Corporate executives are talking more than ever about “buy now pay later”—the slick digital lending that is a hit with Gen Z and millennial shoppers. The question is whether it will disrupt the $8 trillion credit card industry, and whether these loans will encourage a new generation to borrow more than they can afford.
The phrase “buy now pay later” seldom came up in public discussions with execs until last year. But widespread lockdowns to contain the pandemic likely gave this type of financing a major boost, as it’s designed to fit hand-in-glove with shopping apps and websites. Adding to the momentum (and earnings call mentions), BNPL fintech Affirm joined the public market in January, and PayPal recently started a pay-later service. There were a record 46 mentions in February, according to data compiled by Sentieo, up from zero in April. Companies like Klarna, Afterpay, and Affirm “are well on their way to becoming household names, with new user growth and transaction volume exploding,” according to CB Insights.
PayPal has been talking more energetically about BNPL than just about anyone else, with 12 mentions during the past year. “Buy now, pay later has been a home run launch for us, and we’re going to continue to innovate here,” Jonathan Saul Auerbach, executive vice president at PayPal, said during the company’s investor day last month.
Alexander Lacik, CEO of jewelry seller Pandora, told analysts in February that the company was experimenting with pay-later offerings from Klarna and Afterpay to convert more online visitors into customers. PagSeguro, a São Paulo-based e-commerce company, said it bought a stake in Brazilian BNPL firm Boletoflex. And Oliver Jenkyn, executive vice president at Visa, told virtual conference attendees this month that BNPL “is top of the list of topics, right after crypto, and things that we’re often talking about in settings like this.” He said Visa, which is an investor in BNPL pioneer Klarna, is partnering with providers and offering its own services for BNPL.
BNPL is like a reformatted layaway plan, and it’s a catchall term for two main types of borrowing. One is a point-of-sale loan, in which companies partner with merchants so they can offer financing at the checkout. It’s basically a personal loan with payments spread over months or years. The other is a “pay in four” loan that lets you buy stuff online and pay for it in, you guessed it, four installments. Both types may not have an interest charge if everything is paid on time. Otherwise the interest charge may be a fixed-fee that is shown up front.
Younger, perhaps credit-card shy, generations may be attracted to this kind of borrowing, as it purports to be interest free, and the loans may be quicker and easier to get. “Buy now pay later products especially resonate with young consumers, who, since the start of the pandemic, have contributed to the significant shift in online spending,” Shopify COO Harley Michael Finkelstein said during an earnings call on Feb. 17.
A key question question is whether BNPL leaves consumers, and even merchants, worse off. Some companies say their offerings are more transparent and simple to understand than a typical credit card, which can incentivize consumers to make minimum monthly payments that cause interest costs to stack up.
Even so, Jason Mikula, a fintech consultant who previously worked for startup LendUp and Goldman Sachs, has pointed out that BNPL has commonalities with payday loans: Pay-later financing, like its less reputable cousin, offers loans in small amounts, uses alternative underwriting, often doesn’t report to credit bureaus, and may operate under short timeframes. For merchants, Mikula estimates that BNPL charges could be more than double the 2% to 3% that come with credit card transactions. Consumers can end up with an annual percentage rate (APR) on the loans of around 20%.
In a survey by Which?, a consumer advice service in the UK, about a quarter of respondents said pay-later financing inspired them to spend more than they intended to. Financial watchdogs there are gearing up to regulate the sector more closely. “While the emergence of unregulated BNPL products has provided a meaningful alternative to payday loans and other forms of credit, BNPL also represents a significant potential consumer harm,” wrote Christopher Woolard, who chaired a review for Britain’s Financial Conduct Authority.
In the meantime, competition is exploding, according to CB Insights. While pay-later financing is still a fraction of the $8 trillion credit card industry, the data and analytics company expects BNPL to increase by as much as 15-times by 2025, growing to $1 trillion of annual merchandize volume.
As competition ramps up, a common question from analysts is whether there’s room for multiple BNPL firms. Online retailers may not want to clutter the checkout screen with too many options. And if the services are pretty similar, consumers may not get much from having a bunch of pay-later buttons on the screen. Or as Seaport Global Securities analyst Christopher Charles Brendler said to Affirm: There’s something of a “land grab right now with buy-now-pay-later really taking off here in the US and around the world.” He asked Affirm founder (and original PayPal mafioso) Max Levchin whether there’s room for more than one provider, and what happens to Affirm’s market share when there are two or more.
Levchin responded that, when it comes to payments, there are a handful of networks available at pretty much every checkout—notably Visa, Mastercard, and American Express. Likewise, “the expectation should be that there will be more than one BNPL brand that wins,” Levchin said. “Land grab does not sound especially positive, but I’d like to believe we’re all taking over part of the credit card volume, and that is an enormous chunk of transaction volume, and there’s quite a lot of growth for everyone.”