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Buy Now, Pay Later

A flexible alternative to credit

Overview

Buy now, pay later brings installment financing to the checkout

Buy now, pay later (BNPL, also referred to as “point-of-sale financing” or “installment financing”) is an evolution of traditional layaway plans that allow customers to place a product on hold and pay over time, receiving the product upon completing payment. While these plans were mainly used for big-ticket items, such as furniture or electronics, the recent surge in BNPL has been driven by startups introducing short-term financing for smaller-ticket items.

BNPL commonly offers deferred payment options to shoppers at online and in-store checkouts, allowing shoppers to claim ownership of the product immediately, while the BNPL provider pays the merchant in full for the goods upfront. The customer then pays for the goods in installments, typically over 2-6 months, which go to the BNPL provider instead of the merchant. The BNPL provider screens the shopper using a soft check or hard check, (the latter is reported to the credit bureau), approves the plan, and assumes the credit risk. The provider partners with third-party lenders to originate loans and pays interest in return. Although this is the most common way to fund loans, some larger providers also offer loans utilizing their balance sheets (e.g., Affirm).

What's driving this industry?
Market Sizing

The combined market for BNPL platforms in the US could reach USD 2.3 - 4.6 billion by 2025

Conservative case

USD 2.3 Bn

Base case

USD 3.5 Bn

Expansion case

USD 4.6 Bn

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COVID-19 IMPACT

E-commerce prevailed as a primary benefactor of the Covid-19-led store closures and social distancing policies, which subsequently led to a higher uptake of BNPL services:

  • 64% of users claimed to have increased the use of BNPL since the start of the Covid-19 pandemic.

  • The frequency of average monthly purchases per user through BNPL providers increased to 5.0 in June 2020 from around 3.1 per user in June 2019.

The shift to e-commerce translated to significant growth in key metrics such as gross merchandise value (GMV) and revenue for several disruptors:

  • Sezzle’s GMV and revenue grew more than 250% YoY in FY2020.

  • Afterpay doubled revenue in FY2020 and recorded GMV growth of 110% YoY.

  • Affirm witnessed GMV growth of 77% along with revenue growth of 93% YoY in FY2020.

  • Openpay almost doubled GMV and witnessed revenue growth of 64% YoY in 2020, driven by a 52% increase in merchant sign-ups over the same period.

  • Payright reported a 63% growth in GMV and almost a threefold increase in revenue in FY2020.

However, the influx of users with lower credit quality poses a threat to BNPL providers' profitability:

  • Klarna reported losses increasing sevenfold (to around USD 60 million) in the H1 FY2020, citing increased credit losses as a result of the pandemic.

Market Mapping

BNPL industry players operate in four segments, with the B2C (app) niche housing the bulk of startups in the space. The heavy B2C focus is a result of BNPL services being used primarily as an e-commerce payment method and the relatively low barriers to entry. Startups from the B2C (app + virtual card) segment account for the majority of total funding and include large players such as Affirm, Klarna, and Zip Co.

The BNPL infrastructure segment is the least populated, with only a handful of startups. One possible reason could be that retailers prefer to take advantage of the brand value of large players by integrating with them instead of building in-house BNPL payment options. Hence, monetization opportunities may be limited for infrastructure players.

Incumbents typically include banks, credit card networks, and financial service providers that offer B2C apps. They provide in-house BNPL offerings that are an extension of their core products (e.g., credit cards and digital wallets). Due to the heterogeneous nature of the product, incumbents and disruptors compete on merchant and customer reach, with incumbents such as PayPal, Visa, and Mastercard possessing a competitive advantage in this area.

Incumbents
Growth
Early
Seed
Pre-Seed
B2C (App)
?
B2C (App+Virtual Card)
?
B2B
?
BNPL Infrastructure
?
Technologies
Technologies
Technologies
Technologies
PayPal
Visa
American Express
Mastercard
JP Morgan Chase
Citibank
Curo
Citizens Bank
Capital One Financial Corporation
Synchrony Financial
Santander Bank
Openpay
Splitit
Revo Technologies
Payright
Humm Group
Uplift
DivideBuy
Katapult
Addi
Kueski
Fly Now Pay Later
Tabby
Tamara
Kafene
Alma
Wisetack
ViaBill
Edstart
Paypo
Deferit
PrimaHealth Credit
Nelo
Walnut
Graviti
Willow
Square
Alliance Data Systems
Goldman Sachs
Apple
First National Bank of Omaha
Standard Chartered
Klarna
Affirm
Zip Co
Sezzle
Sunbit
Laybuy
Zilch
Scalapay
Bumper
Aplazo
Butter
Leanpay
Finloup
Neon Financial Inc.
American Express
Fintex Capital
Affirm
Zip Co
Behalf
Splitit
Billie
Resolve
Vartana
Now
Credit Key
Butn
Hokodo
TruePay
Cacheflow
medZERO
BlueTape
Playter Pay
Tillit
Biller
Topi
Visa
American Express
Mastercard
Alliance Data Systems
Amount
Divido
Jifiti
LimePay
ChargeAfter
Skeps
Equipifi

The Disruptors

Klarna, Affirm, and Zip Co are industry leaders

More than 90% of SPEEDA Edge disruptors were established after 2010 and have raised a combined USD 10 billion in funding as of August 2021. B2C (app+virtual card) startups have raised a majority of this total with leading disruptors such as Klarna, Affirm, and Zip Co combining for the bulk of it. This can be partly attributed to balance sheet requirements for originating loans, which creates a need for significant funding to maintain merchant and customer base growth. Incumbents, on the other hand, are able to leverage their existing merchant and customer base through core offerings (e.g. credit cards and digital payment methods) to push their BNPL products—requiring less cash on hand.

Sweden’s Klarna is the highest funded disruptor in the space with USD 3.7 billion raised at a USD 45.6 billion valuation as of its USD 639 million round in June 2021. San Francisco-based Affirm is another deep pocketed player in the space with USD 2.9 billion raised ahead of its Nasdaq listing in January 2021.

A common thread in the BNPL industry is players using partnerships and acquisitions to expand their merchant and customer base. This includes companies such as Zip Co, which made four separate acquisitions to expand into Europe, the Middle East, and the US.

B2C (App)

?

Disruptors

?
Funding in USD Millions
Humm Group
Public - Market cap USD 328.2 mn
Katapult
Public - Market cap USD 256.4 mn
Splitit
Public - Market cap USD 88.9 mn
Openpay
Public - Market cap USD 66.7 mn
Payright
Public - Market cap USD 14.9 mn
Uplift
689
DivideBuy
493
Addi
376
Kueski
300
Fly Now Pay Later
172
Tabby
132
Tamara
116
Kafene
89
Alma
74
Wisetack
64
ViaBill
57
Revo Technologies
27
Edstart
17
Paypo
17
Deferit
11
PrimaHealth Credit
1
Watchlist
?
Nelo
Walnut
Graviti
Willow

B2C (App+Virtual Card)

?

Disruptors

?
Funding in USD Millions
Affirm
Public - Market cap USD 19.4 bn
Zip Co
Public - Market cap USD 3.3 bn
Sezzle
Public - Market cap USD 426.3 mn
Laybuy
Public - Market cap USD 40.8 mn
Klarna
3738
Zilch
339
Sunbit
210
Scalapay
203
Bumper
46
Aplazo
42
Butter
22
Watchlist
?
Leanpay
Finloup
Neon Financial Inc.

B2B

?

Disruptors

?
Funding in USD Millions
Affirm
Public - Market cap USD 19.4 bn
Zip Co
Public - Market cap USD 3.3 bn
Splitit
Public - Market cap USD 88.9 mn
Butn
Public - Market cap USD 39.0 mn
Behalf
462
Billie
149
Resolve
85
Vartana
57
Now
41
Credit Key
36
Hokodo
17
Watchlist
?
TruePay
Cacheflow
medZERO
Topi
BlueTape
Playter Pay
Tillit
Biller

BNPL Infrastructure

?

Disruptors

?
Funding in USD Millions
Amount
243
Divido
49
Jifiti
29
LimePay
27
ChargeAfter
17
Skeps
11
Watchlist
?
Equipifi

Humm Group

Humm (formerly Flexigroup) is a BNPL provider operating in Australia, New Zealand, and Ireland. Flexigroup acquired Certegy Australia (a provider of interest-free financing in Australia and New Zealand) for AUD 31.4 million (approximately USD 30 million) in 2008. It underwent a corporate rebrand in August 2020 to focus on the BNPL segment, which saw Flexigroup unified with its BNPL brand Humm (launched in 2019 by Flexigroup through the restructuring of its legacy platforms, including the Certegy financing products). Flexigroup’s consumer finance (cards), commercial leasing, and SME financing services are also provided under Humm Group after the rebrand. Additionally, the company announced plans to raise AUD 140 million (approximately USD 97 million) in funding. In December 2020, it entered a strategic partnership with neobank Douugh to bring BNPL services to the US market.

Humm’s BNPL solutions include both B2C (Humm, Bundll, and Humm90) and B2B (HummPro) offerings. In partnership with Mastercard, Bundll launched in February 2020 to provide cardholders the option to use their ordinary Mastercard at any merchant either in-store or online to make purchases up to AUD 1,000 (approximately USD 730) and repay in 14 days at 0% interest. Furthermore, Humm90 (launched in November 2020) offers up to 110 days interest-free on all purchases with no minimum spend. In addition, users can convert purchases of more than AUD 250 (around USD 180) into an interest-free installment plan across 9, 12, or 15 months, while long-term financing up to 60 months is available at select retailers.

Humm’s original BNPL product is split into two, namely, “Little things,” providing financing for smaller ticket purchases up to AUD 2,000 (approximately USD 1,460), and “Big things,” financing purchases up to AUD 30,000 (around USD 22,000). Smaller ticket purchases can be spread across 5-10 biweekly payments, while larger ticket items can be repaid over 6-60 months. Upon signup, users will be approved for the smaller wallet, and credit limits will depend on the soft credit check conducted by Humm. The approval process for purchases above AUD 5,000 (approximately USD 3,660) is longer and is provided to fund one specific transaction.

Humm generates revenue through merchant service fees, interest, and consumer fees. The late payment fee for both wallets amount to AUD 10 (USD 8), respectively. The larger wallet charges include an establishment fee between AUD 35 (USD 25) and AUD 90 (USD 65) for initial purchases and AUD 22 (USD 16) for repeat purchases.

Humm launched its B2B solution for small businesses, HummPro, in February 2021. The solution offers businesses to secure up to AUD 30,000 in financing to be paid in 6-12 months for a monthly charge of AUD 15 (USD 11), a minimum monthly plan fee of 1.5% (of the monthly balance), and a late fee penalty of AUD 20 (USD 15).

In June 2021, it launched a digital card, Humm//TAPP, allowing users to pay in-store regardless of the merchant’s POS system. Humm claims that it significantly reduces the time to integrate with the merchant (usually three months) for the in-store use of BNPL solutions. The service is provided in partnership with Mastercard and is available in-store at all Humm merchants.

Humm announced that the Australian payments firm Latitude Group Holdings Ltd. (Latitude) had extended a proposal to acquire Humm Consumer Finance (HCF) . HCF comprises its BNPL, installment, and credit card operations. The two parties have entered into a non-binding agreement to conduct due diligence and negotiations for a definitive agreement.

In FY2021, Humm recorded a GMV of AUD 2.7 billion (approximately USD 2 billion) and revenue of AUD 121 million (approximately USD 92 million) with 82,000 merchants and around 2.7 million customers. Interest income represented 75% of its revenue, while the rest included account servicing fees and transaction processing fees. As a result, the segment generated AUD 100,000 (approximately USD 75,000) in net profit in FY2021.

Segment:
B2C (App)
Competitors:
Openpay, Payright, Deferit
Disruptor Funding History

B2C (App):

Katapult
Splitit
Openpay
Payright
Uplift
DivideBuy
Addi
Kueski
Fly Now Pay Later
Tabby
Tamara
Kafene
Alma
Wisetack
ViaBill
Revo Technologies
Edstart
Paypo
Deferit
PrimaHealth Credit
Nelo
Walnut
Graviti

B2C (App+Virtual Card):

Affirm
Zip Co
Sezzle
Laybuy
Klarna
Zilch
Sunbit
Scalapay
Bumper
Aplazo
Butter
Leanpay
Finloup

B2B:

The Incumbents

Core offerings form the foundation for BNPL solutions developed in-house

Incumbents in the BNPL space include banks, credit card network providers, and payment technology providers that commonly enter the industry by developing in-house products. This is an expected strategy, given that installment financing is an extension of their core products. Furthermore, their existing merchant reach allows them to bypass re-integration with merchant checkouts, translating to a competitive edge.

Leading payment technology providers and credit card networks such as PayPal, Square, Visa, Mastercard, and American Express offer B2C solutions leveraging their existing merchant and customer reach. However, while the solutions from incumbents like Visa may be restricted to one specific network, leading disruptors establish partnerships across networks to appear more attractive to merchants and shoppers. In addition, incumbents frequently invest in BNPL startups, with all four credit card network providers having participated in startup funding rounds. Leading startups such as Klarna, and Affirm focus on monetization through the merchant, while credit card networks focus on the shopper as the primary avenue for BNPL monetization.

Prominent banks such as JPMorgan Chase, Citizens Bank, and Citibank compete on larger balance sheets, lower cost of funds, better underwriting models, and an established customer base acquired through their core offerings.

More recently in July 2021, it was reported that Apple was working with Goldman Sachs on its in-house BNPL product “Apple Pay Later”. The product seems to be an extension of its installment financing for Mac and iPad purchases made through the Apple Card. Following this, Square announced that it would acquire the leading Australian BNPL provider Afterpay for USD 29 billion, a 31% premium to its market value, via a share swap.

In-house development

Acquisition

Partnership

Investment

company-logo-0PayPal
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company-logo-1Visa
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company-logo-2American Express
check
check
company-logo-3Mastercard
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check
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company-logo-4Square
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company-logo-5JP Morgan Chase
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company-logo-6Citibank
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company-logo-7Alliance Data Systems
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company-logo-8Curo
check
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company-logo-9Citizens Bank
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company-logo-10Goldman Sachs
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company-logo-11Apple
check
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company-logo-12Fintex Capital
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company-logo-13First National Bank of Omaha
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company-logo-14Capital One Financial Corporation
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company-logo-15Synchrony Financial
check
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company-logo-16Standard Chartered
check
check
company-logo-17Santander Bank
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PayPal

PayPal entered the BNPL market with the acquisition of “Bill Me Later” in 2008, when it was still under eBay, for nearly USD 1 billion in cash and stock options. Bill Me Later, founded in 2000, offered deferred and flexible payment options at the point-of-sale for online shoppers. It was projected to generate USD 150 million in revenue in 2009 and was considered to have one of the leading credit decision-making and underwriting models in the consumer credit industry. Bill Me Later operated as a separate business under PayPal until it was rebranded as PayPal Credit in June 2014 and expanded into the UK and Germany. PayPal Credit offers financing options up to 6 months for purchases above USD 99 at zero interest and 24% APR thereafter.

In August 2020, PayPal launched “Pay in 4” in the US, allowing customers to split purchases over four separate interest-free installments. The payment facility enables customers to spread transactions between USD 30 and USD 1,500 over six weeks. Missed payments incur penalty fees that vary by state depending on where customers reside. PayPal is primed to challenge leading disruptors such as Klarna, Affirm, and Afterpay due to its significant global network (more than 300 million consumer and merchant accounts across 200+ markets), allowing it to offer BNPL financing to PayPal merchants at no extra cost. In addition, the BNPL option will also appear in the PayPal digital wallet for existing customers, bypassing redirections to third-party gateways. PayPal reported over USD 9.5 billion in BNPL transaction volume for the trailing twelve months ending September 2021, with a total of 9.5 million customers and 950,000 merchants. The company is also planning to expand BNPL to Spain and Italy in Q4 2021. 

PayPal expanded its BNPL solutions to the European market (including the UK, Germany, and France) and most recently to Australia in March 2021. Furthermore, Paypal announced its plans to acquire the Japanese BNPL player Paidy for JPY 300 billion (approximately USD 2.7 billion), reported to be a majority cash deal in September 2021.

Founded in 2008, Paidy is a Japanese BNPL solution provider launched in 2014 that initially offered its payment option at checkout, allowing users to settle payments with a consolidated monthly bill. In October 2020, Paidy announced “Paidy 3-Pay,” a financing option enabling customers to split transactions into three equal payments with no interest or account set-up fees. Paidy also offers additional solutions such as Paidy Anywhere (registering Paidy as a Visa card) and Paidy Plus (pre-approved limits for financing). The company uses proprietary algorithms in its credit underwriting decisions. As of March 2021, it had access to more than 700,000 e-commerce sites in verticals such as beauty and health, fashion, digital content, and consumer durables. In April 2021, Paidy announced a new feature, Paidy Link, which can be used to link Paidy’s app with third-party digital wallets. The launch partner was PayPal, giving Paidy customers access to around 29 million PayPal merchants worldwide.

Paidy’s average order size is around USD 400 to USD 500, while smaller ticket purchases (ranging from USD 50 to USD 200) are also emerging. Additionally, Paidy had attracted investments from payment giants such as Visa and PayPal in 2018 and 2019, respectively. Paidy has raised a total of around USD 400 million to date and counts more than 6 million registered users (September 2021).

Following the acquisition, Paidy will maintain its brand and operate under the leadership of Russell Cummer (Founder/ Executive Chairman, Paidy) and Riku Sugie (President/CEO, Paidy). The acquisition is expected to close in Q4 2021. Since Japan is considered to be a hotspot for growth in the BNPL space, given its consumer affinity towards e-commerce, the acquisition strengthens PayPal’s footing in the BNPL space and expands its operations in Japan.

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