How ‘Buy Now, Pay Later’ Businesses Are Reinventing Consumer Credit

BNow You Pay Later Businesses, a niche in the fintech space, are emerging as a hot target for investors – and a lucrative opportunity for existing financial operators.

The concept behind Buy Now Pay Later (BNPL) is simple: providing e-commerce buyers with an alternative way to purchase goods without having to go into debt on their credit cards. BNPL companies allow consumers to pay for their goods in installments. For example, a consumer can use a BNPL service to pay $ 400 for a television set over several months, paying in increments of $ 100. The mechanism is similar to paying off a mortgage or over time, but on lower priced items and without crushing interest rates.

The pandemic and the widespread hub of online shopping have accelerated BNPL’s growth. To affirm (AFRM), a US-based BNPL company founded by PayPal (PYPLalum 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 is today valued at around $ 20 billion. Earlier this week, Klarna, the leading BNPL company in Europe, raised $ 1 billion in private funding at a valuation of $ 31 billion, becoming the most valued startup in Europe.

“BNPL is expanding financial inclusion by providing significant benefits to consumers and businesses that accept these forms of payment,” said Brad Paterson, CEO of Splitit (STTTF), a smaller player in the BNPL space. According to a recent press release, Splitit’s revenue grew 300% last year to $ 8.4 million, and the company has entered into partnership deals with leading companies like Stripe, Visa (V) and Mastercard (MY).

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

Indeed, the advantages of BNPL compared to credit are numerous and convincing.

First, most BNPL service providers make money by charging a commission to the merchants they partner with, rather than adding costs to the consumer. Consumers are tired of drowning in credit card debt and compound interest; BNPL’s focus on low interest or no interest payments is a viable and attractive alternative. In fact, nearly 40% of BNPL buyers said avoiding credit card interest payments prompted them to try BNPL, according to one. recent poll directed by Motley Fool.

Second, BNPL revolves around online shopping, which is increasingly akin to the future of commerce. BNPL service providers appear as small widgets next to online shopping carts and on checkout pages, giving consumers an easy one-click option. In a world where e-commerce is dominant, BNPL is well positioned to thrive.

Third, young Millennials and Gen Z shoppers are reluctant to spend on credit. Only 30% of Gen Zers have a credit card, according to recent Experian to study. Plus, the fact that young consumers are so used to native digital experiences means they are likely to adopt BNPL’s stylish widgets like fish in water.

With the industry momentum and demographic trends behind them, the biggest concern for newcomers to BNPL might be the financial giants with their own BNPL initiatives. In 2020, PayPal presented its new BNPL product “Pay in 4”. American Express has rolled out its “Plan It” payment service. And Mastercard and Visa have formed partnerships with payment companies to introduce BNPL services.

In the midst of the fintech frenzy, BNPL companies have carved out their own space. But they will have to redouble their efforts to innovate to push back the incumbent operators.

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

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