Buy Now Pay Later (BNPL) has come from virtually nothing in 2017 to a major force in payments and financial services. In fact, as a financial services analyst for more than 20 years, it’s hard for me to think of a market innovation that has had such an impact, over such a wide geographic area, in such a short space of time.
At RFi we are at the forefront of innovation in financial services and have been tracking BNPL awareness and usage since the beginning of 2017. We now have data on more than 10 markets, ranging from Australia, Canada, New Zealand, Singapore, the UK and the US.
In the UK, 67% of consumers are now aware of a BNPL brand, whilst in Singapore - a market already familiar with instalment payments through credit card programs - four out of five consumers are aware of the BNPL construct. RFi’s data shows that even in Canada, a market where BNPL is very new, 20% of consumers recognise BNPL.
Comparing usage, one in three Australians and Kiwis and one in four Brits has now used BNPL.
The right place at the right time
Part of the success of BNPL can be attributed to the marketing of brands like AfterPay and Klarna who continue to put themselves in front of consumers at the point of sale. In fact, when we ask consumers why they initially used BNPL, one of the most common reasons is "I just wanted to try it."
However, beyond marketing, BNPL success is partly a case of the right product at the right time. Consider the effect of the pandemic over the last 18 months, consumers and merchants are facing unprecedented uncertainty when it comes to their personal economics – many consumers’ jobs are in flux and many merchants have had to drastically alter or consolidate their businesses.
Enter BNPL. For consumers, this 'no-cost' proposition has huge appeal at a time when they want to save money and budget rather than splurge and borrow. Meanwhile, for the merchants (who ultimately fund the model), the cost of BNPL acceptance is offset by the ability to increase average basket price, expand the customer base, achieve higher repeat customer ratios, lower checkout abandonment and reduce risk and overheads of traditional laybuy models.
Mix-shift in growth as markets mature
So, what’s the outlook for BNPL going forward? While historic growth has been impressive, RFi believes that 2021 is not going to be the year in which we see global growth slow down. We expect to see growth coming in several areas:
- New geographic markets – AfterPay, Klarna and PayPal are expanding the category globally with impressive speed
- New consumers in existing markets – in newer, less mature markets we are seeing significant growth in awareness and usage of the BNPL category as a whole
- Increasing engagement of existing customers – in more mature markets, we are seeing an increasing frequency of usage among existing BNPL customers
- New retail categories – As BNPL matures and the competitors seek to find new niches, new merchant categories open up to consumers
As markets mature, we will see a shift in growth, from new category customers to increasingly engaged customers and into new demographic groups.
The first shift tends to be in the demographic makeup of the BNPL user. In the early stages of growth in the markets we study, the take-up of BNPL services tended to be skewed toward younger consumers – 18-24 and 25-34 year olds. Purchases similarly were skewed towards online and fast fashion and to a female audience.
After the initial influx of trailblazers and fast followers, the mass market consumer begins to pay attention. Alongside this, the BNPL brands themselves extend into areas of retail that appeal to different groups of consumers – technology, white and brown goods, DIY, cosmetic surgery. As a consequence, the age profile matures.
The second shift comes when the growth of new customers slows. At this point we see increasing usage among existing BNPL users.
In the Australian market, the proportion of consumers that say they have used at least one BNPL service has not changed materially in the last 12 months. As of March 2021, 32% of Australians had used BNPL, vs 31% in March 2020. Compare this to the UK, wherein a similar 12-month period, the penetration of BNPL services grew from 19% of the population to 24%.
This doesn’t mean the market in Australia isn’t growing. Rather, what we are seeing is that both the number of BNPL brands that each consumer uses is rising and the frequency with which they are making purchases is increasing. More than half of Australian BNPL users are now using multiple brands and more than a third are using BNPL more than once per month.
Compare this to the UK, where just one in three BNPL users is using multiple brands.
Globally, the regulatory response to BNPL will be key to its future growth.
The Financial Conduct Authority (FCA) in the UK has been the most vocal to date. Earlier this year the FCA wrote to Treasury to ask for BNPL to be brought under its regulatory remit. The FCA also published a review of BNPL conducted by former FCA CEO Christopher Woolard, which made 20 recommendations and calls for “urgent” regulation of BNPL.
Meanwhile, in Australia the regulators have been less active. ASIC has indicated two safeguards that it would like to see – capping late payment fees and preventing consumers from making further purchases if they miss a payment. However, according to the regulator, not all BNPL providers have made these changes yet.
Headwinds or tailwinds?
The biggest potential headwind for BNPL providers would be a challenge to their funding models. Currently, BNPL providers need to borrow short-term to fund purchases made by consumers. That works well in the current ultra-low interest rate environment, where costs of borrowing are lower than the percentage fee that BNPL providers get from merchants on the purchase value. However, with increased competition as markets mature, we expect that fee to come under pressure and if it reduces as borrowing costs go up, then that could challenge the whole BNPL model.
In this scenario, finding alternative funding models will be key and many speculate that the larger BNPL brands may seek banking licenses that would enable them to take on consumer deposits as means of potentially self-funding.
Is BNPL here to stay?
So, what is the outlook for BNPL? Clearly the model is popular with large numbers of consumers around the globe and there seems to be plenty of consumer appetite for future usage. In New Zealand, where usage sits at 24%, a further one in ten consumers say they are likely to use a BNPL service. Meanwhile, in Canada, where BNPL is just taking off, 30% of consumers not using BNPL, say they’re likely to start using it in the near future.
One of the key indicators of enduring usage is likely to be CX/ UX and on that front it’s hard to fault the BNPL brands. In the UK, 91% of BNPL users are satisfied or very satisfied. In the US, the equivalent figure is 96% and the NZ and Australian markets tell a similar story.
With a compelling combination of growth opportunities, consumer and merchant demand and fantastic customer experience, it's hard to argue that BNPL is not going to be a category to watch for the foreseeable future.
For more on BNPL, access our latest report, which takes a snapshot look at the future of BNPL in the UK.
I'll be sharing more insights in the coming weeks, but for now you can also watch my latest video, where I do a quick take on four key drivers for BNPL usage.
*This article was originally published on Alan Shield's LinkedIn.