The buy now, pay later revolution
The buy now, pay later (BNPL) sector highlights something that has been widely discussed over the last few months: the ability of start-ups to challenge incumbents by being more nimble, less constrained by legacy technology and, frankly cheaper. The looming questions are how can the sector do what it does so cheaply and why hasn’t it attracted more interest from the regulators?
According to a report by comparison site Finder (https://www.finder.com/uk/buy-now-pay-later-statistics), the BNPL market is the fastest growing payment method in the UK, with a growth rate that is double that of bank transfers and more than triple that of digital wallets. Meanwhile, according to CB Insights, nearly a quarter of the total number of ecommerce payments Sweden in 2019 were completed using BNPL. Sweden is home to one of the most successful BNPL firms to have been set up so far, and there is little doubt that market growth followed an impressive growth trajectory throughout the significant economic disruption of the last 18 months.
The meteoric rise of a new form of credit is not necessarily anything new in the financial markets. People have always looked for ways to buy things on tick, indulge in plastic-splugery or “auf Pump” and debt has driven the financial markets and politics for millennia.
It is safe to say that the financial markets are have become more formalised. Since 2008, regulators have been very conscious of the potential damage that debt can have and economists see a national’s individual debt as one of the key indicators of financial health.
As a result, regulators tend to be quick top step in and discourage innovations that appear to threaten financial stability. Despite its phenomenal growth at this stage, beyond the odd rumbling, it is interesting that the BNPL sector has not attracted a great deal of formal attention.
This is despite considerable concern from traditional financial institutions and credit card companies that are seeing their roles undermined and their market undercut by these new participants.
The mystery of the dog that didn’t bark…
The massive challenge for incumbents is that operators in the BNPL sector offer their services with no interest and no fees, which is very difficult for credit card companies to compete with because they have traditionally charged in the region of 20% APR interest (after their very accommodating introductory periods).
So how has the BNPL sector managed such a meteoric rise and why are regulators actively examining the way that they operate? In most circumstances, regulators would be quick to bite if someone was undercutting a traditional market, not least because they would want to understand whether the business model is sustainable, but so far they appear to have been satisfied.
The first reason for this is that the start-ups don’t have the costly legacy infrastructure that the incumbents rely on. And because the new platforms are built to respond to today’s opportunities without having to accommodate yesterday’s challenges, they are much more agile.
As I discussed in this article [The fintech relationship enters its fifth epoch], the financial services have had a symbiotic relationship with technology for a very long time. While the relationship has always been close, they have mostly remained separate.
The emergence of the BNPL platforms is technology and a financial service completely intertwined, creating an unprecedented efficiency. This in turn means lower prices for consumers and incumbents being undercut without concerning regulators.
It also means that their technology is nimble enough to be able to respond to regulators questions and concerns quickly and relatively easily. Given some of the debates and difficulties over financial regulations over the last three decades, it must be refreshing for regulators to be able to ask a question and get a coherent answer relatively quickly.
The other side of the coin is that retailers also appreciate the support that some BNPL vendors have offered, particularly given the unprecedented disruption of the last 18 months. Having the option to spread payments means that consumers are more willing to spend on bigger ticket items and the BNPL merchants have made the process simpler.
Unlike many of the traditional credit companies that tend to be off shoots of global financial service behemoths, the business of the BNPL organisations are focused on a relatively limited line of business. There is less contagion risk and they are not too big to fail. This makes them less concerning from a regulatory perspective.
Finally, the rapid growth of BNPL has come at a point where governments globally have been keen to finds ways to keep the economic wheels turning and generating jobs and income. In this environment, it may be that regulators have been less quick to involve themselves with the BNPL business.
…or at least hasn’t yet
Some of these factors are set in stone. The BNPL sector has found itself a niche in the economic ecosystem that may well sustain it and shelter it to an extent from the regulators, but some of the factors have the potential to change as the economic situation evolves.
The bottom line is that even if the regulators step in, if the sector consolidates under the wing of more traditional providers, BNPL has successfully changed the way that consumers think about credit and proved that change can be achieved without adding to costs. As I have mentioned before, innovation is a constant factor in the financial services. It certainly keeps things interesting.
About Marco Quacken
Marco has a passion for business development that helps projects succeed and businesses flourish. With a global network of contacts, he brings teams together, matching expertise to requirements and implementing strategies that help good ideas grow into sustainable businesses. He has experience across a range of sectors including finance, real estate, technology, advertisement, automotive, consumer goods, energy, retail, sports and telecommunications.
