Buy now, pay later (BNPL) is an emerging service which makes it easier for consumers to afford their purchases.
As an investor, you might want to sit up and take note.
In a nutshell, here’s how BNPL works.
BNPL companies partner up with merchants, allowing customers to make their payments in a series of interest-free instalments.
The BNPL service provider will settle the full cost of purchase to the merchant right away, taking a small cut of the purchase price in return.
This cut is termed “merchant fees”.
Late fees are also charged to customers who miss their payment deadlines.
Customers love BNPL services because there are no fees involved if payment is made on time, and the onboarding process is fast and easy.
As BNPL options become more widespread, opportunities for investments will increase as well.
Here are three reasons why your next investment could be a BNPL company.
A fast growing market
BNPL is still nascent, but is growing fast.
According to the Worldpay Global Payments Report 2021, BNPL accounted for 2.1% of global e-commerce spending in 2020, an increase of 1.7 percentage points since 2016.
Crucially, its adoption is not showing any signs of slowing down.
By 2024, BNPL’s share of e-commerce payments globally is expected to double to 4.2%.
To get a sense of how large BNPL’s total addressable market (TAM) is, retail e-commerce sales worldwide hit a whopping US$4.28 trillion in 2020 and are projected to reach US$6.39 trillion by 2024.
Using those figures, a quick calculation shows that BNPL providers processed US$89.9 billion worth of e-commerce payments in 2020.
And by 2024, the forecasted figures predict that the figure will rise to US$268.4 billion, a compound annual growth rate (CAGR) of 31.5%.
Merchants love it
If you have ever added items to an online shopping cart but ended up not making a purchase, you are far from being alone.
Research from Baymard Institute shows that more than two-thirds of online shopping carts are abandoned.
The main reason is attributed to customers balking when they see the total bill on the checkout page.
BNPL helps by breaking down the price into a series of smaller, more affordable instalments, thereby encouraging customers to take the plunge when shopping online.
Take Australian BNPL firm Afterpay Ltd (ASX: APT).
According to Afterpay, 83% of merchants who used its services reported increased conversions and fewer abandoned carts, while 72% saw an increase in average order value.
In addition, 66% of retailers using BNPL also noted an increase in customer satisfaction, coupled with an 18% decrease in product returns.
As more merchants see the positive effects of BNPL services, we could see BNPL spread its presence to a greater variety of shops, both online and offline.
Serving the underserved
If you feel that the concept of BNPL sounds familiar, you would be right.
After all, the idea of paying in instalments is not new, and credit cards do allow interest-free instalment payments as well.
But in the past, instalments were typically reserved for big-ticket items, and there are minimum income requirements in place before you can apply for a credit card.
On the other hand, BNPL does not face these constraints.
BNPL companies do not perform extensive credit checks for customers, and instead use proprietary algorithms and initial spending limits to limit credit risk.
In the case of AfterPay, the service for a user is stopped if a payment is missed.
The sign-up process is also straightforward, and shoppers can create an account with just a couple of clicks.
These practices make BNPL providers more appealing to financially underserved customers.
This group of customers include students who do not have access to credit cards, as well as gig economy workers who may not have a fixed income each month.
With BNPL, these customers can better manage their spending and cash flow, making it easier to make purchases that they could not afford in the past.
Get Smart: A regulatory reckoning
Smart Investors should always be aware of the risks related to any investment.
The key risk for BNPL? Regulation.
In recent months, a handful of regulators have expressed their concern over the harmful effects of such credit services.
For example, the Monetary Authority of Singapore (MAS) fears that BNPL could lead to excessive borrowing, especially amongst youths and impulsive shoppers.
MAS is currently considering implementing regulations to rein in BNPL services.
Elsewhere in the world, the UK’s Financial Conduct Authority and the Australian Securities and Investments Commission have made similar warnings.
With BNPL’s growing influence on shopping behaviour and it making up an increasing portion of total transactions, scrutiny on BNPL is only set to intensify.
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Disclosure: Herman Ng does not own shares in any of the companies mentioned.
