The deal on Buy Now, Pay Later

The concept of installment payments and consumers buying things on credit is not new. Layaway plans became popular during the Great Depression and then became largely supplanted by modern-day credit cards in the 1980s. Over the past decade, the marriage of technology and finance has given birth to Buy Now, Pay Later (BNPL).

 

While there are multiple forms of BNPL, the most common is Pay in 4. As the name suggests, a consumer pays for an item in four equal installments, typically spread over six weeks, and with 0% interest. This is an attractive value proposition for the consumer who really wants that $300 pair of shoes but isn’t comfortable laying out the full amount today. With BNPL, that consumer pays $75 today, and then another $75 during three subsequent two-week intervals thereafter. The merchant also wins, because BNPL enables them to make a sale that they otherwise may not have made, and they are happy to pay a fee to the BNPL provider for facilitating the transaction.

 

Given the strength of the value proposition for both consumers and merchants, we believe BNPL is here to stay as an alternative payment method. BNPL is especially popular among lower- to middle-income consumers, who typically are not focused on accumulating rewards offered by traditional credit cards. They may struggle to qualify for a traditional credit card or may have had a bad experience managing their credit card payments in the past. We see BNPL as a genuinely more consumer-friendly alternative — unlike with traditional credit cards, BNPL is not a form of revolving debt with compounding interest and monthly minimum payments.

 

We also see BNPL as generally having a more attractive credit risk profile than traditional cards. BNPL transactions are underwritten individually, rather than issuing a consumer an open line of credit, as is the case with traditional credit cards. BNPL providers have also adopted AI-enabled models to further increase underwriting proficiency.

 

Today, the BNPL vendor landscape includes a mix of pure-play providers, as well as very large payment platforms and traditional card issuers that offer BNPL solutions to their consumers. Five years ago, BNPL’s share of the U.S. e-commerce market was practically zero, and this has since grown to about 7.5%. We expect BNPL to continue growing faster than the overall e-commerce market. In countries where BNPL started earlier than the U.S., and where credit card rewards are less prevalent (Sweden and Australia are good examples), BNPL’s share of e-commerce has increased to levels as high as roughly 40%. To date, large payment platforms have made limited headway into the BNPL market, and traditional card issuers even less so. The pure-play BNPL providers have continued to generally execute well, and time will tell whether they one day become part of broader financial services companies.

 

In summary, we are bullish on the BNPL market and expect to continue seeing increased participation from both merchants and consumers. Like all forms of credit, BNPL does have macro sensitivity, but it can also represent an important form of cash flow management during periods when consumers feel pinched. Traditionally, BNPL transactions have been concentrated in more discretionary categories of consumer spending (clothing, beauty, electronics). However, this is gradually evolving to include broader non-discretionary areas, especially as very large general merchandise-type merchants (such as Walmart and Amazon) have adopted BNPL, and BNPL providers have rolled out cards that can be used anywhere Visa and Mastercard are accepted. This means that in-store usage will be a trend to watch in the coming years.