How will BNPL Evolve?

How with the market react? Will cards become unbundled? Will issuers compete? What will change and who will win? What will BNPL look like in 2025? 

How will BNPL Evolve?

I woke up this morning asking myself the question: “How will BNPL evolve”?  A question that I’m surprised I’m even asking given I had underestimated BNPL’s prospects just 3 yrs ago. I incorrectly assumed that there was no corner of untapped potential in consumer finance.. During my time at Citibank running channels for Global Consumer (GCG) in 35 countries, I was convinced (as a banker) that every credit worthy consumer in each of these 35 markets had more than adequate access to credit…  I was wrong about BNPL… I had completely underestimated the ability of BNPL to drive incremental conversions and the opportunity for merchants and credit providers to tailor unique offerings (think Peloton financing).

Today, consumers and merchants alike are very keen on BNPL.. in fact, my informal survey has BNPL as the #1 payment priority at top 100 retailers.  This momentum will gain substantially with November’s Amazon/Affirm announcement (see blog), building both awareness and confidence in Affirm and the overall BNPL market. How will the market react? Will cards become unbundled (see Affirm investor pitch deck)? Will issuers compete? What will change and who will win? What will BNPL look like in 2025? 

First let me lay out 3 possible scenarios, based upon the BNPL KPIs below. 

  2022 2025
Merchant Factors    
Consumer Experience #1 #3
Conversion #2 #1
Expanded Funnel (access to credit) #3 #2
Integrated Product Marketing Focused Generic
MDR 8-15% 5-8%
Speed to Deploy 20-40wks 8-10 wks
Equity/ Performance Warrants Key Not offered
Alternatives Low Competitive
Consumer Factors    
Discount #1 #1
Easy to Use/Speed to Apply #2 #5
Preference (ex Easy to Understand) #3 #2
No Late Fees #4 #4
Credit Pricing #5 #3
BNPL Awareness Low High
# BNPL Transactions /customer /yr 2+ 20+
BNPL Provider Loyalty High ?
BNPL Consumer Product (ie Card) None Primary
Credit/Financial Product    
Rev as % of GMV 10% 8%
Net Rev as % of GMV 5% 4%
%GMV of 0% APR 43% 30%
Underwriting Differentiated Banks Competing
Securitization Nascent Mature
Average ITACS Score >95 90% ?
NCL 6-7% ?
NII (as % of GMV) 4.30% ?
Merchant Selling Direct Acquirers/SW Partners
eCom Integration Custom Standard/Packaged
POS Integration eCom Omni Channel
# of BNPL Providers per Merchant 1 1-2
Ticket Size High Ticket All
% Initiated at Merchant vs Affirm 60% 20%
Verticle Specialty All

Scenario 1 – First Mover Advantage – Affirm Dominates

60% confidence

Consumer conversions are the core of Affirm’s merchant value. What payment geeks miss in Affirm’s success is the tightly integrated product pricing and marketing. Look at the Peloton ad above: 0% financing, $0 fees.. These credit features are proven to be key decision drivers at this price point. What is unique about Affirm’s go to market is that they do not have a “one size fits all” pattern for consumer credit. This give merchants the flexibility to integrate a price/promotion strategy. Affirm’s BNPL is a flexible credit offering… and Affirm has a team of experts that understand this and speak to the power organization in retail: the CMO and head of merchandising… NOT THE CFO.  That is why retailers have a #1 priority of a payment scheme that is MORE expensive than V/MA (MDR of 5%-15%… so much for those A2A start ups talking to the CFO). See my 2014 blog Shopper Marketing and Rewiring Commerce

To dominate, Affirm not only scales its merchant business but becomes a “better credit” option for consumers that is accepted at every merchant directly. They become both a consumer “neo bank” that is profitable .. and a highly differentiated lending business, with direct merchant agreements, and flexible product integration. 

In this scenario:

  1. Affirm continues to build out unique retailer relationships with CMO/ Merchandising stakeholders, and helps them develop unique price promotion strategies.  
  2. Key challenges to scale are addressed (speed to deploy and POS sales) through a direct to consumer offering (Debit+ see blog) allowing them to originate more BNPL purchases directly (through their app) vs the merchant site.  
  3. This direct to consumer offering moves transactions per customer from 2.3 to 20+ (by 2025). Biggest uptick will be in Affirm initiated transactions that will include POS.
  4. Amazon’s adoption creates broad awareness, and consumer reputation of $0 fees builds on a unique community that is sensitive to fees, and provides competitive credit rates that are born by both the merchant and consumer. They win consumer mindshare by transparency, trust and reputation. 
  5. As a result of increased consumer awareness, they gain a much larger share of active customers, which attacks more merchants. Affirm will build network effects faster.. and through this rare feat, they obtain both consumer and merchant loyalty (watch out PayPal). 

What will happen to Visa/Mastercard installments? Or PayPal Credit (aka BillMeLater)? Logically PayPal should have owned this space, but their sales team only sold the buy button.. And they never created the right retailer relationships (ie payment geeks only). V/MA currently have the same problem, while their installment products enable existing issuers to compete in these flex terms, they don’t have the relationships, or the expertise to help with the price/promotion strategy. Furthermore the card branding is a negative to consumers as they see it as an extension of their card.. Not as a service of the retailer. 

For Affirm to successfully execute here, they need to cultivate deep acquirer relationships quickly. This is the only thing I don’t see them moving toward.. Perhaps because they have prioritized the consumer channel above the merchant channel. The acquirers are able to integrate unique analytics and loyalty information.. And are better suited to switch payments off of networks to Affirm directly.  

Scenario 2 – PayPal and Visa/MA Compete in Installments

20% confidence level (2025)

To succeed in BNPL Mastercard – Visa – Paypal (MVP) must get beyond the merchant payment geeks and gain credibility (and agreement) with retail heads that own shopper marketing and the price promotion strategy.  MVP’s strength rests in consumer awareness. Their challenge is in pricing flexibility through their merchant and acquirer relationships. For example, processor agreements are typically 5 yr deals. The ability to add a new product, particularly at a higher price point, would be very tough to get through the CFO (who owns the agreement). Affirm sells to the CMO… or head of channels.. The retailer business case is for increase sales (conversion). PayPal has an easier time of it, given they hold much more flexible agreements. While PayPal credit has much larger volume than Affirm, their offering is consumer focused and a different product (different conversion dynamic and NCL).

The key for this scenario is the success of Issuers (and PayPal) creating a direct to consumer BNPL offering (skipping the merchant). 

MVP’s top 20 global brands are ones that consumers recognize and trust. The challenge is that consumers may not credit cards as a competitor to merchant BNPL offering (ex don’t want balance with current bank card). 

C+R Research

Affirm and Afterpay will continue to build depth in merchants, while MVP Installments are an extension of the existing consumer relationship. This is not an unbundling of payments, but rather a repackaging of an existing product. 

C+R Research

This scenario also implies that merchants will move against the higher fees in BNPL offerings as incrementality in conversions levels out to a new normal. BNPL’s will find niches focused on high end purchases or in segments where customers have poor access to credit. 

Scenario 3 – Competitive Credit

20% confidence (2025)

If cards become “unbundled” what does that mean? What is in the card bundle? If the bundle is broken, who owns the ‘unifying’ operating model? My list (not comprehensive)

  1. Consumer Credit 
  2. Consumer Terms
  3. Merchant Acceptance (Merchant Terms/Agreement)
  4. Processing (merchant underwriting, routing, charge backs, returns, POS/PMT Terminals)
  5. Network (standards, operating rules, compliance, certification, marketing, …etc)
  6. 3rd Party Merchant services (Fraud, Audit, Certification, Bureau, Alerts, eCom, Gateway…etc)

As I briefly outlined in Affirm Debit+ blog, what if consumers could use the V/MA rails for a transaction and decide how they want to finance it (and with whom) after the purchase? In other words the change the consumer issuer to a “switch” that lets consumers select the “best” credit provider and terms?  This is why I believe the Debit+ product is such a significant departure from what we have seen networks support.  If the consumer credit/issuing side was the ONLY change, there would be no changes needed in any other segment of the existing network (or the service providers). 

Today, Affirm operates in an alternative approach that does not use MVP rails at all. It is a direct custom integration, with Affirm retaining risk on the loans until they are securitized. This model requires action by both consumer and merchant, with minimal involvement of current network intermediaries above. Affirm obviously benefits in greater control (and price), but at a much reduced scalability (two sided network growth). 

The greatest consumer feature that Affirm is bringing to market is transparency, and their promise of no fees (including late fees).  Can merchants enable consumers to see the options, the costs and the availability of alternate credit options? I don’t see this in next 3 yrs, but I certainly do see consumers broadly adopting BNPL and its simpler product construct over cards in many retail categories and within key demographics. 

Feedback appreciated. 

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8 thoughts on “How will BNPL Evolve?”

  1. I think the analysis is sound, but I would include two further factors into the mix
    1) fraud and who pays
    2) impact of regulation

    Your conclusion re “many retail categories and within key demographics” is what rings true for me – I see large ticket, discretionary purchases by the younger generation continuing to be the heartland of the BNPL value proposition for the foreseeable.

  2. A lot of great points. BNPL is driving innovation for sure. Some random thoughts in no particular order:
    – BNPL isn’t new but it’s finally found its moment. From installments in Latin America to Bill Me Later (acquired by PP), this is more of a refinement fitting the current generation than an invention.
    – Klarna has the most name recognition globally and there are so many new entrants in the space now – guessing consolidation is a next step and from that instability will something else rise?
    – The direct to merchant play is the most coveted but smaller merchants (and their merchant processors) want to participate. Will/should BNPLs expand to that distribution channel and how does that affect MVP?
    – Fraud and regulation, both massive points already brought up. Not to mention, the additional expense of BNPL to the merchant compared to card. Will this face the same price pressure once it is no longer novel?

  3. I agree with Katharine’s comment about Klarna having the most name recognition globally, and she beat me to the BillMeLater reference as well (PayPal definitely should have been driving here). Klarna also had that announcement with Verifone for exposing the Klarna flow in-store, but I am not clear how much fruit that is bearing.

    I’m curious, Tom, of your perspective on BNPL “during the purchase” vs. “post-purchase” as a way to achieve scale without worrying about direct check-out integration? (This also gives issuers a counter offering in a sense, similar to what Amex has been doing for years, I think.

  4. Older consumers are used to using cards etc, younger consumers are on a device 100% of the time and prefer an app-based UX. I see BNPL converging to the same thing as cards in terms of the underlying financial product (it all ends up on a monthly statement which is wholly or partly paid off), but BNPL is also a new experience which is more appealing and natural to younger consumers.

    Where there are already strong phone-based payment mechanisms (think Asia) I see BNPL having less appeal as a new method, and it’ll be easier for existing payment apps to add credit to defend themselves.

    Whoever can do good risk management combined with a great user experience deserves to win. Part of doing good risk management is understanding that not all merchants will accept higher fees for BNPL when they know many of their customers are already paying with cheaper methods today, i.e. those are inherently lower-risk customers.

  5. Great post.

    Data are likely scarce, but I’d be interested to know more about the dynamic between increased BNPL adoption on a site (particularly apparel) and the subsequent return rate. When using BNPL, I might as well order multiple of the same garment in different sizes and return the one which doesn’t fit – while this has certainly happened historically, in the past many consumer would have found the cash flow constraint a limiting factor (money leaving account and waiting a few weeks for the return to process), but BNPL removes that. We’ve seen many online-only apparel retailers struggle with the cost of returns eating into already slim margins and I worry this could be retailers paying for a service that contributes to that heightened return rate. That said, the stats from BNPL companies do suggest the increased conversion would outweigh this on average, but likely a concern for specific individual businesses (apparel targeted at younger consumers).

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