BNPL: the next big thing in payments or a bubble waiting to burst?

If you believe the generally positive consumer press coverage, buy-now-pay-later is a novel, flexible and consumer friendly alternative to more traditional forms of payments such as the credit card. As Douglas Blakey reports, BNPL is not actually a novel payment form and is rapidly becoming a crowded field

Buy now pay later (BNPL) arrangements – allowing consumers to buy and receive goods and services immediately but pay for that purchase over time – are all the rage.

And there are even some journalists falling for the hype that BNPL are quickly taking the place of credit cards.

Myth number one: buy-now-pay-later is a new form of payment. 

First off, it would help to dispel some commonly held myths.

Myth number one: buy-now-pay-later is a new form of payment. Not so. Take PayBright in Canada for example. PayBright dates back its formation in 2009.

Since then, it has approved over C$1bn in consumer credit for over 250,000 customers. Needless to say, as recently as last September it was raising equity investment to accelerate the expansion of its buy now, pay later solution for e-commerce and in-store purchases.”

Having taken so long to grow customer numbers to 250,000, the Canadian credit card sector can sleep easy, at least meantime.

Then there is Affirm. It was founded by PayPal co-founder Max Levchin as long ago as 2012.

In the intervening eight years, Affirm has grown user numbers to 5.6 million in the US for a company valuation of around $2.9bn.

Not to be rubbished in any way but let us keep a degree of perspective.

In 2019 merchants signed up by Affirm benefited from $500m in annualised sales referred from Affirm. So, on a rough calculation, the average Affirm user spent less than $90 in a year using the service. As is widely known, if not among consumer press feature writers, the margins on BNPL transactions are modest.

myth number 2: BNPL usage does not affect a user’s credit score. 

Again, not so.

For customers who manage their finances well, BNPL can be a good interest-free alternative to credit cards and can help to avoid credit card debt.

However, there is a huge amount of evidence to show that BNPL users are more likely to buy more than they usually would and overspend because they have the option of breaking up the payment.

In an unfavourable scenario, BNPL can have an impact on a customer’s financial future, with excessive purchases and late payments affecting credit scores and the ability to secure loans in the future.

In a survey in the first quarter of 2020, price comparison website Compare the Market found that over 40% of BNPL users did not know that missed payments could affect their credit scores. At the same time, around 20% of users did not understand their BNPL provider’s terms and conditions.

myth number 3: Major BNPL providers such as Afterpay are performing strongly

Well this is certainly a commonly held view and the Afterpay share price is up from below A$9 in March to A$78 by 21 August.

But before you rush out and jump on the Afterpay bandwagon, look at some basic metrics.

It remains loss-making for starters with accumulated losses of A$98m million to Dec 2019 with more to come this year.

According to estimates from Australia-based payments consultants McLean Roche, Afterpay will earn A$450m in core revenue for 2020 year plus some late fees.

And yet somehow this modest revenue leads to a market cap of over A$20bn? Nor is Afterpay keeping pace with the massive online explosion. For example, Afterpay only grew customers by 200,000 over the last 6 months in Australia/New Zealand. By comparison PayPal added 1.3 million in three months to reach 8.4 million consumers in Australia only.

In the US, rival Klarna is reporting impressive numbers with 8 million customers and counting. There remains one big cloud on the horizon. Before taking a long-term view on the BNPL sector’s prospects, let’s see how it performs in its first recession. For BNPL players that are not using credit bureaus, a rude awakening may be around the corner.

myth number 4: BNPL does not need to be regulated

The major BNPL operators are unswerving in their assertion that as they do not charge interest to consumers and so avoid FCA scrutiny, they can be trusted to police themselves. To date, the argument that they make their money direct from merchant transaction fees from retailers, and have a tiny proportion of customers paying penalty fees, has won the day.

The BNPL is however now in the sights of various debt charities and there is an investigation into possible future regulation in Australia. It would be a brave pundit who forecast that the sector will escape regulation for much longer.

 myth number 5: BNPL players such as Klarna and Affirm can dominate

Not remotely true. In fact, the sector is becoming increasingly crowded. In recent weeks, Splitit has raised A$71.5m. Then there is Sezzle, raising $62m and eyeing up expansion to India.

Another player is Viabill, launched in 2014 but still raising fresh capital as recently as last year.

It claims to be challenging the way we pay and offers payments split into four equal monthly payments. Sounds familiar. Then there is Zip Pay, offering to spread the purchase price across four fortnightly payments.

Another rival is Laybuy, offering payments in six weekly payments. Meantime, Quadpay offers payment in four instalments paid over six weeks.

And that is just a selection of operators-in total there are around 30 BNPL operators and growing. But perhaps the biggest danger to the major BNPL outfits comes from incumbents such as Citi and American Express.

Citi and Amex both rolled out BNPL in the US in August. These two launches and BNPL releases from other incumbents have the potential to dent all the standalone BNPL operators.

On a positive note, a number of the Klarna ads are great. Fair play to the creative teams and ad agency. In what is proving to be a disappointing year (or two) for memorable financial institution ads, the BNPL sector is responsible for some of the best.