2021 trends to watch: BNPL on the money
In a fast-changing payments landscape, buy-now-pay-later services are an increasingly powerful tool for businesses seeking to drive up revenue and deliver a superior payments customer experience. Here’s why.
To get a sense of the growth of the buy-now-pay-later juggernaut, consider these numbers.
Fintech researcher Kaleido Intelligence predicts global consumers will spend USD 680 billion on BNPL channels in 2025, a 92 per cent rise over the USD 353 billion spent in 2019.
In Australia, IBISWorld has forecast that industry revenue will grow at an annualised 9.8 per cent through to 2024-25 to AUD 1.1 billion. Meanwhile, the Worldpay 2021 Global Payments Report found that BNPL already accounted for 10 per cent of all Australian e-commerce payments in the mix during 2020.
Significantly, there are also signs that international markets are catching on to the BNPL interest-free payment phenomenon. While providers such as Afterpay and Zip dominate the Australian market, international peers such as Affirm, Klarna and, more recently, PayPal’s Pay In 4 are flourishing as more people switch to online shopping.
Millennials drive take-up
The BNPL model appeals to a younger generation of buyers who want their purchases right away, meaning outmoded lay-by options are struggling to stay relevant. With major retailers such as Bunnings, Kmart and Officeworks offering in-store BNPL options to Australian consumers, the service has gone mainstream.
Afterpay CEO Anthony Eisen attributes the success of BNPL in Australia to having turned the traditional payments model on its head. “As Australians, it’s ingrained in us to challenge the status quo and find new ways to do things,” Eisen says.
He believes the seeds of BNPL’s success stemmed from the global financial crisis, which led to younger consumers learning from their parents to favour cash. “This shift created the debit economy as we know it today, and it inspired us to think about how we could bring something to life to support it. Paying in four instalments over six weeks without interest allows customers to manage their cash flow more effectively and removes the reliance on traditional forms of credit.”
Nish Dharmaratne, Head of Product, Global Transaction Services at Westpac Institutional Bank, says three factors have fuelled BNPL’s rise.
First, the model has credit and convenience advantages to consumers. “Compared to credit cards with high interest cost attached for outstanding payments, BNPL provides an advantage of flexible term repayments and comparatively easier engagement process” she says. “That’s a big driver for those who are looking for convenience and easy financing options.”
Second, BNPL has been remarkably successful in wooing the 18-35 demographic. This group is entering the workforce and willing to make lifestyle choices of spending now vs saving for the future.
Third, COVID-19 has tempered traditional credit card strengths, such as travel & entertainment expenses, opening more consumer buying decisions to be made online by paving the way for BNPL growth. “This is the sweet spot for BNPL, whose strength is largely around retail offerings and luxury or white goods purchases, which seemingly thrived during the pandemic,” Dharmaratne says.
Strong value proposition
At the date of writing, data from Australian market leader Afterpay reveals that the average purchase price on its platform is now AUD 155, with about 90 per cent of customers using their own money by linking their Afterpay accounts to their debit cards.
Eisen says while millennials were the first adopters of BNPL and still account for most purchases, other generations are lining up. Gen Z, born in the mid- to late 1990s through to about 2010, accounts for 14 per cent of spending on Afterpay and is the fastest-growing cohort – spending in that group increased 55 per cent year-on-year in December 2020.
Jeff Byrne, Executive Director of Client Engagement, Global Transaction Services, at Westpac Institutional Bank, says the client experience that BNPL platforms offer has been a game-changer.
For example, Afterpay’s algorithms intelligently identify consumers’ brand preferences in a way that is far more targeted than on social media platforms such as Facebook. “It has an engagement model with individuals to connect them to the brands they love the most and it’s agnostic of all financial institutions. That’s quite a powerful proposition.”
Byrne says BNPL providers are seeking to do more than just create another banking product; they ultimately want to help people take control of their finances.
A clear customer-engagement strategy from day one has paid off for Afterpay, according to Eisen. “We knew that really focusing on fashion would help us unlock the connection between millennials and retail and the digital experience would unlock in-store,” he says. “We’ve always seen the big picture as money being reimagined. Our services give people control of their most important asset – their money – to pay better and, ultimately, live better.”
The other big player in the Australian BNPL market is Zip. The company reported record transaction volumes of AUD 2.32 billion in its half-year results for the period ending on December 31, 2020, as well as record revenue of AUD 160 million for the same period.
While Afterpay is seeking to globalise its platform, Zip has been pursuing an aggressive international expansion strategy and has signed up more than 38,000 merchants across the US, Australia, New Zealand and the UK. Through its investment in New York-based QuadPay, Zip has seen a surge in transactions in the US, while the business also has a growing presence in Europe and the Middle East.
Perhaps the big game-changer for BNPL will be the entry of Apple into the market. In July 2021, it was reported that the tech giant is launching a rival service, known internally as Apple Pay Later, that will integrate with its Apple Pay system.
Bloomberg indicated that the Goldman Sachs Group would be the lender for loans through the initiative, allowing Apple Pay users to pay for goods through four interest-free payments made every two weeks, or across several months with interest. Customers would not need an Apple Card, the company’s credit card service, to use Apple Pay Later.
Analysts have suggested the move will put pressure on ‘pure-play’ BNPL providers such as Afterpay, Zip and Affirm, which to date have largely had the BNPL market to themselves.
Westpac on board
Westpac is embracing BNPL as part of an ongoing commitment to improving the payments experience of customers.
Late 2020, Westpac announced Afterpay as the first partner on its new digital banking-as-a-service platform. The partnership allows Afterpay to provide Westpac transaction and savings accounts and other cash flow management tools to its 3.3 million customers in Australia.
Byrne says the platform is ideal for younger consumers who may have less-complicated banking scenarios. “The platform intends to grow the volume of its services, but it has started with some core everyday banking capabilities.”
The collaboration with Westpac builds on Afterpay’s core principle of encouraging responsible spending and enabling financial wellness, says Eisen. “Ultimately, our goal is to create a platform where managing your money is simple, frictionless and stress-free.”
Byrne believes the integration between Afterpay and Westpac shows the banking system has a key role to play in initiatives such as BNPL. “For us it’s great to be a partner of Afterpay because they have something that is really quite special.”
Merchants signing up
The 2020 McKinsey Global Payments Report notes that around the world the shift to digital services is driving up merchants’ payments-acceptance costs as commerce migrates to higher-cost channels such as BNPL.
For their services, BNPL operators typically charge merchants fees of between three per cent to six per cent – higher commission rates than for credit card transactions. However, McKinsey suggests many merchants accept the trade-off of higher fees for demonstrated value, including improved authorisation rates, more seamless payments and stronger ecommerce cart conversion.
Prominent BNPL messaging on merchants’ ecommerce sites and through advertising has given the sector a real presence, Byrne points out. “You are already seeing certain merchants with less recognised brands starting to leverage the Afterpay brand to encourage consumer consideration. That brings more people through the door, and the data suggests they buy more once they are there.”
BNPL platforms have demonstrably allowed merchants to access a larger consumer group. “We’ve created a rich two-way platform that’s really connecting customers and merchants in a unique way,” explains Eisen. “As soon as Afterpay is turned on, customers see bigger basket sizes and average order value, less abandoned carts, less returns, (and) repeat and new customers.”
Statistics which he says highlight the benefits of Afterpay for merchants include:
• delivering higher conversion rates and incremental sales – about 20 per cent to 30 per cent above other payment methods
• connecting 48,000 Australian merchants to three million Australian customers, generating AUD 7.6 billion in total sales in 2020
• charging, on average, in Australia a four per cent fee to merchants, which is six percentage points lower than Facebook and 11 percentage points lower than Amazon.
Challenges on horizon
As the BNPL space matures and grows, Dharmaratne says it will inevitably face market threats and greater competition in Australia. With its scope and scale, PayPal’s entry into the market will test the incumbents, while some major banks have taken steps to join the interest-free credit space.
She also expects regulators to become more vigilant in monitoring industry standards for BNPL players, including transaction monitoring, managing credit defaults and mandatory financial due diligence on consumers. The Australian Finance Industry Association has drafted a new code of conduct for the sector that came into effect on 1 March 2021, and which is designed to strengthen consumer protections.
Dharmaratne notes, though, that the likes of Afterpay and Zip are already addressing loss provisions in the event of any crises “and they have been managed well so far”.
Dharmaratne expects, the expansion of recognising BNPL as a new receivables solution by larger companies, such as utility companies and insurance companies will be the next wave for BNPL. “That’s the future,” she says.
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