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).
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.
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.
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 trend 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.
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.
Humm’s BNPL solutions include both B2C (Humm, Bundll, and Humm90) and B2B (HummPro) offerings. 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). 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 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.
Key customers and partnerships
In December 2020, it entered a strategic partnership with neobank Douugh to bring BNPL services to the US market. In partnership with Mastercard, Humm launched ‘Bundll’ 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.
Humm announced that the Australian payments firm Latitude Group Holdings Ltd. (Latitude) had extended a proposal to acquire Humm Consumer Finance (HCF) , which was later terminated by the two parties due to economic headwinds, including deteriorating consumer sentiment amid rising inflation.
Funding and financials
In FY2022, Humm recorded a GMV of AUD 3.5 billion (~ USD 2.5 billion) and revenue of AUD 440 million (~USD 320 million) across its BNPL, credit card, and commercial and leasing business units. Total revenue recorded a marginal decline of 0.8% YoY despite a GMV growth of 21% YoY. The BNPL segment volume grew 21% YoY to AUD 1.3 billion (~USD 0.9 billion), which accounted for ~40% of total GMV, driven by smaller-ticket e-commerce purchases. The BNPL segment reported revenue of AUD 125 million (+ 3.4% YoY) and reported a cash net loss of AUD 17.3 million (~USD 12.6 million) compared to a profit of AUD 1.2 million (~USD 890,000) in FY2021. This was attributed to investments in geographic expansion and margin pressure on larger-ticket purchases.
B2C (App+Virtual Card):
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.
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