Financials trends report: what's next for BNPL?

“The truth is that BNPL is still in the really early stage of its development,” a former divisional leader at Affirm Holdings Inc told us. However, the future is seemingly full of opportunity. The expert said there are estimations that total processing volumes (TPV) could increase from USD 90bn in 2021 to USD 4tn by 2030. “For any of the players to actually thrive and become the Google of BNPL, how can they strategise their pricing or revenue model to capture a bigger share?”

For context, there are two main types of BNPL offerings: closed and open-loop providers. The former includes companies such as Affirm, Klarna and AfterPay that serve as single providers for the solution, managing consumer lending as well as merchant relationships. The other “fast-growing” side are networks such as Visa, Mastercard, Amex and Discover. “Both achieve similar end purchasing experience but the business model and the go-to-market strategy and the potential market adoption can be very different,” the former divisional leader at Affirm Holdings Inc said. 

The closed-loop players today are channelling their efforts on global expansion. “The US, UK and Australia are the three fast-growing markets in any sort of fintech or BNPL services so it’ll be interesting to see which of those companies can get a much bigger share and grow faster in any of the top three or four global markets,” our expert said.

We heard that some players are also looking to enhance their merchant service offering. “A lot of these providers will want to become a more end-to-end merchant service provider who provides additional value-added services,” the specialist added. Affirm’s acquisition of Returnly last year to help merchants drive higher return-to-repurchase rates is an example of this trend. Affirm also partners with Shopify, which our expert said “is known to be the number one SMB commerce platform for merchants”. It will therefore be interesting to see how other industry players could leverage similar partnerships to “give them a much quicker and bigger lift in the merchant adoption space”. 

As part of this, experts are seeing a push towards more holistic offerings that seek to understand consumers’ mindsets in addition to their financial and lifestyle needs and desires. This is particularly relevant considering that pricing is merchants’ number one question, we are told, because BNPL payment instruments charge a higher fee. Traditional credit cards are about 2.95% whereas BNPL is “at least” 6-7% per transaction. “The merchant cares about why the fee is higher and… what’s the return investment for paying a higher fee?”  

Clearly, one of the biggest concerns regarding the future of the BNPL industry and its users is regulation – or lack thereof. “A lot of these providers make it so easy for consumers to make the purchase without knowing the context of the consumer’s existing affordability and credit risk,” the former divisional leader at Affirm Holdings Inc said. In June, the UK announced that it will toughen regulations, including around affordability and advertising. Similarly in the US there is a heightened focus from the Consumer Financial Protection Bureau. As a former SVP at Affirm Holdings Inc said: as adoption and scale grows regulators could start looking at credit card repayments, for example, as part of a wider crackdown. While this might be good for the industry in the long term, it could cause uncertainty for companies in terms of where and how they should be innovating. 

Another factor to consider is the competitiveness of pure-play BNPL providers (such as Affirm, Klarna and Zip Co.) vs BNPL offerings that are a component of a larger payment ecosystem (such as Afterpay with Block Inc, Pay in 3 with PayPal and Apple Pay Later). A challenge is emerging because these offerings are not differentiated and favour companies like PayPal and Block that have an existing merchant partner and consumer user base. As the BNPL market becomes more crowded, acquisition costs could therefore become substantially higher for pure-play providers.

Still, two experts we spoke to said that by the end of the year there will be close to 100% BNPL merchant adoption in the US. Then it comes down to the volume of transactions, which could be amplified with consumer awareness, among other factors. “I think that’s… where we’ll see a lot of the growth coming from,” the former Affirm SVP said. Indeed, they added that they see distribution moving towards “big platforms” and potentially digital wallets. “In those worlds we’re talking about things like Shopify, for example, even Amazon to a certain extent, we should consider not only a merchant but really a platform, consumer wallets like maybe Apple Pay, Google Pay.” This is “much more of a technology play”, they said, where the playing field shifts to technology capabilities and the ability to underwrite loans to a much wider audience. Here, “they’re less interested in brand and audience base.”

Ultimately, however, the network effect of Visa and Mastercard “is really hard to beat” and the consensus among our experts is that few BNPL providers will succeed at reaching the same level of scale. Smaller regional players could be absorbed by larger players, we heard, resulting in overall market consolidation. “My very candid and potentially blunt opinion is that I think a lot of these other players are going to die out, in terms of the neobanks and fintechs,” a former divisional leader at Cash App Investing LLC (Block Inc) said.

So, while the world of BNPL is seemingly here to stay, the competitive landscape could look considerably different in the years to come to how it does today.