What is Buy Now Pay Later?
Buy Now Pay Later (BNPL) is a short-term loan that allows consumers to make purchases and spread the cost over a future series of installments, usually weeks or months. The first installment is due at checkout, followed by equal payments period by period. While short-term BNPL products are typically interest-free, longer-term products may charge interest. BNPL's use has expanded from online purchases to in-store, and become popular for electronics, fashion retail, furniture, and appliances, even extending to services like travel and health care. Significant players include Affirm, Afterpay, Klarna, Sezzle, Zip, Clearpay, Laybuy, and PayPal's BNPL model.
Growth in BNPL
More people opt to use BNPL services each year. An estimated 15 million adults in the U.K. are actively using this form of credit. A 2021 Accenture report showed BNPL users in the U.S. increased by 300% since 2018, reaching 45 million active users in 2021 and expected to reach 76 million by 2025. The user base is predominantly Millennials and Gen Z, along with lower-income consumers who may lack traditional forms of credit. By 2023, an estimated 3% of global e-commerce revenue will come from BNPL.
BNPL deals
With the magnitude of deals occurring, some are dubbing BNPL the hottest business in payments. Most companies are choosing to buy instead of build, and the fastest way in is via M&A. 2021 saw Block's all-stock purchase of Afterpay for $29 billion, and PayPal's $2.6 billion cash deal for Paidy. In 2021, 50% of all M&A activity in the payments industry revolved around BNPL.
Benefits to BNPL
For consumers, the primary benefit is credit, especially for lower-income consumers with limited means. BNPL also offers a predetermined, simplified repayment schedule, and consumers with little credit history can use it to build credit. For merchants, Klarna and Affirm report less cart abandonment and a 20% repeat purchase rate, with higher average transaction values. Merchants also shift chargeback and fraud risk to the BNPL firm, and gain a competitive advantage by attracting consumers who prefer these plans.
Concerns with BNPL
High growth and lack of regulation have raised concerns, particularly about users spending more than they can afford. Soft credit checks let consumers accumulate debt across multiple lenders and risk financial overextension. BNPL can encourage impulse buying: Klarna and Affirm estimate users raise order value by 81% versus those who pay upfront. Multiple products often result in late and missed payments leading to interest accrual. Merchants also bear costs: a BNPL transaction varies from 1.5 to 7 percent of total value, compared to 1 to 3 percent for typical card transactions, and returns can be arduous.
Conclusion
BNPL's growth is undeniable as it is increasingly offered by merchants and used by consumers. While it benefits consumers and merchants alike, it also comes with many concerns and uncertainty. Regulation may need to be enacted to better protect the consumer, and merchants must carefully weigh the costs versus benefits of offering these payment options.
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