The Buy Now Pay Later market has never been so hot with brands making headlines every week. Klarna’s valuation has skyrocketed to $45 billion, and Square just acquired Australian Buy Now Pay Later solution Afterpay for $29 billion in the first week of August 2021.
Why is Buy Now Pay Later so popular? What makes it so attractive for merchants? Who are the top solution providers?
At OneStepCheckout we identified this trend would be big as a growing number of our customers, Magento merchants, are integrating BNPL offerings into their Magento 2 checkouts. For you, we thought we’d compile insights so you understand what it’s all about.
Buy Now Pay Later, the new popular payment option for online and offline purchases
First, let’s understand what Buy Now Pay Later (BNPL) is.
BNPL is a payment solution that merchants can offer and allow consumers to get their items straight away but only pay at a later stage. Most often:
- A First installment is required straight away and the rest can be paid later either monthly, every 6 weeks etc…
- Or no down payment is required at all and the full amount has to be paid after 14 or 30 days, allowing consumers to receive the item and try it before they pay. This is called “Paid after delivery”.
The first new and very attractive part of this payment method is that consumers often don’t have to pay interest on installments. That’s why adoption has been fast.
No financing middleman
The second new element is that, unlike short-term financing, the agreement often takes place directly between the consumer and the retailers, without the involvement of a third party managing the loan.
Although new technology allowed mobile apps to create a smooth registration process, BNPL solutions can also be used in physical stores. In fact, in the United States, an equal number of BNPL loans are taken up in physical stores vs. online.
Buy Now Pay Later was built for millennials
Buy Now Pay Later is built for consumers who saw their parents and relatives suffer during the 2008 subprime crisis and who suffered themselves during the economic crisis due to the COVID-19 pandemic.
These consumers hate credit, in particular the high fees and the revolving nature of the plans. This is confirmed by recent studies conducted by the Mercator Advisory Group and the Ascent by the Motley Fool.
Frequent BNPL users are young and tech-savvy
- Highest growth and highest adoptions vs other age groups is the 18-24 age bracket, with 61% adoption.
- Reluctant to use credit cards.
- Middle income and skews toward those with sufficient credit.
- Equally distributed across the US.
COVID-19 is a key driver for the adoption of BNPL
As of March 2021, Ascent reported that 56% of Americans have used a Buy Now Pay Later service. Moreover, half of the people who have never used buy now, pay later solutions are at least somewhat likely to use them in the next year.
The pandemic’s economic hardship boosted the trial and repeat usage of BNPL.
Respondents cite related reasons as key drivers for choosing BNPL, including:
- The need to conserve cash in case of an emergency: 41.31%.
- Increased shopping spend 30.04%.
- Lost income and needed a way to make purchases: 24.62%.
Late payment risks
Over a third of US Buy Now Pay Later users say they’ve made a late payment or incurred a late fee. Consumers aged 18 to 24 are the most affected with almost 50% of them not paying on time with 43.80% saying they were “somewhat” or “very” likely to make a late payment in the coming 12 months!
Only 30.91% of consumers say they’re very unlikely to be late, while 17.74% say they’re somewhat unlikely to be late.
Habit is the key barrier against the usage of BNPL
Among the US consumers who said they will not use Buy Now Pay Later solutions, the top reasons are:
- 44.68% say they can use cash or a debit card instead.
- 27.15% say they can fall back on credit cards.
- 10.86% are hesitant to use Buy Now, Pay Later because they don’t understand how it works.
- 10.29% have never heard of buy now, pay later.
Buy Now Pay Later drives an increase in checkout conversion, repeat purchases, and average transaction values (ATV)
Because of its flexibility and convenience for shoppers, merchants who offer Buy Now Pay Later solutions get real advantages vs those who don’t.
Based on promises and results quoted by the various BNPL players, merchants can expect an increase in important KPIs:
- New customers (more traffic, more visitors).
- Conversion at checkout +20% to 30% improvement on average.
- average order or transaction value (also called basket size) +40% up to +85% higher.
- repurchase rate, up to 80% increase.
In addition to this, merchants benefit from even more advantages:
- They don’t bear the credit risk.
- They benefit from exposure to BNPL brands’ merchant networks as well as marketing.
Top eCommerce Buy Now Pay Later Solutions
With half of the Americans using BNPL and total lending forecasted to exceed 100 Billion USD according to the Mercator Group, there is a lot at stake and the biggest market opportunity for BNPL players.
According to Ascent surveys, 48% of respondents said they use PayPal, while 35.6% said they use Afterpay and 25% reported using Affirm.
PayPal (NASDAQ: PYPL), headquartered in San Jose, was created in 2005. The company spun off from eBay Inc and went IPO on its own in 2014.
PayPal already reached 400 million active accounts globally and is present in almost every country in the world with TPV (total payment volume generated through PayPal) exceeding 1 trillion USD for 2021.
Bill me Later/ PayPal Credit
In 2008, PayPal acquired Bill Me Later, a Maryland-based startup that offered a deferred payment and financing option through a network of well-known retailers such as Apple, Zappos, and Walmart. Today this service is now branded as PayPal Credit and the open-ended line of credit is managed by another bank.
PAYPAL Pay in 4
PayPal launched its “Pay in 4” product in 2020 in the United States enabling merchants to get paid upfront while enabling customers to pay for purchases between $30 and $1,500 over a six-week period.
- Split payment in 4 and repay one installment every 2 weeks.
- Starts allowing consumers to repay directly from their bank account as opposed to credit or debit card.
In Q4 2020 the product was used by 3 million unique consumers generating $750M payment volume through 250K unique merchants including Uniqlo, Best Buy, Coach, Aldo, Bed Bath and Beyond.
PayPal’s pay in 4 key success factors are:
- No Late fees for consumers.
- No extra fees to merchants as the service is absorbed in the merchants’ existing PayPal fees.
- PayPal’s unmatched consumer base.
- Integration with Magento 2.4.3.
Here’s a video on how it works:
Affirm (NASDAQ: AFRM) was founded in 2012 and is headquartered in San Francisco.
Affirm offers short term credit as follows:
- Up to $17,500.
- Interest can vary from 0 to 30% annual percentage rate (APR) based on the purchased amount, where consumers shop, and their credit profile.
- Interest is agreed to upfront as consumers choose how fast they want to repay and therefore how much interest is going to be paid in total.
- No fees at all: no late fees, no annual fees.
- Affirm’s App allows shoppers to use Affirm even when stores don’t offer it at checkout.
Merchants that accept Affirm include Walmart.com, Expedia, Adidas, Neiman Marcus, Casper, and Pottery Barn.
Affirm value proposition to merchants:
- +85% AOV.
- 20% repeat purchases.
- Repeat purchases make up for 67% of Affirm’s transactions.
- 6.2M shoppers within its network that can be marketed to.
- +78 Net promoter score.
- Affirm pays the merchant upfront within 1 to 3 business days.
Affirm’s business performance: Gross merchandise volume (“GMV”) for the second quarter of fiscal 2021 was $2.1 billion, i.e. +55% when compared to the second quarter of fiscal 2020.
Affirm’s global expansion: Acquisition of PayBright Inc in January 2021 for its presence on the Canadian market.
Katapult (NASDAQ: KPLT) was founded in 2014 and is headquartered in New York. Their team is dedicated to providing omnichannel lease-to-own solutions with no late fees, ever. They stand out for their ability to serve shoppers with no credit or poor credit. Katapult estimates that 65% of shoppers aren’t eligible for traditional BNPL services, however, they can service more than half of those consumers.
Consumer benefits of Katapult:
- No credit is required.
- 60-second application process with instant approvals up to $3,500.
- Can be used online and in-store.
- 10-18 month lease-to-buy agreements, with options to complete payments early and save money.
Merchants benefits of Katapult include:
- Shoppers fill out 14 fields and get an approval notification within 5 seconds.
- Merchants get funded within 1-3 days, and Katapult takes on the risk of collecting payments from the shopper.
- Merchants can be listed in the Katapult directory, helping Katapult users find your brand.
- Katapult reports a substantial increase in conversion rates and average order values.
- Their net promoter score (NPS) is 47.
- Katapult can be used in conjunction with another BNPL platform, like Affirm, to support shoppers that don’t qualify for prime BNPL offers.
Katapult has partnered with merchants such as Wayfair, Lenovo, Purple, and Motorola. In Q1 of 2021, Katapult received $82 million in revenue, up 88% YoY. Net income was $8.1 million, a 120% increase YoY. Given their IPO in June of 2021 and their official partnerships with eCommerce platforms like Magento/AdobeCommerce, they have been earning more attention in the market this year.
Here’s an in-depth interview with a member of the Katapult team, discussing the growth of BNPL:
Klarna is a Swedish company founded in 2005. It operates in 20 countries and reported 90 million active consumers globally as of May 2021 with 2 million transactions per day.
As of June 2021, with its latest funding round of $639 million and valuation of $45 billion, it’s the highest-valued private fintech in Europe according to Techcrunch.
As of January 2021, 15 million US consumers chose to shop with Klarna, which is the BNPL partner of choice for 20 of the top 100 US retailers including Macy’s, Etsy, Sephora, Saks 5TH, Lululemon, Adidas and Gamestop.
Klarna offers three products for the US market:
- 4 interest-free payments with integrated brands or anywhere Visa is accepted, paid every 2 weeks.
- Pay in 30 days, interest-free.
- 6 to 36 months financing, incurring interest.
They also actively promote their Vibe Reward Club by offering $5 to each member who signs up so as to grow and nurture an engaged pool of shoppers that will shop at their merchant partners.
The Klarna App offers added value with the following functionalities:
- Deals from merchants.
- Pay in 4.
- Track packages.
- Manage returns.
- Earn rewards.
Klarna’s value proposition for merchants:
- +45% in AOV.
- + 30% in checkout conversions as they claim that 44% of shoppers would have abandoned their carts if Pay in 4 was not offered.
- More engaged customers: Customers who choose Klarna shop 20% more often than others.
Klarna’s pricing to US-based merchants includes:
- Fee per transaction: $0.30/ transaction.
- Plus 5.99% of the item value.
- Contract duration: 36 months.
What stands out with this company is its branding and advertising strategy and execution. They have been disrupting all the visual and tone of voice codes in the financial services category by using a pink color, provocative headlines, and ambassadors such as Snoop Dogg and Lady Gaga through 360-degree communications channels including offline media such as TV, and print outdoors.
Here are some examples:
This acquisition made huge headlines as Square (NYSE: SQ), Jack Dorsey’s fintech company announced it will acquire Australian Afterpay (ASX: APT) with $29 billion in stock.
Afterpay was founded in Sydney in 2015 and operates in 3 continents: APAC (mainly Australia & New Zealand), North America (the United States and Canada), and Europe under the Clearpay brand in the United Kingdom.
As of June 30, 2021, Afterpay serves more than 16 million consumers in the US and 75,000 merchants globally.
One of Afterpay’s key selling points to businesses is the use of their channels to drive traffic and new visitors, boasting 27M referrals to their merchants in 2020.
Well-known US-based stores offering Afterpay, whether in-store or online, include Shein, Dillard’s, The Children’s place, Pandora, Adidas, Levi’s, and Ulta Beauty.
Afterpay’s consumer product:
- First payment now and the remaining 3 installments over 6 weeks, interest-free.
- Late fees go up to 25% of the order value.
Afterpay’s value proposition for merchants:
- Loyal and engaged customers: Afterpay users use it 48 times per year.
- +20% in cart conversion.
- Up to +40% in AOV.
- Attract new customers.
- Upload merchant’s logo and picture to their shopping directory.
Merchant pricing is not available on their website, but various sources mention a 4 to 6% transaction fee.
Quadpay is a New York-based fintech company acquired by Australian Zip Co Ltd (ASX: Z1P) founded in 2013 in Sydney.
As of December 31st, 2020, ZipCo has 5.7M active consumers, 3.2M of which are in the USA, a 191% increase YoY, with total app downloads of 4.1m, a 310% increase YoY.
Quadpay is available at most US department stores i.e. Target, Walmart, Costco, Wholefoods, and hot brands among Millenials such as Herschel, Asos, Zara, Mac cosmetics, and other established brands such as Sears, Fanatics, and Newegg.
ZIP is currently launching a global rebrand and the Quadpay brand will be fully replaced by the Zip brand on August 16th, 2021.
- 4 installments to be paid over 6 weeks, interest-free.
- Works wherever Visa is accepted.
- An initial late fee of $5, $7, or $10 depending on shoppers’ state of residence.
- App: generates a Quadpay card that you can keep in your Apple or Google wallet.
The value propositions for merchants:
- +20% in conversion and topline sales.
- 80% increase in repeat customer rate.
- + 60% increase in AOV.
- Instant plug and play integration, no API required.
- Also accepts Amex and Discover.
Merchant pricing: not disclosed but the help page states a set percentage and small transaction fee.
Futurepay is an eCommerce market-focused company part of New Oak Finance, based in New York that leverages its expertise and capabilities in credit underwriting, asset management, and capital markets access. The larger group also caters to another market segment: advancing funds on already earned wages through their Orbispay offering.
According to their LinkedIn page, the company was founded in 2019 with less than 50 staff today.
FuturePay’s consumer product: My Tab™ is really positioning itself for consumers who don’t like credit cards but still want the flexibility to pay for their purchases at a later stage, at their own pace.
- Revolving credit: at the end of each billing period, consumers can pay their balance or carry it over for another month.
- Flat financing charge of $1.50/month for every $50 of carried balance (that’s 3% interest per month).
- Minimum payments are as low as $25/month.
- Real-time application qualifies in <2 seconds.
- One-time approval.
The value proposition for merchants:
- Reduces friction at checkout as no credit card numbers need to be typed in.
- Lower fees than credit cards.
- Repeat purchases due to the revolving nature of the credit.
- Cross marketing driving acquisition of new customers from Futurepay’s merchants’ network.
Sezzle was founded in 2016 in Minnesota and is traded on the Australian Stock Market (ASX: SZL).
One of their key differences is their “Public Benefit Corporation” status and B Corp Certification. That means that a big part of their business is dedicated to instilling a purpose and creating a socially responsible future of payments and retail. Initiatives include setting up scholarship funds, aiding the environmental and education systems through nonprofits, and choosing to work with partner companies that share a common goal to benefit communities at large.
Sezzle has operated in the US and Canada since 2019 and is planning an expansion into India and Europe.
Sezzle’s Consumer products:
- 4 interest-free installments over 6 weeks – no credit score impact.
- Fee charged if a payment fails.
- Fee if the repayment date needs to be adjusted more than once.
- Can increase the approved spending limit once.
- Allows shoppers to build credit.
- Access to exclusive in App merchants.
Sezzle’s 2020 annual report states that Underlying Merchant Sales grew 251% to reach $856M.
As of the end of June 2021, Sezzle reported it reached 2.9 million active consumers (+95.5% YoY) and over 40,000 merchants (+ 150% YoY), including Target, GameStop as well as Pure Hockey, the largest hockey retailer in the US.
Splitit (ASX SPT) is an Australian-based company founded in 2012 with a presence in 30+ countries.
Their product is the only solution that lets consumers use their existing credit cards to pay in monthly installments. That means:
- No application, credit check, or registration is required to start a plan.
- Splitit won’t charge interest or late fees but the credit card issuer might.
The claimed merchant benefits are:
- A +78% improvement in conversion rate as shoppers use their existing credit and don’t have to go through the process of applying for a new credit line.
- Up to 80% higher AOV.
- Connected to 80+ payment and commerce partners worldwide.
- Launched a new platform as a service product that enables white-label implementation in selected categories and markets.
- Launched a point of sale solution to accept Buy Now Pay Later in physical stores.
- Partnership with Union Pay, the world’s largest card network with 9 billion cardholders globally.
In Q1 2021, the company recorded:
- Merchant Sales Value (MSV) up 93% YoY to US$172 million.
- Total Merchants up 167% YoY to 2,800.
- Total shoppers to reach 566,000.
Customers of Splitit include Emma, Simba (mattresses), Vestiaire Collective.
Openpay (ASX: OPY) is an Australian company founded in Melbourne.
They recently launched their US operations (opy.com/us). As of the writing of this article, their website is only focused on merchant acquisition.
Consumer offering (based on what they offer in Australia and the United Kingdom):
- Longer plans: 2 to 6 months with no interest.
- Credit check to ensure responsible lending.
- Monthly repayments.
- Late fee, capped.
- Strong with high AOV items in sectors like Automotive, Health, Veterinary and Home Improvement.
- Increases basket size and AOV.
- Improves brand loyalty.
- Increases customer conversion.
They offer a key difference to other BNPL solutions as their consumers are more mature, have more disposable income, and make bigger purchases.
In order to give you a better representation of what shoppers see, here is how an Openpay integration with OneStepCheckout looks:
If you enjoyed this article and want to know more about Buy Now Pay Later trends in other big eCommerce markets such as the United Kingdom, Australia, or the Netherlands, check out our Full BNPL review here.