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Consumer finance has long been around but gained popularity after World War 2, when credit card finance was extended to Americans to spur the economy. Globally, credit cards became a high-margin product for lenders as consumers lapped up easy credit to fuel improving lifestyles. However, consumers who did not manage their repayments incurred higher rates of interest and missed payment fees.
Buy now, pay later (BNPL) has recently exploded onto the scene as an alternative credit payment mechanism. Simply put, BNPL allows customers to buy goods upfront and pay for them in interest-free instalments. It is predominately an alternative payment "check out" option on e-commerce websites to credit cards, EFTs and payment wallets.
Millennials and Gen Zers enjoy the simplicity of the product, given that they don’t need to worry about interest and are able to buy products without needing a credit card. The BNPL apps are also highly engaging, with targeted sales offers, wish lists and budgeting tools. Internationally, they are limited to no credit checks and easy to use for the mobile-savvy young person.
Most purchases by this younger audience are skewed towards clothing and home furnishings rather than single-emergency type purchases such as replacing a large appliance. These consumers also aren’t afraid to hold multiple BNPL accounts, though this can get complicated when tracking and managing different installment dates.
If there is no interest, how do these providers make money? The business model is predicated on a few revenue streams. BNPL companies charge the merchant a fee (about 2%-6% of the total value) for utilising the payment option. This rate can vary (similar to other payment options) based on volumes or whether the sale was performed through the BNPL app.
In addition, consumers pay late fees if an instalment payment is missed, and there are further opportunities to cross-sell additional financial products, debit cards and advertising. Some BNPL companies also offer traditional payment options, with an interest rate payable as an alternative to the above.
Merchants have eagerly signed up with various BNPL providers such as Klarna and Affirm in Europe and the US, given that their closed-loop systems allow better data insights into customers, increases both the average order size and volumes, and often lowers customer acquisition costs as consumers are now being directed to the merchant from the BNPL app where the shopping is increasingly initiated.
In 2020, BNPL represented only 2% of the global online market, with analysts predicting that the total addressable market could reach as much as $147bn by 2025. The adoption of BNPL has tripled in Australia and grown fivefold in the UK. Given that only 20% of e-commerce merchants globally have BNPL options, there is strong potential for growth.
With all this excitement, BNPL start-ups have mushroomed around the world. Traditional players such as banks and payments companies have started offering BNPL services to maintain their relevance to consumers. Technology companies have also entered the market, with Apple recently announcing its BNPL offering on its Apple Pay platform and Amazon partnering with Affirm.
In SA, we have Payflex, PayJustNow, TymeBank and ZeroPay. Market analysts expect the gross merchandise value (GMV) to grow from $231m in 2021 to more than $4.8bn by 2028. In 2022, the total GMV is expected to grow by about 98%. This is reflected in Payflex and PayJustNow now having more than 160,000 and 180,000 customers, respectively. With thousands of merchants offering the BNPL payment option, the penetration of the product is expected to keep growing rapidly in SA.
There has been also been much M&A activity in the sector, with deals such as Square acquiring AfterPay for $29bn and PayPal acquiring Paidly for about $3bn. In SA, Australian BNPL player Zip recently bought Payflex, and Homechoice bought PayJustNow..
However, competition is heating up fast and a deteriorating economic climate is already putting pressure on BNPL companies. Valuations of businesses such as Affirm and Klarna have declined by about 85% and 67%, respectively, over the past 12 months as investors worry how credit losses, slowing growth and rising interest rates will affect these firms’ profitability in the long run. Regulators also pose a stiff challenge and have taken a closer look at the offering as they are wary of loose lending criteria and the effect on the consumer.
With such a large addressable market and a secular shift to digital payments and e-commerce, BNPL players will certainly feel like they have the wind at their backs. But it remains to be seen if this is a fundamental shift in how consumer finance works.
• Varughese is head of technology, media & telecoms advisory at RMB
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Published by Arena Holdings and distributed with the Financial Mail on the last Thursday of every month except December and January.