Buy Now, Pay Later (BNPL) is one of the hottest trends of the summer -- and some big tech players are taking notice.
BNPL is essentially a loan from a fintech or payment provider that allows consumers to purchase goods and services immediately at the point of sale and then pay for said goods or services in installments. These loans are often paid off in three to four interest-free payments, differentiating them from simple credit transactions.
Per C+R Research, 60% of U.S. consumers responding to its survey have used a BNPL service in the course of the pandemic, while 46% of those are continuing to make payments to a BNPL provider. Perhaps even more importantly, the practice is most popular among younger consumers.
Striking while this iron was hot, some of the largest tech companies and payment providers in the U.S. have seized on the emerging opportunity through blockbuster M&A deals and partnerships.
Mobile payment leader Square (SQ) made a big splash earlier this summer with its $29 billion all-stock move for Afterpay, while PayPal (PYPL) has placed the practice squarely in its crosshairs with its Pay in 4 offering for the U.S. Meanwhile, Apple (AAPL) is reportedly eyeing the space alongside Goldman Sachs (GS) , adding to its already popular mobile payment offering.
"By partnering with Amazon we're bringing the transparency, predictability and affordability that Affirm provides today to the millions of people who shop on Amazon.com in the U.S.," Eric Morse, Senior Vice President of Sales at Affirm, said in a statement. "Offering Affirm's alternative to credit cards also delivers more of the payment choice and flexibility consumers on Amazon want."
Judging by the stock price reaction for both Affirm and Amazon, this type of deal is exactly what investors wanted as well.
Still, as so many big tech names pile into the BNPL craze, there is room to be cautious about buying big now before risks arrive later.
Timing the Trend
To be sure, the craze at present over delayed payments is not entirely new. Nor is it a massive leap from the ubiquitous use of credit cards offered by Visa (V) and Mastercard (MA) that similarly delay payment for goods and services demanded in the present.
However, the key differentiators are found in the lack of exorbitant interest on payments, the flexibility of payment schedules, and the transparency on payment terms. That is not to mention the non-impact on credit scores. It is precisely these factors that are enticing younger consumers to ditch the plastic payment options, according to Doug Bland, General Manager of Global Credit at PayPal.
"What we know is that credit, as a construct, is not what these younger generations have issues with - their concern is with the hidden or complicated terms," he said. "With most BNPL products, like PayPal's, the terms are very straightforward, and we do everything we can to help a user remain in good standing while using the product."
It is also those consumers that do not have good credit standing or otherwise have not been able to build credit.
"The traditional credit system has historically been closed off to consumers that it has deemed 'credit invisible', failing to incorporate alternative creditworthiness factors such as making on-time payments for rent and other expenses," Shazia Virji, General Manager of Credit Services at Credit and Loan company Credit Sesame, told Real Money. "BNPL is an alternative payment method that increases the purchasing power for consumers who have previously been locked out of accessing credit."
According to a 2015 study performed by the Consumer Financial Protection Bureau, 26 million Americans fell into the "credit invisible" category. While data is not available for comparison, it is a safe assumption that the pandemic likely pushed this figure upward. As such, even the solid growth seen thus far in BNPL is likely only the beginning of a boon for the nascent industry.
Where Consumers Are Buying Now
While these broader trends have allowed the industry to bloom broadly, consumers have most certainly picked their favorite providers.
Per C+R Research, PayPal is the dominant player at present, garnering 57% of BNPL users. With many users utilize more than one service, PayPal's pole position is followed by Square-subsidiary Afterpay with 29%, Amazon's new ally Affirm with 28%, and the SoftBank-backed Klarna at 23% of users.
In terms of analyst attention, each of the publicly traded payment processing options are attracting positive attention as "Buy" ratings abound on the market leadership in BNPL. In particular, analysts applauded Affirm's deal with Amazon as a game-changer.
"We believe Affirm is well positioned to capitalize on the secular growth of Buy Now Pay Later (BNPL) as a payment method at the [point of sale]," RBC Capital Markets analyst Daniel Perlin wrote in a recent note to clients. "Broadly, BNPL is incremental to merchants and disruptive to alternative forms of payments."
He added that Affirm's lack of penalty fees suggests its financial model is not reliant upon these taxes on consumers, setting it apart from its peers.
In general, analysts have welcomed the dynamics of big tech's entry to the BNPL arena, though with some caveats. Namely, Square's deal for Afterpay at a hefty $29 billion valuation stoked some sticker-shock.
"BNPL was arguably one of the few solutions missing from [Square's] arsenal," Cowen analyst George Mihalos wrote in a note to clients. "[But] the debate will revolve around the decision to buy vs. build, given SQ's success in rolling out internally developed offerings and the path taken by fellow super-app developer PayPal."
Gain Now, Risk Later?
Though there are many that note risks larger than just the price tag on Square's purchase of Afterpay. Indeed, many see persistently underappreciated risks that are sure to arise sooner or later in the BNPL space.
Mahala Johnson, Head of Product at payment software provider ACI Worldwide, was one of those still cautious on the practice. She cited the pitfalls of the payment method as compared to the more established practice of layaway.
"For layaway, the merchant retained the merchandise and it was only handed over to the consumer when they had paid it off. The risk to the merchant was that the consumer never paid it off and they had to put the item back into inventory," Johnson explained. "With BNPL, the consumer immediately receives the merchandise, the merchant is paid in full (less fees) and it is on the BNPL provider to ultimately collect from the consumer - that is a risk."
This risk is also important to note in terms of the demand from those with poor credit or the "credit invisible" that are making up a not insignificant factor in the surging demand.
In many cases, there is good reason that these consumers are not being served by traditional credit providers. Passing this risk from banks and credit card providers to BNPL will ultimately only add a headache for those seeking to court these customers. As was seen in the housing bubble blow-up, the well-intentioned extension of credit to those that are simply not creditworthy can quickly cause serious problems.
Finally, BNPL is a target for abuse if not monitored closely by each of the companies betting on the space.
"BNPL companies assume huge amounts of risk - not just in collecting on payments but in instances of payment fraud," Kevin Lee, Trust and Safety Architect at payment protection firm Sift, told Real Money. "As a result, BNPL vendors need to employ advanced filters and technology to weed out the use of stolen payment info and/or user credentials, particularly because the margins on pay-later transactions are low."
In the end, big tech's bets on the BNPL space are biting off quite a bit to chew and it will only digest the risks later. As such, a long-term view with cognizance of these risks is paramount.