In the first part of our series on the relatively new trend in online shopping that is “Buy Now Pay Later,” we took a look at the advantages and disadvantages of this phenomenon. In this second part, we will focus on the source of its popularity, the potential it brings for the financial industry, and possible future developments.
Square buys Afterpay for $29 billion
Square inc. a large American financial services and digital payments company just recently bought Afterpay, one of the largest BNPL providers in the world. Jack Dorsey, Co-Founder, and CEO of Square made the following statement regarding the acquisition of Afterpay: “Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.” This acquisition helps illustrate the bright future that is currently being attributed to BNPL. In this article, we will take a look at the potential that BNPL credits or loans bring to investors looking for opportunities in the private debt and consumer debt sectors.
The popularity of online shopping
According to emarketer[1], there will be about 2.14 Billion online shoppers worldwide at the end of 2021 with sales expected to increase rapidly over the next few years [Fig.1]. This development should come as no surprise, with the pandemic having served as a catalyst for online (retail) shopping. Consequently, this raises the question of whether BNPL will continue to be a crucial part of the hype or become just a sidekick.
Rising adoration of social e-commerce
E-commerce revenue in the U.S. is forecasted to grow to almost $1 trillion by 2023 [2]. Additionally, there is also the rising popularity of social e-commerce, which can be seen as an indicator supporting the prolonged potential of BNPL. Social e-commerce can be described as online buying assisted through recommendations on social media by users or influencers. Influencers on Facebook, Instagram, and many other platforms with their word of mouth have a big impact on the behavior of consumers, being able to create a strong shift in the way goods are bought online.
Many influencers already advertise products, brands, and luxury goods. The overlay of those social platforms which they use to promote is very intuitive and easy to understand. As mentioned in the first BNPL article, one of the key advantages of BNPL is its intuitive interface. BNPL is, therefore, able to provide these users that come from social media platforms with the familiar and easy-to-use interface solution they are looking for, allowing for a seamless shopping experience. Adding to this, there is also rising numbers of digital native generations who keep growing into a bigger customer segment.
To them, the simplistic and intuitive nature of BNPL serves as a convincing argument. Many of them may venture into the lifestyle and social media landscapes to make their buying decisions from there on. A buying experience with as little friction as possible will be of advantage to online shops which aim to target these demographics with their products. These developments can be seen as leading to a further blurring of the lines between entertainment, consumerism, and finance. Finally, the portion of products presented by influencers that belong to the luxury segment therefore may be rather expensive. BNPL may therefore offer the sellers of these products access to new customer segments which previously may not have considered the product.
Not just a finance offering
As mentioned above, it’s not only about the BNPL service. For many consumers coming from social media, what counts is not only the product itself but rather the buying experience. Consequently, many big players aspire to become a “super app” such as is the case with Ant Group. Their idea of BNPL is in many ways congruent with Square’s idea behind the acquisition of Afterpay. They want to engage their customers through the entire purchase journey, from pre-purchase to post-purchase [3], and by offering a whole suite of solutions ranging from shopping and payments to banking products and much more.
BNPL in the next years
So is BNPL part of the shopping hype? Looking past data shows a clear trend when it comes to the funding of BNPL businesses. The volume of total BNPL funding has increased by over 734% from 2014 to 2021. Additionally, it is estimated that in 2023, 3% of global e-commerce spending will be through BNPL services. This number is expected to expand by an additional 2 percentage points until 2025. These figures alone show the potential of this new technology and how its chances are perceived by investors. Chances are high that BNPL won't just vanish. There are also promising words from Andrew Lipsman, eMarketer Principal Analyst at Insider Intelligence: “Buy now, pay later is definitely not a fad; it’s here to stay."
As if this wasn’t enough, according to a recent study by McKinsey & Company, Point-of-sale financing, also known as BNPL, is growing faster than other forms of unsecured lending, with this trend likely to continue [Figure 3].
Banks vs. Fintechs
“Fintechs are capturing almost all the value being created in POS financing because banks have been slow to respond. Consequently, banks have lost about $8 billion to $10 billion in annual revenues to fintech.” The above-mentioned study from McKinsey & Company concludes. These banks also lose access to a new acquisition channel, especially for younger people. The BNPL providers like Klarna, Affirm or Heidipay also have a valuable advantage: Unlike banks, they aren’t limited in their choice of consumers by selection methods such as a credit score. Another advantage is that BNPL providers can transform into shopping apps. This means that consumers can access their favorite platforms directly through the BNPL providers app which enables them to not just appear at the checkout. This also allows the inclusion of online retailers which previously would not have had access to this technology.
Potential Investments
We have seen the clear advantages for (online) retailers and websites as well as consumers. So what does this mean for investors? Professionals looking at their options when it comes to consumer debt as an investment tool will find that BNPL financing poses an interesting opportunity. Most financed purchases have a short repayment term, with most installments being paid in 6 months with the maximum being 36 months. Most BNPLs don’t charge interest for these loans if the payment schedule is upheld. This increases the probability of full repayment.
In short, investors are investing in short-term investments with periodic payment tranches that greatly decrease the risk of default. Furthermore, for a professional investor, the investment is more akin to that invoice financing. As the sale is made, the BNPL provider charges the seller a percentage of the sale price and immediately reimburses them for the sale. When the consumer now makes payments these will not only cover the principal paid to the online business but also serve to give interest on the amount loaned. Regarding diversification there is also a huge advantage: The system diversifies itself by providing the BNPL service to a large number of different people of different ages, incomes, locations, and other demographic aspects.
[1] https://www.emarketer.com/topics/industry/ecommerce-retail
[2] https://www.amount.com/blog/buy-now-pay-later
[3] https://www.mckinsey.com/industries/financial-services/our-insights/buy-now-pay-later-five-business-models-to-compete
