The growing trend of Buy Now, Pay Later

Fintech is a concept that I saw evolving from its inception. From being just a trendy buzzword, to a full scale segment of the financial industry. One of the most recent trends is the Buy Now, Pay Later, also referred to as BNPL. The new form of lending sees me be living its golden age.

Apple has just announced its intentions to enter the Buy Now, Pay Later space in a more aggressive fashion than expected – Apple’s BNPL will be available anywhere where Apple Pay is accepted (US only for now). With this move, Apple is moving deeper into financial services by opting to manage their own credit decisions, leveraging their vast cash balance sheet, instead of partnering with an institution like Goldman Sachs as they did on the Apple Card. Apple’s BNPL feature works on the Mastercard Installments technology platform, helping mostly banks to offer easy installment products to their customers. Prior to this announcement, BNPL stocks had already gone into a tailspin as the model’s defensibility, rising competition (including now from Apple), and regulatory risks are called into question.

The state of the sector isn’t as bad, however, as suggested by some news reports, which reflect calculations from peaks that were part of a wider tech-stock bubble and were not sustainable. As more inflation rate hikes are coming from record low levels, BNPL companies are facing higher costs in borrowing funds, which eat into the margins derived from providing interest-free instalment loans for shoppers at point of sale. Let’s not forget that most of the BNPL players are early-stage growth companies – to grow, they need to keep spending money on areas like marketing and technology for user acquisition, resulting in a multi-year path to profitability. Consequently, some predict that BNPL as we’ve known it in the last few years will not survive due to “structurally negative unit profitability, which it obscures through highly misleading reporting”.

I had a conversation with Radek Jezbera, the CEO of Kilde, an alternative lending platform licensed under the Monetary Authority of Singapore (MAS).

“Industry participants in this space will increasingly fall into two camps defined by their customer bases and levels of consumer loyalty.”

Said Jezbera “The likes of Atome, Klarna, and Afterpay, who have high levels of consumer loyalty and active customer bases, will likely pivot to become global shopping and financial super apps, leveraging their robust customer relationships and brand recognition to penetrate into all aspects of financial services. The second group of BNPLs, which focus on the merchant side, will most likely continue servicing e-commerce merchants. As competition grows, this will exert increasing pressure on merchant fees and margin. Higher borrowing costs threaten to hit all kinds of growth-oriented fintechs, impacting their margins, while at the same time consumer spending may be decreasing.”

And on how the current market in influencing the BNPL trend, Jexbera commented: “Even through an economic downturn people will keep shopping and might be increasingly tempted to try new ways of borrowing at zero cost, which is precisely what BNPL offers. In emerging markets specifically, people are only at the start of their consumption journey and pay-later plans may look more compelling when compared to putting a purchase on credit cards as rates rise.”