BUY NOW PAY LATER CONSUMER BEHAVIOUR & MARKET More than half of consumers have now used BNPL services at least once, with the largest surges in utilization occurring among 18- to 24-year-olds and those 55 and older, at 62% and 98%, respectively. The data also shows that 26% of millennials paid for their most recent online purchase with BNPL, and 15% did so in stores. More than 26 percent of millennials and nearly 11 percent of Gen Z consumers had tapped BNPL to finance their most recent online purchases, compared to only 7.5 percent of older generations who had done the same BNPL Users 18-24 yrs – 42% 25-34 yrs- 49% 35-44yrs – 46% 45-54yrs – 25% 55-64yrs – 16% 65-74yrs – 10% 63% - BNPL users who have full time employment 40% - BNPL users with a university or higher level of education Younger people tend to use BNPL products for smaller, higher-frequency purchases, whereas older consumers turn to it for larger items. Across all age groups, a majority of BNPL users use it less than once a month and for purchases under £100 in value. By comparison, the average credit card in the UK is used two or three times a month, with an average value of £50 per transaction. Young consumers using buy now, pay later tend to buy low-priced items Younger consumers use buy now, pay later more frequently Spending categories : clothing and shoes (45%), electronics (43%), and home and garden (28%). According to ZestMoney reports, following 5 cities top when it comes to transactions related to Smartphone/Electronics – Bangalore/ Mumbai/ Hyderabad/ Kollam/ Pune Travel - Bangalore/ Mumbai/ Ahmedabad/ Udaipur/Delhi Fitness - Bangalore/ Mumbai/ Hyderabad/Chennai/ Pune Home Furnishings - Bangalore/ Mumbai/ Hyderabad/ Kannchipuram/ Pune Fashion/Lifestyle - Bangalore/ Mumbai/ Hyderabad/ Mohali/ Pune Ed Tech- Bangalore/ Mumbai/ Hyderabad/ Delhi/ Pune 1. 2. 3. 4. 5. 6. Genderwise – 77% Men & 23% Women 48 percent of BNPL users will not buy from a merchant if they don’t offer a BNPL option Demand for BNPL programs is higher among consumers who buy products and services from online marketplaces and aggregator sites, where some 53 percent of BNPL users leverage the service — or on merchants' home sites, where 45 percent of BNPL consumers tend to flock. Online marketplace/ aggregators – 53% Merchant websites – 45% By Phone – 43% In Phone – 38% BNPL has been growing at a blistering pace. It represented 5% of e-commerce transaction volume in 2020, up from 3% in 2019, according to Worldpay. Based on data supplied by BNPL providers, we estimate annual BNPL transactions total approximately £6.4 billion, roughly a 60%–70% increase over the same period a year before. 10.1 million people used BNPL in the previous year, showing roughly 70% to 80% annual growth. (Bain & Company – UK Reaserach) Many BNPL players have integrated with the merchants’ in-store POS systems, allowing shoppers to pay using a QR code or bar code. 69% of users we surveyed said they had never missed a payment. 200% Increase in transactions on Amazon, Flipkart & Myntra Companies offering BNPL services, ties up with a merchant, such as Amazon, Flipkart, Zomato, or Swiggy. Digital payments received a further boost during the pandemic with 68% of Indian consumers now preferring online payment routes for financial transitions . According to the Financial Brand, 47% of the customers use BNPL to avoid paying credit card interest charges. According to the data from Ascent, 36% of the American BNPL users use this service once a month or more. More than 49 percent of people are spending more when using a BNPL service than they would spend on a credit card Why buy now, pay later is popular? The most common reason to use buy now, pay later services is to make purchases that don't fit in one's budget -- 45% of respondents have used it for this reason. Buying electronics is the most common use of buy now, pay later, with 48% of users saying they've used it for that reason. The cost of a BNPL transaction for merchants ranges from 1.5 to 7 percent of the purchase value (including tax), The pandemic induced lockdown, job losses, salary cuts, and uncertain income have helped in BNPL gaining momentum in India. LazyPay alone is currently serving over 30 million users in India while Simpl witnessed a 40% increase in transactions for daily essentials from hyper-local merchants, after the pandemic. According to a 2021 Global Payments Report by FIS, BNPL outpaced other payment modes in the high-growth e-commerce and online shopping space in India and is expected to command a 9% market share by 2024, with a 53% CAGR, up from the 3% share in 2020. set to increase from 3 per cent last year BUSINESS MODEL Here’s a chart showing a typical pricing structure, assuming the retailer pays 4 per cent to the BNPL vendor: BNPL payment mode can be categorized into: Split pay Pay later Long-term financing at 0% Annual Percentage Rate (APR) Longer-term financing with subsidized interest or fee Top BNPL companies worldwide deploy one or more of the business models listed below. 1. Integrated shopping apps 2. Card-linked installment offerings 3. Off-card financing solutions 4. Virtual rent-to-own model 5. Vertical focused larger ticket plays Off-card solutions On and off-card 6. SME sales financing 1. Integrated shopping apps Recording a 300% to 400% growth in 2020 alone, the integrated shopping apps model treats BNPL as more than just a credit product. It comprises a holistic ecosystem that drives engagement and value through every facet of the customer’s purchase journey. Leading pay in 4 players (i.e., companies that let customers pay in four installments without any interest) like Afterpay, Klarna, and Sezzle adopt the integrated shopping apps approach to BNPL. From pre-purchase to post-purchase phase, merchants interact with consumers, giving credit choices and EMI conversion options for low ticket purchases. Here the BNPL players create super apps (a centralized, one-stop app that enables consumers to shop at different virtual marketplaces without the hassle of signing in and out of various apps) with well-integrated shopping, payments, financing, and banking ecosystems on a single platform. This form of buy now, pay later model is predominant in South-East Asian countries. Klarna and Afterpay have adopted this integrated shopping model and have benefited from higher conversions, repeat high ticket purchases, Average Order Value (AOV), and lower cart abandonment rates. The super app persuades low and high credit history customers to spend conveniently using BNPL. Hence merchants worldwide deploy this BNPL model even if it means cannibalizing their card portfolio. Even though the duration of financing in smaller in this model, receivables turnover is about eight to ten times a year, resulting in 30% to 35% Return on Assets (ROA). Still wonder why the integrated shopping apps model is most prevalent? The key differentiators in this model (discussed below) are unique and very difficult to replicate by banks and other businesses. Solutions to engage throughout the purchase journey: Today, over 17% of Klarna consumers begin their purchase journey from the super app. They log into Klarna super app, and then transition into Amazon or other ecommerce apps for further purchase. Thus there is more scope to engage consumers throughout their purchase journey. Fresh revenue streams: The super app companies monetize customer engagement through loyalty and reward programs, attractive offers and marketing campaigns, and newer credit features throughout the purchase journey. They also earn significant revenue through affiliate marketing and advertising. Lower customer acquisition cost: Checkout pages embedded with BNPL serve as low-cost customer acquisition channels. Most people sign up for the integrated shopping apps during checkout, and therefore companies can mint this area by cross-selling banking solutions, credit and debit cards. Sophisticated technological capabilities: The technology stack of integrated shopping apps is robust and efficient in handling merchant underwriting, consumer frauds, payment intent, dispute mitigation, checkouts, real-time billing, customer service, and much more. For example, lenders require deep integrations into order management systems for SKU-level data access to enable advanced underwriting. This type of deep integration is quite a challenging process for banks. Brand positioning- The integrated shopping apps model helps lenders position themselves as a part of ecommerce brand rather than just a credit service provider. This positioning is crucial for the growth of merchants and BNPL service provider. 2. Off-card financing solutions With a growth rate of 80% to 100%, the off-card financing model is perfect for industries such as electronics, furniture, and home goods, sports and home fitness equipment, and travel. Companies such as Affirm and Uplift cater to this mid and high-ticket, low-frequency purchase financing that requires monthly installment payments over eight to nine months. Unlike the integrated shopping apps model, off-card financing solutions mandate consumers to pay a 0% APR for a certain period and then a subsidized Annual Percentage Rate (APR). Over 80% of consumers in this model have high credit scores with sufficient credit card availability. But they choose BNPL for cheaper credit. As a result, the off-card model cannibalizes credit card transaction volumes for card issuers who offer BNPL services. Merchants choose the off-card financing solutions model when margins and customer acquisition costs are hurt, and cart abandonment rates are as high as 90%. Additionally, providing card-linked installments enable a smooth financing process that matches the 0% APR experience of the off-card financing providers. But card-linked installment payments present a severe threat to off-card financing players like Affirm. Hence they take significant steps to ward off the risk through major acquisitions (Eg: Affirm and Returnly) that help them stitch BNPL services with the shopping journey right from pre-purchase to returns. 3. Virtual rent-to-own models The virtual rent-to-own (VRTO) is an arrangement where consumers make payments for items they wish to own. Once all the payments are done, the purchase is deemed complete. Over 78% of use cases in the virtual rent-to-own model are from home appliances, mattresses/furniture and electronics, and other goods that can be repossessed. Growing at a 30% to 35% CAGR, the VRTO model targets the subprime consumer base with a poor credit score. Currently, over 95% of consumers have a credit score lower than 700, and 70 % have a credit score below 600. Though there are no credit checks with super fast approvals, minimal deposits, and flexible payments, merchants do not reduce APRs for consumers. But large sellers tend to receive good discounts from VRTO players on prescribed conditions. Companies such as Acima, Acceptance Now, and Progressive Leasing are leading players in the BNPL space with the VRTO model. Like Progressive Leasing in Best Buy and Katapult at Wayfair, VRTO players have integrated in-store and digital presence and serve as 2nd or 3rd level financing providers. 4. Card-linked installments Growing at a CAGR of 200% to 300%, card-linked installments are a predominant form of Point of Sale (POS) financing in Asia and Latin America. It is basically a no-cost EMI option (using credit cards) with the capability to enable high ticket purchases of over $1000 through subsidized merchant offers. Though card issuers in the US like American Express Plan It and Citi Flex Pay have allowed post-purchase installment payments, their adoption rates are low compared to 0% APR BNPL payments at the purchase point. Fintechs leverage this opportunity by introducing card-linked BNPL installments in the prepurchase, at purchase, and post-purchase stage for EMI conversions. Companies like SplitIt are good examples of the card-linked installment model. 5. Vertical-focused larger-ticket plays The vertical focused larger ticket plays model focuses on financing high-value purchases between $2000 and $50,000. Growing at 10 to 15% CAGR, they cater to high ticket industries such as elective and non-elective healthcare, veterinary, power sports, and home improvement. CareCredit in healthcare and GreenSky in home improvement are category specialists in this form of BNPL. High value purchases usually happen in healthcare subcategories such as dental, dermatology, cardiology, etc. And in home improvement, high ticket purchases occurs in heating, ventilation, air conditioning (HVAC), home remodeling, and solar paneling. The category leaders in these sectors partner with original equipment manufacturers (OEMs) to achieve scale, manage margin pressure, and counter larger loan tenures and tax credit implications. Before venturing into this model, BNPL companies need to carefully assess the subcategories and decide on the go-to-market approach and end-consumer relationship. This model and category are an excellent fit for banks that seek to acquire high-credit customers and crosssell mortgage refinancing and other banking services. 6. SME sales financing SME sales financing is a great deferred payments model for small businesses running low on capital. Players like CIT and Dell Financial Services deliver POS financing for Small and Medium-sized Enterprises (SMEs) that can be repaid in interest-free easy installments (if repaid before the prescribed period). Usually done as off-card payments, this instant credit helps small-timers manage infrastructure costs through custom financing and leasing. Companies like Solv and Zip take online lending a notch higher by funding SMEs to make all checkout payments in easy installments. All they need to do is centralize expense management and integrate the BNPL option into their payment ecosystem. As the financing is for underlying business transactions, the lenders gain a comprehensive understanding of the risk profile and repayment ability. The SME financing model benefits businesses, partnering fintechs, and NBFCs by lowering cost, increasing loan disbursal volumes and easing credit evaluation without significant risk implications. How it works You make a purchase at a participating retailer and opt for buy now, pay later at checkout. If approved (you're told in seconds), you make a small down payment, such as 25% of the overall purchase amount. You then pay off the remaining amount due in a series of interest-free installments. You can pay via a check or bank transfer; payments can also be deducted from your debit card, bank account, or credit card automatically. Indian digital payments company MobiKwik started offering BNPL services in May 2019 before the pandemic hit. The initial public offering-bound MobiKwik, which picked up $20 million in funding from the Abu Dhabi Investment Authority in June, has experienced tremendous growth. The Gurugram-based company says it now has 22.3 million BNPL users and is handling 4 million transactions in this space per month, offering credit between $50 and $500. “The average profile of the user is ages 23 to 38, and 65 per cent male default rates have risen during the pandemic, from 1.9 per cent for the financial year to the end of March 2020 to 5 per cent as of March 2021. This number is now easing as the economic environment has improved Buy Now Pay Later Market Key Segments By Channel Online Channel- Will generate higher revenue POS Channel By Application Retail Goods Media & Entertainment Healthcare & Wellness Automotive Home Improvement Others By End User Generation X Generation Z/Millennials – will dominate the market Baby Boomers Redseer estimates India's BNPL market will rocket to $45-50 billion by 2026 from $3-3.5 billion now. India’s BNPL or Buy Now Pay Later market is estimated at $3-3.5 billion today but could potentially grow to $45-50 billion by 2026, according to consultancy firm RedSeer. The firm also estimates that the number of BNPL users in the country may touch 80-100 million by 2026 from the 10-15 million estimated currently. BNPL loans have an average transaction size of just around `300-600 with zero interest charges. The repayment cycle for BNPL is usually between 15-30 days, compared with 3-12 months in EMI products. BNPL providers make money charging a 2-3% commission from merchants for each transaction which allows these credit providers to offer zero interest on transactions. DELIQUENCY RATE Also, the repayment rate for delinquent BNPL loans at 30 days past due is 30%, compared to 10.5% for credit cards, the study says. At 90 days past due, the repayment rate on delinquent BNPL loans is 60.9%, compared to 34.5% for credit cards.
