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Buy now, pay later (BNPL) solutions have become a global phenomenon. While installment payment options have existed in retail for decades, BNPL set itself apart by shifting focus from big-ticket items to small everyday purchases.
BNPL ticks boxes on both sides of a transaction. Consumers are drawn to the simplicity, convenience and affordability it provides. At the same time, merchants see it as a way to boost conversion and average order values.
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However, BNPL has also found itself at the center of intense debate. Critics claim that BNPL threatens consumers who risk sleepwalking into financial trouble due to misunderstanding the product or using it when they cannot afford to do so. And it'll mean BNPL will for sure receive more regulatory oversight in the coming years.
This article explains the BNPL landscape today by looking at its origins and recent developments.
BNPL's appeal may seem a no-brainer, but it's not always been that way
When the BNPL pioneers emerged in the wake of the 2008 financial crisis, they faced a 'chicken and egg' situation. The retailers they were pitching didn't see any consumer demand. And shoppers didn't ask for it because it wasn't an option they knew about.
Without this demand and no solid proof of value, merchants had little incentive to assign the resources needed to integrate a BNPL solution into their payments stack. The three to six percent charged for processing a BNPL transaction was also off-putting.
BNPL risked fading away before it even got started. That was until Klarna took a different approach and set its marketing wheels into motion — investing heavily in consumer visibility and merchant education. Its slick campaign and unconventional branding resonated with young audiences and fashion-focused brands, creating international evangelists like H&M and ASOS.
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Customers quickly grew more familiar with BNPL. Their appetite became apparent as Affirm and Afterpay found considerable success with their offerings in the US and Australia.
BNPL has since emerged in other regions as well. Take Tamara in Saudi Arabia and Nigeria's Carbon Zero as examples, both of whose success demonstrates the global appeal of a BNPL payment method.
Fashion fueled momentum
BNPL wasn't quite what we know it to be today in its formative years. It began life as a deferred or invoice-based payment for ecommerce. This is commonly known as Pay Later.
The Pay Later structure sees the financing provider pay the merchant upfront when a consumer uses the solution to make a purchase. The consumer then pays the BNPL company directly — typically 15 or 30 days later — once they've received the goods. It facilitated the ecommerce version of try-before-you-buy that consumers were used to in-store.
Unsurprisingly, fashion was the first segment to recognize the immediate benefits. Brands in the fashion sector quickly found Pay Later to be a powerful conversion tool. It also helped them to improve customer satisfaction and loyalty. Forwarding thinking brands took this a step further. They used Pay Later to capitalize on the consumer fear of missing out, encouraging its use for spontaneous sales, drop shops, and celebrity lines.
The shift to sliced payments
Pay later soon evolved into the BNPL installment-based payment solution most common today. At first glance, today's buy now, pay later may look like installment or layaway financing in a new wrapper. But despite sharing a common goal — to make purchases more affordable — BNPL is dramatically different.
- It's not confined to big-ticket purchases – minimum orders can be below $20
- It's typically interest-free – if customers pay on time
- It's fast and easy to access instantly, instore and online
- In most countries, it falls outside standard credit regulations
All this delivers low friction flexible financing for users. And a double-digit conversion tool for retailers looking to raise sales and boost average order value. This has seen BNPL take off in new segments, including luxury, furniture, electricals and homeware. Considering this, it is perhaps unsurprising that BNPL transactions grew by 292% between 2018 and 2020.
Despite growing demand for BNPL, it took the arrival of COVID in 2020 to turn BNPL from an alternative payment method to a serious credit contender.
The pandemic sparked a mass migration of consumers from in-store to ecommerce. This led businesses to focus more on what payment methods they offered, with many enabling a BNPL at the checkout. While consumers, especially younger shoppers, gig economy workers and those frequently furloughed, were forced to rethink how they managed their finances. As a result, many consumers began using BNPL to cover everyday spending, in addition to its more traditional use cases.
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More players and greater scrutiny
The pace of development in the BNPL space isn't slowing down. Current forecasts predict the BNPL market will reach $166bn by 2023 and $3.98tn by 2030. This is driven by multiple factors including venture-funded fintechs. Banks are also starting to use BNPL to meet underserved segments' needs and stimulate ecommerce growth in developing markets.
Major technology companies like Amazon are looking to build their own BNPL offering in mature markets. Meanwhile, American Express, Visa, Mastercard and PayPal have launched BNPL products to prevent customer erosion.
However, there's a question that still needs answering. How will the sector be regulated? So far, BNPL has largely fallen out of the scope of normal credit regulation, although consumer protection laws generally apply. With more consumers now reliant on BNPL, local legislators are anxious to increase safeguards.
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The UK and US are already taking steps to bring BNPL into their regulated legal framework. Other markets will likely follow. It's unlikely these regulations will kill BNPL. However, they will undoubtedly reshape the market, potentially leading to the consolidation of providers and further development around the offering.
BNPL has transformed retail — what next?
BNPL has become the face of millennial finance. And it's moving from a conversion booster to a ‘must have’ acquisition tool.
Consumers are actively seeking retailers that offer specific BNPL brands. And merchants are choosing BNPL partners based on their ability to open up new markets or create broader audience engagement through co-marketing, push promotions and direct channels. As people become accustomed to splitting purchases into easy phased payments, we'll see BNPL lending models applied to big markets like health care, entertainment and travel.
No matter what sector they are in, businesses should consider how a BNPL option will fit into their offering or risk losing out.
Look out for our next blog in the series where we deep dive into the BNPL space in MENAP.
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