Pandemic lockdowns accelerated the already growing popularity of buy now pay later transactions. But for the operators behind these transactions, margins are wafer thin. So how sustainable is the business model?
Foreign streets are full of shoppers now the recent pandemic lockdowns in the uk and other nations had a devastating effect on bricks and mortar retail but as consumers were forced to stay at home online shopping surged and that only accelerated the already growing popularity of buy now pay later or bnpl the npl allows consumers to make purchases and pay for them
Over several installments typically that’s across a couple of months or they can delay payment normally for a month so that they can try before they buy if repayments are made on time there’s no interest charged lenders instead make money on the fees levied on retailers for their part merchants generally benefit from increased conversion rates and higher order
Values the npl fintech services have become seamlessly integrated into many online shopping platforms they’re especially popular with millennial and gen z consumers in the u.s clothing and furniture were particularly big sellers during the pandemic a major strength of many bnpl apps is an easy to use intuitive interface it seems like really the key difference
Between your bank and your bank relator is the shiny app on your phone yeah if you think of the apps on your phone uh the banking app is probably the worst app you have it’s a bit slow bit clunky often has downtime and if you contrast that with the apps of firms like planner they’re like very slick like you’re kind of making seamless decisions they’re showing you
Things you like and it’s almost like they’re like the instagram of like banking the value of the global bnpl market was estimated at 120 billion dollars in 2021 up from 33 billion dollars in 2019 but with shoppers back on the high street the outlook for bnpl providers in the year to date has declined dramatically for example in the u.s a firm is a major player in
2020 its most important merchant partner accounting for about 30 percent of its revenue was home fitness company peloton whose popularity rocketed during the covid-19 crisis many new subscribers bought a luxury peloton bike using buy now pay later credits offered by a firm firm started publicly trading on the nasdaq in january 2021 but after reaching almost 50
Billion dollars in market cap last november it lost approximately 90 percent of its valuation by july a post-pandemic trend shared by its e-commerce competitors pre-pandemic in the uk the percentage of e-commerce as a total of retail spend was about 19 and then during the pandemic when the first lockdown hit it went up all the way up to 38 in january 2021 declined
Massively now with the the worst in economic conditions the fact that people are now spending more in a physical environment where buy now pay later doesn’t really translate as convenient as it is online i think that’s kind of why things have changed swedish firm klana is a bnpl giant and was once europe’s most valuable private tech company however a recent funding
Round saw their valuation drop from 46 billion dollars in 2021 to less than 7 billion dollars and losses quadrupled in the first half of this year what we’ve seen is investor sentiment has shifted from you know a drive towards hyper growth that we’ve seen over the past couple of years more towards profitability we’re now at over 150 million consumers globally we’re
In a position now where we can just move that balance between growth you know back towards profitability and that’s going to be our focus it doesn’t change our ultimate goal to disrupt retail banking it’s just a you know a change in the journey to get there in the near term given the external factors that are impacting you know all companies right now chief among
Those external factors right now is the cost of living crisis which has seen food and fuel prices soar worldwide alongside associated rising inflation in turn that’s heightened the concerns of consumer groups already critical of the way some bnpl providers operate we found one in 12 people who’ve used it used it to buy basic centrals like food or toiletries and often
Then do end up struggling so somebody that we helped recently a pensioner who’d borrowed 40 pounds to make the food shop and in her words it was by now pay later or staff so she used it and then is struggling to repay although she’s still being bombarded with offers to borrow hundreds more and what we’re really worried about is with the cost of living crisis raging
We’re going to see people in desperate situations seeing this unregulated form of credit as the answer unlike some other forms of lending bnpl in the uk at least has until now been unregulated but that will change following a report published by the financial conduct authority in 2021 the report called for regulation as a matter of urgency but urgency means is up
The debate legislation is only likely to come to effect by 2023 at the earliest a time frame not helped by political upheaval in westminster an array of institutions have launched bnpl products in recent years with even tech giant apples joining the fray however clana at least remains optimistic about further growth in the uk right now by now parade represents
Roughly five percent of payments in the e-commerce you know area sector that compares to say credit cards which is closer to 30 so from our perspective actually the competition remains credit cards on the shift there rather than against you know other binocular providers in the sector if many investors don’t currently share clana’s bullish outlook for buy now pay
Later as a consumer service there does seem to be far more enthusiasm around bnpl in the business to business space there’s a wave of new companies emerging across europe including hakodo in east london if you think of the dynamics of b2b trade it’s fundamentally unfair let’s imagine that you’re a farmer and you sell to a supermarket your buyer at the supermarket
Is likely to impose 60-day credit terms on you and reciprocally if you’re purchasing your own you know ingredients let’s say manure or seeds whatever your supplier is likely to demand upfront payment from you because you’re the small player so if you can bring a solution to uh you know alleviate the liquidity pressure points throughout the supply chain and bring
Trade credits to people who actually deserve it we’re actually going to create a you know a more fluid economy a kodo is just one of a number of bnpl startups specializing in b2b that have raised significant amounts of vc funding when you think of b2b trade it’s humongous it’s actually about two to three times as large as b2c so in the six markets where we operate
B2b trade is worth 12 trillion dollars bnpl in the b2b space does have similarities to existing supply chain financing and following cases like the green seal capital collapse just like b2c a certain caution and future regulation might be needed for the b2b sector as the bnpl market continues to evolve the remarkable growth in the consumer sector may have cooled
But it could be businesses that prove to be bnpls most lucrative clients foreign
Transcribed from video
Is buy now, pay later a sustainable business model? | FT Tech By Financial Times