The next wave of BNPL

Introduction

The rapid rise of BNPL (Buy Now, Pay Later) has gained immense popularity worldwide, revolutionizing how people purchase and manage their finance. This report will delve into the concept of the BNPL industry, its challenges and its impact on the financial landscape.

Market overview

BNPL is a form of short-term financing that allows payment in instalments without any interest or fee within a given period from the point of sale. This type of payment is made possible through the partnership of third-party organizations with merchants, providing consumers with a more flexible payment option.

• The global BNPL market is expected to reach USD 543 billion by 2026, with the total BNPL transaction value making up 6% of e-commerce payments.
• Sweden is currently in the lead in BNPL payments with a market share of 24%, showcasing impressive growth and innovation in this payment space.
• The top 3 players in the market with the most active BNPL users are Klarna (147 million), Afterpay (19 million) and Affirm (16 million).

Industry challenges

The industry faces these challenges that impact its growth and sustainability:

• #1 Competitive threats and disruption:

As the BNPL market becomes more crowded, providers face increased competition from traditional financial institutions and new entrants. Traditional banks and credit card companies are expanding their digital offerings, while fintech startups are introducing innovative payment solutions. This intensifying competition pressures market players to differentiate themselves, improve customer experience, and continually innovate to stay relevant.

• #2 Restricted regulatory environment to freely market and operate BNPL products:

The regulatory landscape for BNPL is evolving, resulting in various countries implementing new rules and guidelines to govern the industry. Compliance with consumer protection laws, responsible lending practices, and data privacy regulations are essential for BNPL providers. Adhering to these regulations can be complex and costly, particularly for smaller players, as non-compliance could lead to legal and reputational risks.

Regulations across the globe include:

1. India – The RBI (Reserve Bank of India) guidelines restrict non-banking institutions from using credit lines and issuing prepaid payment instruments, impacting the expansion of the industry.
2. Australia – Providers must obtain Australian Credit Licences, adhere to responsible lending obligations, meet dispute resolution and hardship requirements, and ensure their apps comply with the National Consumer Credit Protection Act 2009.
3. US – Anticipated regulations by the CFPB (Consumer Financial Protection Bureau) may align BNPL with traditional credit companies, thus limiting data harvesting and leverage from customers.
4. UK – Financial Conduct Authority (FCA) regulates the providers under the Consumer Credit Act 1974. The providers must be authorized by the FCA and comply with responsible lending requirements. The FCA also emphasizes transparency, affordability assessments, and clear consumer communication.
5. EU – The European Commission plans to include BNPL under the Consumer Credit Directive. It finalized its regulatory framework in late 2022 and is currently awaiting full implementation.
6. China – There is no direct regulation for BNPL products, while digital finance platforms offering interest-free short-term financing similar to BNPL continue to be strictly regulated by the government.
7. Singapore, Malaysia, and Hong Kong – While the industry in these countries is self-regulated, the respective monetary authorities (MAS, HKMA) and Central Bank (BNM) continue to keep a close eye on the providers. Providers must comply with licensing requirements and consumer protection measures to operate in these markets.

• #3 Macro-economic impact on BNPL business model:

The industry is susceptible to macro-economic factors, such as changes in interest rates, economic downturns, and fluctuations in consumer spending. Economic uncertainties and financial instability can impact borrowers’ ability to repay their BNPL loans, leading to potential increases in defaults. Market players must closely monitor economic indicators and adjust their risk management strategies accordingly.

5 BNPL business models

As the industry grows, market players can explore new business models to grow into the market and better tailor their offerings to meet consumers’ and merchants’ unique needs. There are currently 5 different business models they can adopt:

• #1 BNPL-as-a-Service:

The concept of BNPL-as-a-Service is gaining momentum as it allows financial institutions to offer BNPL as a payment option directly through merchants’ websites and apps. This model can become a key opportunity for revenue growth for banks and other providers in the market.

• #2 Card-linked financing:

BNPL enables users to convert regular purchases into 0% EMI (Equated Monthly Installments) with credit cards, allowing more control at the pre-purchase, purchase, and post-purchase stages of a transaction. The model also attracts users through high-ticket purchases and added benefits like reward points or merchant-offered subsidies.

• #3 Off-card financing solution:

Unlike card-linked financing, this model provides credit with EMIs at 0% APR (Annual Percentage Rate) for the initial months, followed by subsidized APR. It is suitable for mid-to-high-ticket items with low frequencies, such as furniture, home improvement, travel and fitness equipment. Users with high credit scores often use this service to reduce the risk of default payments.

• #4 Rent-to-own model:

This model targets users with low credit scores, allowing them to avail credit for items they wish to own. As the name suggests, the user acquires the item on the day of purchase, yet full ownership of the product will remain with the service provider until all instalments are completed. Rent-to-own models typically carry charges ranging from 1-5%.

• #5 Vertical-focused large ticket size financing:

Market players have expanded their offerings to include high-value transactions in specific industries like green energy, healthcare, and home improvement. These transactions can range from USD 2,000 to USD 50,000. This model can also involve partnerships with major operators or equipment manufacturers, allowing them to achieve high volume and profit margins.

3 innovative use cases of BNPL

BNPL providers are embracing innovation and shaping the payment landscape due to their prevalence in today’s consumer behaviour. Some of the notable innovations include:

• #1 ChatGPT powered shopping assistant – AI in everything:

Providers have started to utilize more AI and ML technologies to enhance their offerings. This increase is because AI-driven apps can better personalize the user experience and offer more tailored recommendations based on their preferences and spending habits.

• #2 BNPL SUPERAPP – Embedded shopping stores:

Market players partner with popular shopping stores to bring them under one roof via an app. This model allows users to use their credit to shop on the BNPL marketplace with their favourite brands, enhancing the customer experience and driving higher revenue for merchants.

• #3 BNPL @POS – Expansion into offline retail:

While BNPL initially gained popularity in online retail, it is now expanding into offline retail environments. Point-of-sale financing options are becoming more common in physical stores, allowing customers to avail themselves of this payment method for in-store purchases. This expansion broadens the scope of BNPL, making it accessible to a wider range of consumers and industries.

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