BNPL: Opening the brackets

07.08.2022 | 11:09 Home / News / Fintech /
#BNPL #Klarna
The global transaction value for BNPL (buy now, pay later) payments reached $100 billion in 2021. BNPL is becoming increasingly popular in Europe, reports.

In European countries, one-fifth of all retailers offer one form or another of BNPL. In Germany, to give one example, half the people that know what BNPL even is, have already used it. In the UK, £4 in £100 is spent using BNPL.

There are three players involved - a consumer, a merchant and a BNPL company.

Customers get the obvious benefit of spreading their purchases across weekly or monthly installments (usually with little to no interest), while merchants get to up their sales through higher conversion rates and fewer abandoned carts. What do the BNPL companies get? A modest percentage of the revenue from each of those purchases, of course.

In fact, recent data suggests that customers spend 55% more when BNPL is available. For consumers the benefit isn’t just that they get to pay for stuff in multiple installments, but that they get to do it without succumbing to other forms of predatory lending (i. e. high interest rates), such as credit cards.

None of this is to say, of course, that you can just buy 150 new pairs of shoes in the space of two months, and then figure out how to pay for them later. That, clearly, wouldn’t be in the interests of neither the merchants nor the BNPL companies. So most BNPL companies have:

- a limit on basket value for interest-free lending,
- a personalized monthly credit limit per customer.

For context, 2020 was a record year for BNPL startups already - raising $1.5 billion worldwide, of which $1.2 billion went to European startups. But that’s nothing compared to Klarna’s $1 billion round a few months ago, or to the fact that in the last 2 months alone, European BNPL startups have raised €900 million. In fact, a recent analysis by Kaleido Intelligence sets the European BNPL market to grow to a grand total of €300 billion by 2025 (30% of the eCommerce market).

While BNPL has lots of positives, it also has many challenges to face before the model reaches mass adoption and/or total domination.

First challenge is regulation. At the EU level at least, it hasn’t been regulated, but instead falls under the Digital Single Market Strategy and the Payments Services Directive. In simple terms, this means that BNPL startups are not considered credit companies like American Express, but instead electronic payment companies, with all the freedoms that implies. But that’s about to change, it seems, because, in part at least, Klarna got big, very big, and that drew regulators’ attention.

BNPL faces many other challenges, some bigger than others. One such challenge is the possibility of customers getting in way over their financial heads, and buying more than they can afford because of how easy BNPL makes it. Overborrowing invariably leads to debt spirals, which mean unpaid installments.

Another challenge on the customer (or even the merchant) side is that, like any other financing vehicle, BNPL are quite open to fraud. The fact that, for example, many of the financing options offered by BNPLs require no credit check makes them very vulnerable to fraud. Yes, the amount per purchase in those cases is small, but scale that enough and suddenly these companies have a very, very big problem in their hands. On the merchant side, there’s nothing stopping merchants from submitting falsified orders and collect payments on the products “sold”, but not actually fulfilled.

Finally there are two other challenges that BNPL companies need to be aware of: competition from within the sector, and competition from without the sector.

The BNPL sector behaves a lot like the winner-takes-all sector that is food delivery, meaning eventually there will be at most 3 players dominating the whole of Europe, perhaps the world. And there’s no guarantee that whoever’s on top now will stay on top ten years from now.

In fact, Klarna’s CEO Sebastian Siemiatkowski recently noted that what worries him most are the “little companies” coming out of smaller markets, and dominating them with an amazing product.

And then there’s the threat from without the sector, meaning legacy companies and tech giants. BNPL startups are against some big players, notable Paypal, American Express, and Amazon, who have already started to offer 0% interest installment payment options in some European Geographies.

While these big-tech companies may be a bit too late in the game to stop the large BNPL players like Klarna, they could very well kill all the minor players.
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