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What Is “Buy Now Pay Later” and Could It Approach $4 Trillion By 2030?

What Is “Buy Now Pay Later” and Could It Approach $4 Trillion By 2030?

We’re sick and tired of hearing about “the pandemic” and its variants. But one thing is for sure. It’s disrupted the entire world and affected many industries. One of those industries significantly affected, and continues to be so, is the “buy now pay later” (BNPL) market. Buy Now Pay Later is a type of short-term financing that allows individuals to purchase goods that they otherwise might not afford in a one-time payment. It is a point of sale (POS) installment loan process permitting consumers to buy the products and manage reimbursement. Sounds like a credit card, no? Sort of. But it’s, in reality, much different. BNPL arrangements allow consumers to buy goods on credit and pay for them later, either through regular interest-free installments or after an interest-free period. To put it mildly, the pandemic has made the industry explode. According to Allied Market Research,  “The COVID-19 pandemic has positively impacted the buy now pay later market, owing to growth in penetration of buy now pay later platforms among consumers for purchasing expensive households and other items for general use.” CNBC also says that the BNPL business model has been hugely successful during the pandemic, thanks to “federal stimulus checks, and upended consumer credit markets.” In 2020, the global BNPL market size was valued at just about $90.69 billion. By 2030, it is projected to explode to roughly $3.98 trillion at a staggering CAGR of 45.7%.

Several Catalysts Have Caused the Market to Explode

1. Increased adoption of online payment methods

Thanks to COVID-19, the payment behavior of consumers has changed. According to a ResearchAndMarkets report, nearly 50% of global shoppers used digital payments more than before the pandemic. The majority plans to continue doing so long after the virus is contained. E-Wallets and contactless cards are the top payment methods benefiting from this change, as consumers use less cash and purchase more online. In an international survey cited in the report, close to three-quarters of respondents found that contactless was a cleaner way to pay. Obviously. 

2. Affordable and Convenient

The convenience and affordability of BNPL make it a desirable option to both merchants consumers. Especially when you consider that it is usually interest-free. Instead, a merchant will usually pay a commission fee to the BNPL provider. Not to mention, for both merchants and consumers, BNPL is much more user-friendly. There’s a near real-time, frictionless, and fully digital process. It usually consists of upfront payments (typically 25% of the purchase amount) followed by a predetermined fixed schedule and a small number of installments at future dates. Plus, it’s a lot easier to be preapproved for a BNPL payment rather than going through the arduous process of applying and getting approved for an interest-bearing credit card. The merchant is paid right away by the BNPL provider. Therefore, the BNPL provider takes on risks like liabilities due to fraud, chargebacks, defaulting, and more. No wonder 15% of millennials are using BNPL today, i.e., 5 times more than older generations.
Source: PYMNTS
“This generation likes to buy a lot of things,” said Joseph Flowers to CNBC, a 22-year-old content creator. “I spend a lot of money, and it makes me feel better when I don’t have to pay it all at once.”

2. Rise of Luxury eCommerce

The growth in eCommerce, especially for luxury goods, across the globe, and the rise of BNPL go hand-in-hand. For younger people, BNPL platforms allow them to purchase products in interest-free installments that they otherwise would not be able to afford, like computers and designer clothing. Studies have also shown that when consumers pay in installments, they typically spend more.

What Are The Best Ways To Play This Market?

Affirm Holdings is arguably the purest way to play on the BNPL trend in the public market. Founded in 2013 by PayPal co-founder Max Levchin, it operates a digital and mobile-first commerce platform in the United States and Canada. It includes point-of-sale payment solutions for consumers, merchant commerce solutions, and a consumer-focused app. Its payments network and partnership with an originating bank enables consumers to pay for a purchase over time with terms ranging from one to forty-eight months.  As of June 11, 2021, Affirm reported that it has approximately over 11,500 merchants in its partner network across the United States. It also noted that it had 7.1 million active customers in Q4 2021, up from 5.4 million in the previous period. But based on the summer that the company’s had, these numbers could be primed to skyrocket. After the AFRM stock, along with other speculative plays, took a nosedive from mid-February to mid-May and lost more than half of its market value, its fortunes have dramatically changed.  Based on the following catalysts, the AFRM stock has soared as much as 78.26% since August 2. It is also up another staggering 20% in extended trading after the market close on September 9 following a blowout earnings report.
Source: Stockcharts
  • Affirm’s already had partnerships with giants like Walmart and Peloton. But its announcement last month that it’s teaming up with Amazon to launch the e-commerce giant’s first partnership with an installment payment player could be game-changing. The partnership allows Amazon customers in the U.S. to split purchases of $50 or more into smaller, monthly installments. Shares of AFRM rose as much as 44% on the news. 
  • Announced a partnership with Apple in Canada to launch a “buy now, pay later” program for Apple device purchases. The service will let iPhone, Mac, and iPad buyers in Canada pay for purchases over 12 or 24 months instead of in full at the time of the transaction. Apple told staff it will offer the program interest-free for a limited time after the launch. This will become Apple’s first installment program in Canada in several years.
  • A blowout earnings report that included solid guidance and 71% revenue growth.
Based on these catalysts, credit card companies have to be shaking in their boots. Just look how its performance compares to Visa and Mastercard since July 28, when both credit card giants were at or around record highs.
Source: Stockcharts

Yet, while AFRM is the purest play on the BNPL boom, there are other ways to get involved and monitor the trend too.

International BNPL providers have been looking for ways to disrupt the U.S. market since it is still primarily seen as an untapped and relatively new frontier. Around the same time that AFRM announced its partnerships with Amazon and Apple, Twitter founder Jack Dorsey’s payment processing company Square made a shocking announcement. It declared its intention to buy Australian BNPL giant Afterpay for $29 billion. Square pointed to younger consumers eschewing traditional credit cards. Square CFO Amrita Ahuja said that the company sees the acquisition as an opportunity to create a “more powerful eCommerce platform” that appeases growing consumer interest in “transparent buying opportunities” and offers new ways for merchants to serve their customers. “We see a real opportunity to enable the next-gen consumer that’s looking for different ways and, in this experience, an interest-free way of expanding the purchase potential,” Ahuja added.
Long the face of FinTech disruption, PayPal made the most recent earth-shaking BNPL move. On September 8, the company announced its intent to acquire Japanese BNPL firm Paidy in a $2.7 billion primarily cash deal. It also entered Australia last year, raising the stakes for smaller companies like Sezzle and Zip Co. “The acquisition will expand PayPal’s capabilities, distribution and relevance in the domestic payments market in Japan, the third-largest e-commerce market in the world, complementing the company’s existing cross-border e-commerce business in the country,” PayPal said in a statement. According to the company, the transaction is expected to close in the fourth quarter of 2021. It is also likely to be minimally dilutive to PayPal’s adjusted EPS in 2022.
Klarna is not yet public, but keep your eyes on this company for when it eventually IPOs. There’s no date yet, but it could come by the end of the year. Klarna provides online financial services such as storefront payment options and is one of the world’s leading Buy Now Pay Later providers. It accrued more relevance in a condensed period than even they thought possible and crossed the $1 billion annual revenue threshold for the first time last year. According to Benzinga, based on Klarna’s private funding history amassing $3.1 billion, it could have a $31 billion valuation.
Source: Benzinga
However, based on its most recent funding round, Klarna, as of the end of July, may actually have a $45.6 billion valuation, making it Europe’s most valuable startup. Klarna operates in 17 countries,​​​​ two million transactions go through Klarna a day, and the platform has 90 million active customers. Customers can also use Klarna to process payments on over 250,000 merchant websites.
Avoiding the Credit Cards
As Buy Now Pay Later has gained steam this summer, major credit card companies have fallen under significant pressure. For example, Visa Inc (NYSE:V) has drifted into correction territory since hitting an all-time high in late July.
Source: Stockcharts
Mastercard (NYSE:MA) has also had ups and downs since reaching an all-time high in April and has practically fallen off a cliff since late July as well.
Source: Stockcharts
BNPL firms such as Affirm, and the other disruptors mentioned above, such as Square, Paypal, and the soon-to-be-public Klarna, could take a significant chunk out of the volume of credit card fees charged over the coming years. Even as consumer debt levels could further rise. In a stock market that’s already frothy, the recent downturns experienced by credit card companies are something to take note of. On the one hand, it could be a buying opportunity. On the other hand, investors need to weigh the risks brought forth by disruptive companies involved in Buy Now Pay Later.

Long Term: Is It a Fad, or Will It Eventually Replace Credit Cards?

There are some things to worry about BNPL. There are high late and returned payment fees hampering the growth potential of the market. Data shows that nearly 31% of U.S. BNPL consumers may have made a late payment or incurred a late fee. Additionally, Fitch analysts caution investors that BNPL platforms are relatively unregulated compared to other forms of consumer credit. Plus, while the costs tend to be low, the underwriting process is usually “very fast” and based on “‘soft’ credit checks” rather than more thorough vetting. Fitch also said that most Buy Now Pay Later providers “have not set aside large provisions for losses and report minimal bad debt.” Additionally, those attracted to the small payments and ease of borrowing may be the least financially able to make payments if they suffer a job loss or other economic disruption. Be that as it may, the growth potential for Buy Now Pay Later is undeniable. Could it eventually fully overtake credit cards? The benefits are unquestionably there. But surely, there will be some sort of reckoning in the future, along with growing pains. For now, though, it’s the wild west, with many attractive opportunities for investors to gain exposure to.

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