DISCUSSION
Will the ‘Buy Now, Pay Later’ model overcome economic and regulatory challenges?
Written by Tom Ryan
The newly launched Klarna Card offers its “Pay in 4” service in a physical VISA card form – Photo: Klarna
“Buy Now, Pay Later” (BNPL) services, such as Affirm, Afterpay, Clearpay and Klarna, saw explosive adoption as e-commerce upshifted into a higher gear during the pandemic, but are now facing questions over their sustainability against a tide of rising interest rates, inflation and regulatory threats.
The services let shoppers defer payments to a later date or break up purchases into interest-free installments.
Rising interest rates narrow already-thin margins for BNPL providers. Their profitability is dependent on their own borrowing rates being much lower than the fees charged to merchants for their service.
Soaring inflation and concerns about a possible recession are making consumers more apprehensive about purchasing the big ticket items best suited for extended payments.
Finally, the fast growth of the largely-unregulated BNPL space has been drawing more scrutiny from state and federal authorities over concerns that consumers are not aware of the large late fees that can accumulate.
Regardless, many consumers discovered the benefits of BNPL’s flexible payment options and avoiding the financial commitments involved with credit cards, even on lower ticket items.
Experian’s “Global Insights Report,” based on a survey of 6,000 consumers globally in March, found that 18 percent had used BNPL in the past six months. Fifty-seven percent said they believe BNPL could replace their credit card and 71 percent perceive BNPL as secure. In the U.S, 80 percent of respondents use BNPL to avoid credit card debt.
GlobalData’s report, “Buy Now Pay Later – Thematic Research,” which came out in late May, found BNPL expanding from $33 billion in 2019 to $120 billion in 2021, driven by greater adoption by merchants including Amazon and Shopify. GlobalData predicts BNPL sales will increase nearly five-fold to $576 billion by 2026, driven by appeal to Millennials and Gen-Zers.
Some fintech watchers believe reasonable regulations could ultimately help consumers gain a greater sense of trust in the payment model to support growth.
Apple, which recently announced plans to offer BNPL loans starting in September, could be a threat to the pure BNPL providers. Amrit Dhami, associate analyst at GlobalData, however, said Apple’s entry “could help to combat negative publicity in the BNPL market around the lack of transparency of contracts and the obscured impact of BNPL services on consumers’ credit scores.”
- Klarna closes major financing round during worst stock downturn in 50 years – Klarna
- Is Buy Klarna valuation plunges 85% to $6.7 billion as ‘buy now, pay later’ hype fades – CNBC
- Buy Now, Pay Later Industry In Flux Amid Inflation and Potential Recession – Adweek
- Experian Finds Mobile Wallets Rival Traditional Payment Methods – Experian
- ‘Buy Now Pay Later’ global transaction value reached $120 billion in 2021, according to GlobalData – GlobalData
- Apple Pay Later raises new concerns over the lack of regulation of buy now, pay later services, says GlobalData – GlobalData
- Regulations, the double-edged sword for the BNPL space – GlobalData
- Inflation and a Possible Recession May Cement BNPL in Consumers’ Wallets Forever – Morning Consult