Fueled by the Pandemic, Buy Now, Pay Later Is Reaching an Inflection Point

As ecommerce reached new heights during the Covid-19 pandemic, so too have a bevy of fast-growing platforms that offer shoppers interest-free ways to delay payments on big-ticket items. While buy now, pay later (BNPL) companies like Klarna, Afterpay and Affirm aren't new, they've emerged as a formidable alternative to the credit card industry in recent months thanks to the growing popularity of BNPL among millennial and Gen Z consumers during coronavirus-related lockdowns. A flurry of deals between retailers and BNPL platforms as well as eye-popping investments, acquisitions and public offerings have now made these companies ubiquitous across the retail landscape. Most recently, Square bought Afterpay this month in a blockbuster $29 billion deal that aligned two giants of the financial tech sector. Research firm CB Insights estimates the BNPL space will balloon to 10 to 15 times its current size in the next three years, reaching a valuation of $1 trillion—roughly an eighth of the credit card industry. "There is growing evidence that BNPL is at an inflection point," a CB Insights analyst wrote in a research note last week. Is ‘Buy Now’ Twitter’s E-commerce Future? But as BNPL companies scramble to shore up more merchant clients and integrate further into payments processes, the possibility of more regulation also looms, according to analysts. "I fully foresee that regulation is on the horizon, for this is as an economy," said Gartner ecommerce analyst Ant Duffin. Deals for access to merchants Through deals like Square's purchase of Afterpay or Affirm's recent acquisition of online returns platform Returnly, BNPL companies are finding access to new merchants and feeling out ways to expand into other parts of the payment and retail pipeline. For Square, it gets more cachet with Afterpay's largely millennial and Gen Z base as well as an opening to many of its clients in the retail industry, according to Holden Bale, head of commerce at Brooklyn-based agency Huge. How exactly Square plans to integrate those big enterprise clients into its own small and mid-sized business division remains an open question. "You have a pool of enterprise clients who have very mature digital commerce businesses," Bale said. "And frankly, a lot of these businesses have never had a reason to even talk to or think about Square. And so it's a bigger question for analysts or for the market, what Square can offer to those enterprise clients now that they have them in their Rolodex." Businesses continue to be surprised by ecommerce, they continue to be surprised that consumers are willing to make certain types of purchases.Holden Bale, head of commerce, Huge Bale said the recent deal activity in the space has made every financial player involved in retail transactions—from banks to credit cards and digital payment platforms like Apple and Google Pay—consider whether they need to create or acquire a BNPL option of some sort. "Is buy now, pay later an offering that every single company in the payment space needs to have?" Bale said. "With Apple Pay and Google Pay in your wallet, should there be a buy now, pay later option for Chase and Visa?" More big-ticket marketing Even before the pandemic, consumers had already been increasingly warming up to the idea of purchasing big-ticket items online, and the growing prominence of buy now, pay later is accelerating that trend. According to Gartner, about half of consumers say they are willing to pay between 10% and 20% more on items through BNPL than they would be through conventional debit or credit card transactions. "The majority of customers are being drawn towards high-value items that they typically wouldn't be able to attain based on their current monthly budgets and based on their salary," Duffin said. "So that's across holidays, fashion, beauty items, electronics." That ability for younger customers to purchase luxury items could lead to a shift in ecommerce marketing to focus on selling more expensive wares to younger customers, according to Bale. "Businesses continue to be surprised by ecommerce, they continue to be surprised that consumers are willing to make certain types of purchases," Bale said. "What [BNPL] does is it allows a very highly attractive consumer base—a very attractive millennial and, to a certain extent, Gen Z consumer base—to have access to all of those kinds of experiences." Regulation looming? Because the buy now, pay later space was in some ways born out of legal loopholes, the industry always runs the risk of catching the attention of regulators, according to Duffin. The U.K. has already taken steps to put stricter controls on the BNPL industry, and Duffin believes it is only a matter of time before the U.S. follows suit. Beyond the direct liability of regulations, there is also a potential PR risk for retailers if they eventually come to be associated with a product contributing to inflated consumer debt, Duffin said. "Through buy now, pay later, there is a potential issue where marketing leaders and retailers are going to be contributing to an already inflated potential debt crisis," Duffin said. "That is a challenge that they need to be mindful of and be wary of." While Amazon Remains the Ecommerce Leader, It Could Be Set for Disruption