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London streets are full of shoppers now. The recent pandemic lockdowns in the UK and other nations had a devastating effect on bricks and mortar retail. But as consumers were forced to stay at home online shopping surged. And that only accelerated the already growing popularity of buy now, pay later, or BNPL.
BNPL allows consumers to make purchases and pay for them over several instalments. Typically, that’s across a couple of months. Or they can delay payment, normally for a month, so that they can try before they buy. If repayments are made on time there’s no interest charged. Lenders instead make money on the fees levied on retailers. For their part merchants generally benefit from increased conversion rates and higher order values.
BNPL fintech services have become seamlessly integrated into many online shopping platforms. They’re especially popular with millennial and Gen Z consumers. In the US, clothing and furniture were particularly big sellers during the pandemic.
A major strength of many BNPL apps is an easy to use, intuitive interface. It seems like, really, the key difference between your bank and your buy now, pay later is the shiny app on your phone.
Yeah. If you think of the apps on your phone, the banking app is probably the worst app you have. It’s pretty slow, a bit clunky, often has downtime. And if you contrast that with the apps of firms like Klarna, they’re very slick. Like, you’re making seamless decisions. They’re showing you things you like. And it’s almost like they’re like the Instagram of banking.
The value of the global BNPL market was estimated at $120bn in 2021, up from $33bn in 2019. But with shoppers back on the high street, the outlook for BNPL providers in the year to date has declined dramatically. For example, in the US, Affirm is a major player. In 2020, its most important merchant partner, accounting for about 30 per cent of its revenue, was home fitness company Peloton, whose popularity rocketed during the Covid-19 crisis.
I could even do this forever.
Many new subscribers bought a luxury Peloton bike using buy now, pay later credit offered by Affirm. Affirm started publicly trading on the Nasdaq in January 2021, but after reaching almost $50bn in market cap last November, it lost approximately 90 per cent of its valuation by July – a post-pandemic trend shared by its e-commerce competitors.
Pre-pandemic in the UK, the percentage of e-commerce as a total of retail spend was about 19 per cent. And then during the pandemic, when the first lockdown hit, it went all the way up to 38 per cent in January 2021. It’s declined massively now, with the worsened economic conditions. The fact that people are now spending more in a physical environment where buy now, pay later doesn’t really translate as convenient as it is online. I think that’s kind of why things have changed.
Swedish firm Klarna is a BNPL giant and was once Europe’s most valuable private tech company.
Good to see you again.
However, a recent funding round saw their valuation drop from $46bn in 2021 to less than $7bn. And losses quadrupled in the first half of this year.
What we’ve seen is investor sentiment has shifted from a drive towards hyper-growth that we’ve seen over the past couple of years more towards profitability. We’re now at over 150mn consumers globally. We’re in a position now where we can just move that balance between growth back towards profitability. And that’s going to be our focus. It doesn’t change our ultimate goal to disrupt retail banking. It’s just a change in the journey to get there in the near-term, given the external factors that are impacting all companies right now.
Chief among those external factors right now is the cost of living crisis, which has seen food and fuel prices soar worldwide, alongside associated rising inflation. In turn, that’s heightened the concerns consumer groups, already critical of the way some BNPL providers operate.
We found 1 in 12 people who’ve used it used it to buy basic essentials like food or toiletries and often then do end up struggling. So somebody that we helped recently, a pensioner, who’d borrowed £40 to make the food shop – and in her words it was buy now, pay later or starve. So she used it, then is struggling to repay, although she’s still being bombarded with offers to borrow hundreds more.
And what we’re really worried about is, with the cost of living crisis raging we’re going to see people in desperate situations seeing this unregulated form of credit as the answer.
Unlike some other forms of lending, BNPL, in the UK at least, has until now been unregulated. But that will change, following a report published by the Financial Conduct Authority in 2021.
The report called for regulation as a matter of urgency. What urgency means is up for debate. Legislation is only likely to come into effect by 2023 at the earliest – a time frame not helped by political upheaval in Westminster.
An array of institutions have launched BNPL products in recent years, with even tech giant Apple joining the fray. However, Klarna at least remains optimistic about further growth.
In the UK right now, buy now, pay later represents roughly 5 per cent of payments in the e-commerce area, sector. That compares to, say, credit cards, which is closer to 30 per cent. So from our perspective, actually, the competition remains credit cards and the shift there, rather than against other buy now, pay later providers in the sector.
If many investors don’t currently share Klarna’s bullish outlook for buy now, pay later as a consumer service, there does seem to be far more enthusiasm around BNPL in the business-to-business space. There’s a wave of new companies emerging across Europe, including Hokodo in east London.
If you think of the dynamics of B2B trade, it’s fundamentally unfair. Let’s imagine that you’re a farmer and you sell to a supermarket. Your buyer, the supermarket, is likely to impose 60-day credit terms on you. And reciprocally, if you’re purchasing your own ingredients – let’s say manure or seeds, whatever – your supplier is likely to demand upfront payment from you. Because you’re the small player. So if you can bring a solution to alleviate the liquidity pressure points throughout the supply chain and bring trade credits to people who actually deserve it, we’re actually going to create a more fluid economy.
Hokodo is just one of a number of BNPL start-ups specialising in B2B that have raised significant amounts of VC funding.
When you think of B2B trade, it’s humongous. It’s actually about two to three times as large as B2C. So in the six markets where we operate, B2B trade is worth $12tn.
BNPL in the B2B space does have similarities to existing supply chain financing. And following cases, like the Greensill Capital collapse, just like B2C a certain caution and future regulation might be needed for the B2B sector. As the BNPL market continues to evolve, the remarkable growth in the consumer sector may have cooled. But it could be businesses that prove to be BNPL’s most lucrative clients.
