Short Blog – BNPL Recap

BNPL specialists have found a way to help merchants serve consumers that were unserved, achieve sales growth and improve consumer experience.

101 Blog… probably not for the BNPL experts. Recap at bottom. 

While CDBC may impact debit networks in a 5 yr view, I thought I would write a short blog on BNPL’s impact to credit networks in near term (See Insider’s BNPL market Analysis and MRC’s overview of solution providers)

As a former banker, I admit to writing off BNPL. My view was that the ultra competitive financial services industry had given a card (or PIL) to virtually every person on the planet. That any BNPL innovation could be easily copied by banks. For example, in 2006 my Citi India team 2006 allowed consumers to select any transaction (credit or debit) for separate financing.

Analysts are still working to distill the “reality” of BNPL from its early cluster like concentration. For example, Affirm’s S1 shows that 30% of revenue is from Peloton (now down in 24% in 4Q). But analyst reluctance to embrace the model has not impacted the US market’s view, with Affirm’s Market cap now near $20B.

Australia is the top market for BNPL. Given this is the most mature BNPL market, AU data points are the most relevant indicators of what future growth will look like (from today’s Australia Financial Review)

  1. RBA states the value of BNPL transactions grew by around 55% in 2019/20 and tripled over the previous two financial years.
  2. In Australia, Afterpay carved out 2 per cent of Australian retail sales and 15 per cent of e-commerce sales in the year to June 2020 (ref).
  3. Afterpay’s top 10% of customers transact 54 times a year.
  4. 20% of consumers missing payments (vs 2% NCL across AU Bank products).
  5. Merchant fees at 4% (vs 1% on card products).

Consumers perceive BNPL as a new form of lay away that will not impact their credit reports. Merchants, that have put in place BNPL, have experienced substantial growth. In fact, within the Australia market, there are demographics that won’t shop without access to BNPL (see Article).

The drivers of merchant success are NOT ONLY credit access, instant gratification and improved consumer checkout experience.

This Shopify blog outlines data from merchants that have added BNPL (eCommerce).

  • Klarna – 58% increase in average order value (AOV), 30% lift in checkout conversion rates
  • Affirm – 87% increase in AOV, 20% increase in conversion rates
  • Afterpay– improved purchasing frequency, loss rates, and customer lifetime value.

This excellent article by Kevin Woodward on Digital Transactions quotes Affirm’s Braskamp, who says Millennials and Generation Z are affecting the payment options merchants provide.

“These two generations, which together make up more than half of Affirm’s consumer network, are increasingly skeptical of traditional credit cards and banking services and are looking for transparent payment alternatives,” Braskamp says. “Additionally, because they grew up with monthly subscription models like Netflix and Rent the Runway, Millennials and GenZ often prefer predictable monthly payments versus payments that vary month-to-month like credit cards.”

Should V/MA be worried?

No, Keefe, Bruyette & Woods (KBW) report suggests the growth in POS lending is expanding the overall pie, “presenting an opportunity for both incumbents and new entrants.”

Point-of-sale lending is projected to account for 11% of total unsecured credit in 2021, up from 5% in 2015, according to KBW. Global BNPL volume is forecasted to increase to more than $680 billion in transaction value by 2025, up from $285 billion in 2018, according to Kaleido Intelligence Ltd. The funding instruments on these transactions are Debit or ACH,  Afterpay says 90% of its transactions are made with debit cards.

While Paypal has “the original” BNPL in its Bill Me Later acquisition (now Paypal credit), V/MA are also launching their own installment payment services: Visa Installment and Mastercard Installment that will let their member banks deliver installment services at parity with the BNPL champions.  While operating within a greatly reduced merchant fee, I see both merchant and consumer friction for the network installment products. Why? well first off you must have an account with a bank.. 

My biggest learnings in BNPL?

  1. Merchants, Millennials and Gen Z perceive a gap in bank services.
  2. BNPL specialists have found a way to help merchants serve consumers that were unserved, achieve sales growth and improve consumer experience.
  3. The merchant value is just astounding, and will likely drive 100% merchant adoption in next few years.
  4. BNPL is NOT competing with V/MA volumes.
  5. Growth rates of BNPL are tapering from 100%+ to 30% (ex Affirm’s US guidance).
  6. Australia’s Afterpay NCLs are creeping up substantially
  7. Per today’s Australia Financial Review, regulators are starting to be concerned.
  8. Banks are acting quite a bit like me… discounting the BNPL opportunity (I was wrong to do so).

My biggest questions?

  1. While merchants will gladly pay 4% for NEW customers (and sales) they would normally not serve, will there be a organized response by established players to take this back (ie Network Installment products). 
  2. How will market volumes mature? Similar to above, merchants would certainly NOT like to see volumes flip from credit unless there is some benefit (frequency, abandonment or basked size). Overall retail sales is rather static.. 
  3. Is BNPL subprime lending? NCLs in Australia look different than bank products. 
  4. Will regulators step in? to protect banks? Consumers? 
  5. Will there be a dominant US player, like Affirm, that can capture the 54 transactions a year Australia’s Afterpay has in top 10%.. or will merchants drive prices lower through competition, leaving 5-15 players subscale? 

Seeking Alpha – Affirm

7 thoughts on “Short Blog – BNPL Recap”

  1. Just one other factor to add in to your assessment Tom – regulators.

    In some jurisdictions, regulators are becoming concerned about people getting into trouble over-extending themselves through BNPL platforms.

  2. BNPL will become ubiquitous once traditional market players in the ecosystem figure out POS / front-end experience, risk/liability framework. Traditional players haven’t been able to compete because eftpos (AU) controls large part of AU POS (what’s in it for them?). Disagree with “having an account at the bank” is friction if you think about BNPL as super-Debit, ST financing.

    1. Thanks for taking time to comment. Re a BNPL account “with Bank”… depends on Geography. In the US, a bank could not launch a credit product under a debit account. It would have to be a new account with all the disclosures and reporting (FCA, credit reporting, … ) that go with it. BNPL is a non-bank account much more like store credit.. This is an advantage for BNPL.. and a hurdle for banks

  3. The key bnpl assumption is a large credit-worthy segment that is currently underserved by bankcards. Its hard to imagine that being true for Australia…

    And couldn’t banks that issue and acquire replicate the BNPL model i.e. provide interest free options to users at checkout while charging the merchant a fee. On-us transactions are not routed via V/MA so no need for an installment platform developed by networks. Am I missing something here?

    If the above is true, it would seem the ‘real’ reason for BNPL popularity is to circumvent the lack of credit via banks. That sounds like sub-prime, as does 20% consumers missing payments. BNPL will be truly tested when there is a large scale ‘credit event’. Central Bank largesse has ensured this wasn’t the case in 2020.

    Or perhaps I am still thinking like a former banker.

    1. I have the former banker problem too. Merchants are in a fantastic position to influence payment at checkout.. having a low cost simple finance offer available.. seems to be enough for BNPL customers. Us bankers have a tendency to overthink things and always look at the macro options… consumers that want stuff.. just want it quickly… BNPL solves a problem…. it is that simple.

  4. Excellent as always , Tom.
    A lot of the discussion is often “either/or” between BNPL and cards, but I also wonder whether the clear demand for merchants to offer credit services to attract and retain customers will accelerate banks seeking to provide the underlying capabilities rather than the “products”. In a low interchange market like the EU, this feels like a strong option and the new alternative to things like co-brand. It’s the logical extension for “embedded finance” and also solves some of the regulatory concerns.

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