The pandemic resulted in a shift to e-commerce with a growing number of companies joining online marketplaces and traditional consumer goods companies starting to sell directly to consumers. This, combined with young and engaged customers looking for simplicity in shopping and paying for products and services, resulted in Buy Now Pay Later (BNPL) becoming one of the fastest growing online payment methods in many economies.
Having offered credit to consumers and merchants since 2008, PayPal has been well placed to take advantage of this trend: since launching BNPL in 2020, PayPal has issued over ~300 million loans to 35 million customers, giving them access to transparent, flexible payment options during these uncertain financial times. Today BNPL continues to be a priority for PayPal with BNPL’s share of e-commerce expected to double by 2024. We believe a few notable factors will drive evolution of the BNPL space over the next few years.
On the macro side, BNPL’s fundamental value proposition – offering consumers interest-free credit – is being challenged by rising inflation, interest rates and recessionary pressures. A persistent high interest rate environment will have an impact on some BNPL models that rely on a low cost of capital to provide interest free or cheap loans. A potential economic downturn in major economies across the globe is likely to result in a higher level of delinquencies. This has the potential to negatively impact the BNPL industry even more than other areas of credit given some of the newer companies have not yet been through a full credit cycle and may have employed less stringent credit checks in their underwriting. BNPL providers who have a track record of prudent lending practices, a strong balance sheet to provide continuity in operations and access to a diverse set of funding options will be best positioned to navigate this environment.
In response to the potentially unfavourable credit cycle and concerns around consumer well-being and affordability, regulators around the world have started to develop and implement new regulations for BNPL. New regulation will likely require more stringent credit underwriting and bring BNPL more in line with legacy consumer credit products. Heightened regulatory scrutiny may also come at an increased cost to service providers, while favouring participants with a strong compliance culture and foundation such as PayPal.
Continued product evolution with a more diverse range of repayment terms beyond “Pay-in-X” is expected with BNPL being offered for a broader range of goods, services and verticals at a wider range of price points. We expect innovation in this space to continue, as greater access to alternative data points can improve the credit underwriting process to further enhance BNPL’s attractive features for the consumers, such as tailored offers and instant credit decisions.
While the fast pace of BNPL adoption we’ve seen over the past few years has been driven primarily by accelerating e-commerce, the next step for many BNPL players is to move into in-store payments as point-of-sale financing grows in popularity with both customers and merchants.
We expect competition to increase in this space with legacy financial institutions who have seen their credit card businesses disrupted stepping up their own BNPL product offerings. In addition, banks are likely to want to prevent the risk of losing access to millennial and Gen Z consumers attracted to the BNPL product. On the other hand, some BNPL players are likely to expand into traditional banking services to improve their profitability and value proposition to consumers.
We expect BNPL to enter the next phase of evolution with increasing regulatory scrutiny, macroeconomic pressures and competition. These factors are likely to result in a more challenging environment for some newer and pure play BNPL players; but with popularity of this product among consumer and merchants showing no signs of abating, we expect BNPL to evolve further into a sustainable business model that provides increased sales and profits without increasing risk exposure for experienced players.
