The evolution of buy now, pay later

Since the dawn of shopping (or, as far back as the 1840s), postponed payment has been a compelling concept. Breaking large purchases into smaller installments is as attractive for the buyer who’s short on cash as it is for the seller seeking customers of all budget sizes.

“Buy now, pay later” as we know it today probably started with department stores like Nordstrom issuing private-label credit cards in the 1980s and 90s, and in the past decade, BNPL has grown into its own market.

“Retailers loved it at the time because it gave them visibility into customer purchases and history…it was like a de facto loyalty card. But managing the finance side was always a pain,” Nikki Baird, VP of retail innovation at Aptos, told Retail Brew. Enter: BNPL fintech startups.

• Affirm was an early adopter in the space, circa 2012, followed by Afterpay two years later.
• After 10 years operating in Europe, Klarna introduced its services in the US in 2015. Sezzle was founded the next year.

The time is now: These not-quite-credit services, trailing the 2008 financial crisis, have become more popular in 2021. Baird chalks it up to Covid-era “uncertainty,” people laid off from their jobs or fearing another disaster. Consumers want the opportunity to hedge and hold onto money, just in case.

• BNPL spending in the US is up 230% since 2020, per a September report by Accenture (that was commissioned by Afterpay). It’s estimated to total ~$226 billion this year, according to a Juniper Research report.
• PayPal claimed BNPL volumes increased 400% on Black Friday alone.

“There are fundamental shifts happening in how consumers shop, pay, and bank. The pandemic accelerated online shopping and demand for BNPL services, and the old banks and credit card systems have not kept pace,” David Sykes, Klarna’s head of North America, told us.

VCs and deal-makers are opening their wallets for a slice of the pie. Just this year, Klarna raised $1 billion in March, plus an additional $639 million in June that valued it at $46 billion. Meanwhile, Afterpay was snapped up by Square (now Block) for $29 billion, and PayPal purchased Paidy, a Japanese BNPL platform, for $2.7 billion. Affirm also went public.

Retailers, too, are hopping on the BNPL train in droves. Klarna now works with 250,000 global retailers including Macy’s, Sephora, and Under Armour. Afterpay’s roster counts Nordstrom, Lululemon, Urban Outfitters, and even Amazon.

• Speaking of the tech behemoth, Amazon just recently partnered with Barclays to roll out an installment-plan service in the UK. (It also linked up with Affirm this year.)

“What buy now, pay later does is it takes all of the risk from the financial perspective off of the retailer…and it lets them outsource it,” Baird said. “The fee they ended up paying the buy now, pay later company, in order to work with them, is totally made up on the volume that they get out of consumers who maybe wouldn’t have made that sort of larger outlay all at once, but is more than happy to break that up over three or four payments.”

• Merchant fees per BNPL transaction can range from 1.5% to 7%, noted the Kansas City Fed.

It’s also a value add: Offering BNPL boosts retail conversion rates 20% to 30%, according to RBC Capital Markets estimates. Ticket sizes, on average, see a 30% to 50% bump.

“From a merchant perspective, they’re looking for new ways to attract a younger audience and a different audience,” Afterpay’s GM of North America, Zahir Khoja, told Retail Brew, “but also a higher basket size from a demographic that they may not have attracted in the past.”

Start ’em young: Afterpay and its fintech cohorts are counting on Gen Z and the wider shift to e-comm to boost its business and the space at large. “The younger shopper in particular is showing an aversion towards what I would call expensive credit, interest, and excessive fees,” Khoja said. “It allows you to use this as a budgeting tool that doesn’t prohibit you from buying things. From a consumer perspective, it fits very nicely into the lifestyle [of] the younger generation. And it’s in a digital format that makes sense to them.”

According to a study by Nerdwallet, one in five holiday shoppers—22% of which were Gen Z—chose BNPL as their main mode of payment. Baird points to the generation’s “sensitivity around credit.” But it’s possible that in choosing these purchasing methods to fend off debt, younger consumers are just…racking up more debt. (See this in-depth piece by Retail Dive.)

Of the Gen Z BNPL–loyal respondents, 43% admitted to missing at least one BNPL payment this past year, per an October report from Piplsay. It might be a widespread case of eyes-bigger-than-stomach, or in this case, wallet.

• The Consumer Financial Protection Bureau said this month it plans to look into BNPL platforms and how they might add to debt, among other concerns.

“[There’s] the potential for backlash for consumers getting in over their heads, where maybe they belong to four or five different BNPL schemes and get themselves into a bind,” Baird warned. “Just because we’re seeing such a huge growth curve and upward trajectory today doesn’t mean that we’re going to sustain that forever. At some point, it’s going to level out. It’s just the law of large numbers.”

Back to the store: Until then, BNPL will follow shoppers wherever they go, even to the mall. As people re-embrace in-person shopping, fintech is already rushing to cash wrap. It’ll take some work, of course, to educate consumers and implement seamless tech. But the startups are wasting no time.

Afterpay, for example, expanded its service to physical stores after witnessing the success of BNPL in 2020. “There are benefits to having that available for the consumer in store…They can try it on, touch it, feel it, and they can take it home right away,” Khoja said.

• Klarna, too, is moving to the storefront via new partnerships with mall owners Simon and Macerich and thousands of brands like Bed Bath & Beyond.

“During the past year, retailers saw the benefit of offering BNPL on their e-commerce sites,” Baird explained. “Now they want to capitalize on those benefits in the physical retail setting.”