Spaces and trends

Buy Now, Pay Later

Sandeep Murthy , Akshat Jain
25th April 2021

‘Pay Later’ is a product that will always be needed as it allows for instant gratification purchases and reduces guilt by not having to pay for everything today. The faster, frictionless and credit payment method gives the consumer a sense of trust in the platform to transact.

The notion of finding friction in a product or service and providing a better consumer experience often unlocks massive value for the ecosystem. Over the past decade, we have seen numerous startups reduce friction in the lives of consumer – Flipkart did that with making it easier, convenient and faster to shop online, Ola made finding a taxi easier and the list goes on..


Similarly, in the payments industry over the years we have seen massive disruptions from cash to merchant credit to cards to digital wallets to UPI (only in India) that have reduced friction for both consumers and merchants to make and receive payments. Buy Now Pay Later (BNPL), is the newest payment method on its way to becoming ubiquitous by removing friction in e-commerce transactions.


Fun Fact – The payment platforms and those that enable payments are valued higher than some of the biggest banks today





What is Buy Now Pay Later?

As the name suggests ‘Pay Later’ products by definition is something that allows a consumer to acquire a product or service today and pay for it later. This option is available at the checkout process via multiple products like credit cards, traditional interest based instalment loans (EMI) and the new age BNPL apps. Similar to credit cards and instalment loans, BNPL is a form of credit payment that allows a consumer to instantly acquire the product or service via interest free or low interest instalments over a specific period of time. The difference between BNPL and other ‘pay later’ methods is the design of the product that is benefiting both the consumers and the brands/merchants. More on these benefits below.




How the BNPL products look at the checkout page globally 

The most popular product in BNPL offered by players like Klarna, Afterpay, and Sezzle is Pay in 4. It allows the consumer to buy the product today at 25% of the price and pay the rest of the 75% in 3 instalments every 2 weeks at 0% interest and no additional fees. Other similar product is Pay in 30 days which gives the consumer 30 days to make a payment. Affirm, another BNPL player, provides 0% interest financing that gives the consumer a period of 6 - 42 months (longer term) to pay for the product without paying interest on it.








Note: Affirm also offers interest based instalment products (like EMI) to consumers to pay in 6-42 months at much lower interest rates than the credit cards. But for this blog, our focus is primarily on 0% interest BNPL products. 43% of Affirms GMV is from 0% interest loans and 57% is from interest based loans (like EMI). But for this blog, our focus is primarily on 0% interest BNPL products.


The rise of BNPL as an online payment method is growing rapidly

Globally about $22 TN is spent on retail every year and with the rapid penetration of e-commerce, there has been a surge in BNPL payments as well. The widely used payment methods in e-commerce transactions currently are Digital Wallets, Credit Cards and Debit Cards. In the next 4 years, the market share of credit cards is expected to decline and the market share penetration of BNPL is expected to double to 4% by 2024E.

In fact, in countries like Australia, Sweden and some parts of Europe the market share of BNPL for e-commerce transactions is already above 10%. Additionally, in the US, BNPL saw a surge of 475% in GMV in just 18 months. The leading BNPL players combined have over 100MM+ active consumers globally onboarded that are transacting on the BNPL platform with 400,000+ active merchants.




Consumers use BNPL for two reasons - Credit and Convenience


For credit 


· Instead of having to apply for a traditional loan to purchase a $200 shoe, consumers prefer to use BNPL. Afterpay, a leading BNPL player in Australia, aptly defines itself as “Help consumers budget for life’s little extras without needing to enter into a traditional loan or credit product for their retail purchases.”   


· Consumers that don’t have access to credit cards and typically use debit cards or digital wallets to make payments access credit via BNPL


For convenience 


· BNPL as a budgeting tool – 75% of Afterpay’s customers claim that they use BNPL as a useful budgeting tool for making purchases to better manage their finances


· Currently, BNPL is one of the most frictionless payment methods available online. With a few clicks consumers can make a payment as opposed to credit/debit cards


· The convenience of buying a product now while paying little upfront meets the consumers demand of instant gratification and reduces their guilt by allowing them to pay later


In the early days, BNPL adopters were driven by the desire to avoid credit card debt, the current wave of new users are attracted above all by the convenience and flexibility of BNPL financing, according to Marqeta.



Who are the typical consumers and what do they buy using BNPL?

A majority of the BNPL consumers are individuals typically aged between 25-44 that want to buy products that may seem a little out of their budget. Despite being in credit rich countries (US, Australia) consumers are opting for BNPL as they typically want to avoid paying sky high credit card interest and load themselves in credit card debt.

The users are typically Millennials and Gen-Z, aspirational in nature and want to stay relevant with trends. Consumer Electronics, Clothing/Fashion, Personal care and Home appliances via e-commerce are the leading categories where consumers opt to use BNPL as a payment method. Just like credit cards, BNPL is majorly used for aspirational products rather than essential products.