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Buy Now, Pay Later
Overview
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.
Industry Updates
Market Sizing
The US market for BNPL platforms could reach USD 8.7–13.7 billion by 2028
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Market Mapping
BNPL industry players operate in four segments, with the B2C (app) and B2B segments 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.
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.
B2C (App)
B2C (App+Virtual Card)
B2B
BNPL Infrastructure
The Disruptors
Klarna, Affirm, and Zip Co are among the industry leaders
More than 90% of SPEEDA Edge disruptors were established after 2010 and have raised close to USD 15 billion in combined funding as of June 2024. 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 4.5 billion in total funding and a valuation of USD 6.7 billion following its USD 800 million funding round in July 2022. UAE-based Tabby is another deep-pocketed player in the space with USD 1.7 billion in total funding, followed by San Francisco-based Affirm with USD 1.5 billion in total funding as of June 2024.
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. Sweden-based Klarna partnered with Airbnb in May 2024 to facilitate AirBnB users with flexible payment options for bookings within the US and Canada.
Funding History
Competitive Analysis
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, 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.
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.
Notable Investors
