And some of the largest players in the BNPL space were founded as early as 2005 (Klarna).īut the sector is certainly gaining momentum.
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The concept of layaway - where a retailer reserves an item until the customer has paid it off - has existed in offline contexts for decades. Why is BNPL accelerating now?īuy now, pay later isn’t a new phenomenon. Affirm, which covers a larger range of transaction sizes, reported increasing AOVs for merchants by 85% in 2019 and 92% in 2018 compared to other payment methods. In exchange for higher merchant fees that are nearly 2-3x what Visa and Mastercard typically charge, BNPL companies aim to drive increased sales conversions and repeat purchases while lowering user acquisition costs.īoth Afterpay and PayPal, which launched its own BNPL feature in 2020, claim to raise average order values by up to 20%. Moreover, BNPL checkout options are seamlessly incorporated into merchant web and mobile sites via APIs that don’t require developer resources. While the BNPL payment option has become popular among millennials and Gen Z shoppers, it has also gained increased attention from merchants.Ī crucial value proposition of the BNPL model is that it helps merchants boost average order values (AOVs) and purchase rates - both key revenue drivers. For example, Affirm’s proprietary credit underwriting model approves 20% more customers on average than comparable competitor products.Īffirm’s unsecured loans are typically originated through partnerships with chartered industrial banks like Cross River Bank and Celtic Bank. Users often opt in for credit products from BNPL providers because they may have a better chance of getting approved. But unlike the 0% APR installments, missing payments on POS loans has the potential to impact credit scores. US-based Affirm and Klarna both offer POS financing, where users are subject to soft credit inquiries and risk-adjusted interest rates. Point-of-sale (POS) financing is also increasingly common among BNPL players as a way to diversify revenue streams. Sweden-based Klarna, another major BNPL player, offers other payment variations, including 3-36 month financing and a Pay in 30 option, but its revenues are predominantly driven by merchant fees as opposed to interest income. Some examples of leading pure-play installment providers include Australia-based Afterpay and US-based Quadpay and Sezzle. Typically, the first payment is made at checkout, and subsequent payments are deducted automatically to avoid late fees.
Additionally, these transactions typically don’t get reported to credit bureaus, which can appeal to some subprime users. The second is to help merchants increase online sales conversions and order values, while lowering user acquisition costs.įlexible payment options for online consumersīNPL providers allow consumers to purchase items online through flexible installments (typically in 4 payments) with no interest or penalties if paid on time, or through fixed-rate interest-bearing loans at the point-of-sale where fees are known upfront.īNPL can be used for smaller purchases - for instance, Klarna offers the service for purchases as low as $10 - without requiring hard credit checks or traditional underwriting. The first is to provide consumers with a seamless purchasing experience, characterized by convenience, transparency, and flexibility.
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