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BNPL Potential

August 16th, 2021

Market Views

In early August, Square, Inc., announced a $29 billion acquisition of Afterpay, a pioneer of Buy Now, Pay Later (“BNPL”).  Many asked: What is BNPL?

It is a financing solution that enables consumers to make purchases in installments. Through a BNPL partner, merchants provide a consumer with a way to purchase a product now while allowing the consumer to pay for the product later, over several specified payments (for example, 4 biweekly payments or 12 monthly payments).

Consumers appreciate the convenience of financing their purchases at the point of sale, and they get a line of sight to paying down balances at lower stated rates (sometimes 0%), making BNPL a highly competitive alternative to credit cards.

The 0% rate is possible because the merchant subsidizes the cost of financing by offering the product at a discount to the BNPL partner who then sells it to the consumer at the full price.  The merchant gives up some economic rent with the hopes of getting customers to both buy more frequently and to buy higher ticket items. The consumer pays in installments without incurring interest expense.

BNPL has enjoyed explosive adoption over the last few years, driven in large part by the purchasing behavior of younger generations.  Just as Boomers and Gen-Xers embraced credit cards over the past few decades, younger consumers are flocking to BNPL as their payment choice. According to a recent CNBC survey, Gen-Z and Millennials are drawn to BNPL solutions for their convenience.  Some stats:

  • A report from found that BNPL solutions increase Millennial basket order sizes by an average of 44% and increase overall conversion to “sales from basket” by 30%.
  • BNPL provider Affirm noted that in 2018 and 2019, merchants using their solution reported 92% and 85% higher order values when compared to other payment methods on the same website.
  • An Afterpay survey of global consumers in 2020 found that about 50% would be more likely to buy from a merchant that had an installment payment solution. No wonder Afterpay served about 16 million users and 100,000 merchants globally as of June 30, 2021 (per the transaction press release).

What are BNPL companies worth? The $100 billion aggregate value of the three main BNPL companies (Klarna, Afterpay, and Affirm) demonstrates BNPL’s potential as a preferred consumer financing solution.

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