Buy now, pay later (BNPL, also referred to as “point-of-sale financing” or “installment financing”) is an evolution of traditional layaway plans that allows customers to purchase a product and pay over time. However, unlike layaway plans, mainly used for big-ticket items such as furniture or electronics that the customer receives upon full payment, BNPL allows a consumer to own the product immediately. It is even suited for short-term financing for smaller-ticket items, driving its recent surge.
BNPL commonly offers deferred payment options to shoppers at online and in-store checkouts, allowing the customer to pay for goods in installments, typically over 2–6 months. This short-term financing solution has gained traction among Gen Z and millennial demographics in the US and has been boosted by rising growth in ecommerce within the country. Moreover, the solutions are popular among merchants who want to reduce cart abandonment rates and increase conversions, particularly to appeal to younger generations.
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 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, Block (formerly 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, Block 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.