing on proposing the products that they like, increasing customer satisfaction.
The pandemic and widespread pivot to online shopping has 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.
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.
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.
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.
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.
