With the market for consumer buy now/pay later loans getting more and more crowded — and the valuations of the market's pioneers dropping sharply — many are looking for ways to transform the product in a bid to find an untapped user base.
Not long ago,
But the events of 2022 have hit the BNPL industry particularly hard. Affirm has seen its share price drop by 65% since January, while Klarna has faced a rocky few months, being forced to lay off a tenth of its staff in May before seeing its valuation plummet 85% to less than $7 billion during a fundraising round last month.
There is a confluence of factors creating a difficult market environment, according to Jeff Tijssen, leader of Bain & Co.'s global fintech practice. These range from decreasing revenue due to the cost-of-living crisis affecting spending, to the rising cost of capital from higher interest rates, and increasing consumer credit risk due to high inflation.
"You can't isolate any one of these factors, they are all having an impact," said Tijssen. "And not just on BNPL players, but on the wider fintech, big tech and consumer retail industries, too."
When contacted by American Banker, Affirm representatives pointed to a
One area where BNPL is looking to grow is in the B2B sector with providers such as Mondu, Billie and Tranch offering new ways for small companies to manage stretched cash flows by deferring payments to merchants, or splitting them into instalments. Over the last three years, Berlin-based Billie — a company which is backed by investment from Klarna among others — has served more than 150,000 businesses, financing a total volume of $1.1 billion.
A new direction
Matthias Knecht, co-founder and managing director of Billie, described the B2B e-commerce market as being more resilient to the current landscape of high interest rates which have affected BNPL providers.
"With B2B BNPL, we can assume higher demand from the buyer side since increased interest rates mean that refinancing and working capital funding will become more expensive, and access to external funding will be more difficult," said Knecht. "A BNPL solution offers the buyer additional liquidity for the duration of the payment period granted by the provider, because the costs for the service are carried by the merchant and not the buyer. As a result, I predict that in B2B, BNPL will actually emerge stronger from this crisis."
Philip Belamant, CEO and co-founder of the BNPL lender Zilch, has criticized this model for being invoice factoring dressed up as BNPL. The Zilch platform takes a slightly different approach to consumer BNPL, which Belamant dubs BNPL 2.0.
Rather than attempting to introduce something new into an e-commerce site's checkout process like most providers, Zilch offers a payment card in conjunction with Mastercard. When someone pays using Zilch, they enter the Mastercard number during checkout, which then triggers the option to pay in instalments.
It remains to be seen whether Zilch's approach can gain it the same market presence as Klarna or Affirm, but Belamant predicts that novel BNPL solutions which bypass the retailer in this manner, could represent the future of the industry.
"Traditional BNPL providers are paid by retailers as payment processors to provide a highly commoditized service," he said. "That means that competitive dynamics are always going to place their margins under downward pressure and there's a tension between what is prudent and responsible to lend and what they're contractually obligated to. This is likely to worsen, because there's a mismatch between the oversupply of these buttons providing checkout finance and the finite demand from retailers for payment processing."
Under pressure
The problems for BNPL providers have been compounded by looming governmental regulation. Policymakers have become concerned that the BNPL business model pushes vulnerable consumers into greater debt, with the Federal Reserve Bank reporting that people with lower income and less education tend to be more likely to use BNPL loans.
Tijssen remains bullish that the future of consumer BNPL is strong, but predicts that providers will need to explore other avenues of growth. These include expanding into sectors beyond retail where BNPL services could add value, such as health care or education, as well as attracting wealthier consumers who want to leverage BNPL to manage their finances in a more efficient way.
"The market opportunity remains significant, especially in a macro-economic environment with inflationary pressures where consumers need to look for alternative sources of credit to cover living expenses," he said.
