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Embedded Finance continues to be an area of focus across the payments industry and with our clients. Providing a range of payment and financing options at the point of sale (POS), be it online or in-store, is increasingly expected by consumers. In this article, we argue that despite facing macroeconomic headwinds, Buy Now, Pay Later (BNPL) still has considerable scope for growth. 

Offering consumers finance, either at online checkout or in-store at a point-of-sale (POS), has grown rapidly over the last few years. BNPL enables consumers to split a purchase into a small number of instalments (typically three), providing a short-term, interest-free loan that is often repaid in monthly instalments, with the first taken at the point of purchase. BNPL has emerged as an effective alternative to other forms of credit, particularly credit cards.

With regulators taking an increasing interest in BNPL, and powerful banking groups such as HSBC and Santander entering the market, new providers are facing shrinking profits and valuation pressures, which is leading some to speculate whether the BNPL boom in coming to an end. With consumer adoption growing rapidly following the recent entrance of Apple to the sector, we don’t believe so – and argue below that whilst some turbulence is coming to the sector, BNPL will mature into a mainstream form of finance.

1. The product is popular with consumers and merchants 

There are many reasons why BNPL is popular with consumers. Firstly, it democratizes credit, making it accessible to generations traditional banks have mostly deemed uncreditworthy (Gen Z/Millennials). Many young consumers have insufficient credit history to receive credit card approval. BNPL’s “soft” credit checks undertaken on a purchase-by-purchase basis circumvent this, and crucially, they do not impact individuals’ credit score.1 Its simplicity and user-friendly nature makes it far more compelling to customers than credit cards. 

Additionally, it enables shoppers to purchase goods they could otherwise not afford. According to Cardify’s recent survey, two-thirds of respondents reported spending on items they would not have purchased if BNPL was not available.2 Notably, the majority of BNPL spending is on fashion & beauty products, furniture & homeware, and electronic goods,3 which are typically more expensive than their everyday purchases. 

The appeal for merchants lies in fewer abandoned shopping carts (higher conversion rate), increased average order value, and higher customer retention. Indeed, 69% of UK retailers reported improvements in at least one area of their business sales and performance metrics as a direct result of offering BNPL.4 According to Klarna, customers spend 45% more with BNPL, and providers such as Affirm are increasingly offering to fund larger purchases with interest-bearing loans repayable over longer terms.5 The appeal of BNPL to consumers and merchants looks set to grow, especially as the products evolve from being primarily a low-value, interest-free finance option.

2. Regulation will ensure consumers are protected, opening the door for further growt

In February 2023, the UK Financial Conduct Authority (FCA) published a Consultation Paper with a view to regulate BNPL credit agreements, bringing them within the FCA’s authorisation regime for financial services.6 In the US, the Bank Policy Institute has lobbied government for regulation of BNPL, requesting the Consumer Financial Protection Bureau (CFPB) use its authority to go after “unfair, deceptive, and abusive acts and practices.” 7 Such enforcement would oblige firms to “disclose all relevant product information in a clear, transparent, and truthful manner in marketing and other product-related materials.” 8 The CFPB is currently investigating Klarna, Zip, Afterpay, Affirm, and PayPal. This helps with investor protection – for everyone, not just vulnerable customers – and, as better customer protections get implemented, people will feel more comfortable using BNPL as they know it is regulated and there is recourse in case of issues (e.g. mis-selling, bankruptcy, etc).

Tighter regulation has also been accentuated by growing rates of delinquency as the cost-of-living crisis bites consumers. This can be partly attributed to BNPL’s target audience, which typically consists of younger individuals and lower-income customers, and KYC and credit practices which are more lenient than traditional banks.9 According to TransUnion Cybil, BNPL delinquency rates stand at 18.9%, almost twice credit cards’ rates.10 BNPL firms are acutely aware of this and are responding appropriately, with Klarna recently sharing consumer purchase data with credit bureaus Experian and TransUnion to increase transparency.11 Increased regulatory focus in the coming years thus presents a real opportunity for the industry to enhance its reputation; as consumers feel at greater ease with the adoption of robust protections to prevent mis-selling, even more will seek to avail of the service.

3. Apple Pay Later has the potential to attract new consumers

On 28th March 2023, Apple launched its BNPL product,  Apple Pay Later  in the U.S. This allows consumers to “split purchases into four instalments with zero interest and no fees.” Users can apply for loans of $50 to $1,000, which can be used for online and in-app purchases made on Apple devices with merchants accepting Apple Pay. After being approved, users will see the Pay Later option when selecting Apple Pay at checkout online, in apps on iPhone and iPad, and can use Apple Pay Later to make a purchase. Once Apple Pay Later is set up, users can also apply for a loan.12

With Apple’s scale and reach – one billion active iPhone users globally as of 202113 – this product release has the potential to be a game changer in the space. While Apple Pay Later has initially been launched by invitation only to selected US customers, Apple has a history of continuing to bring enhancements to other markets and to continue rapidly refining products.

With a Pay Later option within the Apple Pay wallet, available for consumers to use all merchants – ecommerce and face-to-face – it’s not difficult to imagine Apple quickly making inroads into the existing BNPL market. Whether this is at the expense of the newer BNPL providers, e.g., Klarna and Affirm, or traditional banks that are just beginning to experiment with BNPL, this looks like a significant opportunity for the BNPL market to attract new customers and grow.

4. Further growth in the market looks like a racing certainty

The appeal of BNPL at online checkout, with simple, paperless applications and soft searches within the customer journey, looks unlikely to diminish. A BNPL functionality incorporated in digital wallets also looks like an easy-to-use, appealing proposition. Interestingly, both propositions are aimed at the same audience – younger consumers. 

As more traditional banks launch BNPL products,14 newer providers, such as Klarna and Affirm, may lose market share initially gained. It is also not difficult to envisage consumers rapidly adopting BNPL functionalities built into digital wallets. This Pay Later functionality, whether from Apple or other wallet providers, will likely expand the BNPL market.

There will be winners and losers. Traditional banks will have to navigate the complexities of tempting BNPL customers into credit cards and other lending products. The newer BNPL providers, face the issue of expanding into other products, potentially becoming banks, or focusing on BNPL and navigating a course to profitability against a backdrop higher interest rates and potential falling profitability.15

In summary, we believe the simple, easy-to-understand appeal of BNPL means it is here to stay, and although we see approaching turbulence, it remains a market ready for takeoff.

[1] https://www.visa.co.uk/dam/VCOM/regional/ve/unitedkingdom/PDF/reports/vca-europe-bnpl-paper-v6-final.pdf

[2] https://rfi.global/buy-now-pay-later-improves-sales-for-two-thirds-of-uk-retailers/

[3] Divido_State-of-industry_April-2023-Whitepaper.pdf

[4] https://rfi.global/buy-now-pay-later-improves-sales-for-two-thirds-of-uk-retailers/

[5] Millennials and Gen-Z Shoppers Are Addicted to $46 Billion Klarna - BloombergBuy-now, pay-later platforms turn to interest-bearing lending via bank partners | S&P Global Market Intelligence (spglobal.com) and https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/affirm-seeks-new-sponsor-banks-as-it-shifts-to-interest-bearing-loans-74245833

[6] BNPL_consultation_on_draft_legislation.pdf (publishing.service.gov.uk)

[7] https://news.bloomberglaw.com/banking-law/banks-consumer-groups-seek-tougher-buy-now-pay-later-oversight

[8] Ibidem

[9] ‘Buy now pay later’ boom fuels consumer debt concerns as transactions soar | Financial Times (ft.com)

[10] Why did the RBI crackdown on BNPL companies? (The Hindu BusinessLine)

[11] All you need to know about Klarna sharing BNPL payments with credit reference agencies. – Klarna UK

[12] https://www.apple.com/newsroom/2023/03/apple-introduces-apple-pay-later/

[13] There are 1B iPhones in use worldwide, Apple says | AppleInsider

[14] UK banks pile into buy now, pay later in battle with fintechs | Financial Times (ft.com) and https://www.santander.com/en/press-room/press-releases/2022/01/santander-launches-zinia-its-new-buy-now-pay-later-service

[15] Analysis: Buy Now Pay Later business model faces test as rates rise | Reuters


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