We all know that the various forms of “buy now, pay later” (BNPL) payment schemes are doing very well indeed. In fact, they are growing like crazy. Dan Schulman, the CEO of PayPal, told CNBC’s Jim Cramer that their BNPL volume (through their “Pay in 4” product) went up 400% this Black Friday compared to the last one. It’s these kind of numbers that mean that serious fintech investors, such as Alex Rampell from the noted venture capitalists a16z, see BNPL as a threat to the payment industry’s major incumbents Visa (worth almost $500 billion) and MasterCard ($350 billion) as well as a whole ecosystem of card issuing banks, acquirers and processors (eg, Fiserv and FIS and so on). Alex says that BNPL provides a ubiquitous parallel network with both merchant demand and consumer benefit: unlike something like MCX, it can really challenge the networks.
In the UK, more than 17 million customers have already used BNPL to make an online purchase. The biggest provider, Klarna, has doubled its customer base in the last year. It will boom for Christmas in the UK, just as it did for Black Friday in the US, because a recent survey indicated that almost one in 10 people here are planning on using BNPL for at least part of their Christmas shopping.
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The radical shift from a transactional outlook to bringing the elements of inspiration and emotion into the shopping experience has helped Klarna create a coherent purchasing process that encloses the pre, during, as well as the post-purchase journey for each user.
From BNPL Behemoth’s Buying Binge: Klarna’s “SuperApp” Strategy:
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There are, however, growing concerns that BNPL may be storing up some problems. Rachel Gittleman, financial services outreach manager at Consumer Federation of America, highlighted the core issue for to the House Financial Services Committee: BNPL products are credit and carry the same consequences for defaulting as other types of loans. In a recent study by Credit Karma, one-third of consumers who use BNPL products had fallen behind on one or more payments, and almost three-quarters of them said their credit score dropped.
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The biggest regulatory move that could impact the BNPL market is if state regulators redefine BNPL businesses as traditional lenders. They would then be subject to the same state usury limits that protect consumers from loansharking.
From Cynthia ChenKikoff – Protocol — The people, power and politics of tech:
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Now, whether you think BNPL is sub-prime by another name (as I know many people do) or part of a natural repackaging of payments and credit in a connected world, there’s no doubt that it is important. While (as Visa pointed out in their last earnings call) the impressive BNPL growth still leaves it as a small fraction of the total retail payments market, it is indicative of the ability of fintech to mount a real challenge.
Simon Taylor of 11FS
I’ve said it before, but BNPL has to be the perfect use case for Open Banking (especially in Europe, where Open Banking can enable payments in addition to account data).
Imagine if a consumer could authorize a bank account check and set up an installment plan with a single click. The user experience would look like it does today, except when they click the BNPL button, they’d have the option to “verify with their bank.” The BNPL provider would have a better view of the consumer’s affordability (can they afford the item / are they likely to make payments). An approach like this has to be better than a regulator insisting on hard credit checks or complex UX for a BNPL transaction of $30.
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Crucially, Mastercard is deploying Open Banking technology through Finicity in the US and its pending acquisition of Aiia in Europe to use consumer permissioned data tied to debit or bank account credentials to run affordability checks on applicants.
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Snippings 