Buy Now Pay Later (BNPL)

Visa Consulting & Analytics (VCA)

Buy Now Pay Later (BNPL)

Perspectives on and insights into the BNPL market

The credit landscape is changing.

E-commerce growth and technological innovation have converged to deliver transformation across the credit industry. This has opened the door for alternative payment methods including several BNPL options.

In this paper, Visa Consulting & Analytics (VCA) offers an overview of the current landscape, the rise of BNPL alongside the challenges these products face, and provides our perspective on and insights into the BNPL market.

The pandemic forced more of our daily lives online, from working to grocery shopping, children’s education to socializing. Throughout this period, BNPL products continued to grow. At a time when many consumers found themselves in unpredictable financial positions, BNPL was an appealing way to create some liquidity.

Annual growth rate

BNPL as a share of global e-com
Sweden 25%
Germany 20%
Norway 18%
Australia 10%

Regional BNPL penetration (% share of total e-com)

Sources:

Although BNPL still represents a relatively small share of all e-commerce, it is growing rapidly across much of the world. In 2021, the global BNPL market size reached US$132 billion and through to 2030, with a compound annual growth rate of 45 percent, it could reach US$3.68 trillion.

What is driving the high rate of consumer adoption?

BNPL products appeal to consumers because they address the need for funding consumer payments in a more seamless and transparent way than traditional payment methods. Some key characteristics include:

  1. Low upfront cost
    BNPL gives consumers the flexibility to make repayments with a frequency that works best for them. This can be useful as a financial management tool for higher value purchases or to better manage expenses.

Additionally, the pricing structures are transparent, especially for customers who intend to abide by the standard repayment schedule, and the shorter-tenure plans are often interest free; longer-tenure plans tend to be expensive due to the inherent lending costs for issuers, therefore pushing the costs to consumers. Late fees are also charged for late payments.

BNPL appeals to consumers who want to manage their finances effectively without increasing their debt. It is in the best interest of the consumer to consider their overall financial health and ability to pay when choosing a BNPL option, and to do their research when choosing the right installment plan for them.

  1. Optionality
    BNPL can appeal to people who have previously been marginalized by traditional credit products. For example, many young consumers don’t have sufficient credit history to receive approval for traditional credit products. Historically, the “soft” credit checks used by BNPL providers have not used traditional credit bureaus to measure affordability, which would otherwise disadvantage this segment.

On the other hand, traditional financial institutions have extensive experience in risk management and underwriting and are therefore well-positioned to smartly offer BNPL only to customers who can manage their expenses effectively. However, in some markets, BNPL providers have started sharing purchase data of customers with credit bureaus. We also expect the use of data available through open banking platforms to provide a more comprehensive approach to credit decisioning.

Why is BNPL popular with merchants and providers?

Merchants

BNPL has been adopted as an embedded finance solution across a huge range of merchants with differing target audiences and with terms and conditions that vary. Having such a wide range of options improves the customer experience and gives shoppers additional choices.

When questioned about the key drivers for accepting BNPL, the top reasons cited were: customer convenience, customer demand, the belief that BNPL could increase average spend, and the desire to remain competitive.

Crucially, BNPL has also given smaller merchants an opportunity to compete.

Providers

BNPL providers can be segmented into three categories:

  1. Monoline BNPL providers – Afterpay, Klarna, Clearpay, Sezzle etc.
  2. Traditional lenders/incumbent banks
  3. Big Tech

The BNPL market landscape is changing quickly and continuously evolving, but providers are convinced there is still space for new entrants. For example, Apple announced that it would enter the U.S. BNPL market with Apple Pay Later, allowing users to pay for goods in four equal payments, without interest.

Current challenges facing BNPL

Despite BNPL’s rapid growth and ability to address clear customer needs, the industry faces some challenges:

  1. Regulation
    The need for responsible lending is underpinned by new regulation already in effect in several regions and impending regulation in other markets.

BNPL is marketed as a no-interest credit option, however, if payments are missed, providers do charge interest and, if repeated, this may impact the consumers’ credit score.

  1. Industry saturation
    Existing business models will continue to evolve with the rapid pace of entry of new players, leading to more consolidation among existing players and horizontal acquisitions.

  2. Macro-economic impact
    BNPL providers are facing price pressures due to rising credit costs and potential increases in defaults, which particularly challenge smaller providers.

  3. Making the economics work for both the providers and the merchants/acquirers.

Our perspective on and insights into the BNPL market

As the BNPL market adapts, providers are approaching BNPL in differing ways, addressing customer needs while delivering a profitable solution through distinct business models.

Key factors influencing the various business models include:

To succeed in this market, providers need to focus on customer-centric business models that best fit their targets and align with desired business outcomes.