- Point-of-sale finance isn't new, but it has regained attention as a wave of startups like Affirm, Afterpay, and Klarna gained millions of new users during the coronavirus pandemic.
- These fintechs offer consumers the ability to buy online now and pay later, both online and in-store.
- And now established companies like Amex, Citi and PayPal are relying on this new way of payment that consumers have come to to stretch their dollars.
- Fintechs are trying to establish their own brands, while established companies rely on their existing consumer base to take market share from startups.
- Here's a look at some of the key moments over the past six months as space buys now and pays for later.
- You can find more stories on the Business Insider homepage.
Point-of-sale financing has been around for some time. Retailers have always used funding to turn browsers into buyers, from retail stores to branded credit cards.
However, in recent years, a cohort of fintechs has emerged offering retailers a new way to increase sales: buy now, pay later. From interest-free two-week installment plans to longer-term financing, fintechs like Affirm, Afterpay, and Klarna, to name a few, have millions of consumers and tens of thousands of retailers to use with their digital, straightforward alternatives to credit cards.
It's no secret that e-commerce has continued to grow year over year over the past decade. And like other digitally driven trends, the coronavirus pandemic has only accelerated growth in the e-commerce segment.
In 2019, e-commerce represented 11% of total retail sales in the United States. In 2020, total retail sales were down, but in the second quarter of this year, when brick and mortar retailing largely ceased, e-commerce rose to 16% of total retail sales, up 44% from the previous quarter. Quarter, according to the US Census Bureau.
As consumers get used to shopping more online, they come to BNPL products too.
"The availability of credit actually closed a lot under pandemic conditions. So that the purchase accelerates now and pays later, which turned out to be a new thing at the point of sale, as an alternative way to actually get credit, which was important." Ben Savage, partner at Clocktower Technology Ventures, told Business Insider.
At the same time, consumer behavior, especially among younger consumers, has shifted from credit to direct debit, added Savage. And these trends have proven to be a tailwind for BNPL providers, many of which have resonated with Millennial and Gen Z consumers.
Continue reading: Buying PayPal now and launching PayPal later start the next wave of adoption. Here's what it means for startups and banks competing in space.
BNPL has become a must for retailers
Around this time last year, online shoppers at retailers like Asos or Casper probably saw a version of "Pay in Four Installments" as a checkout option offered by fintechs like Affirm, Afterpay or Klarna, to name a few. But today these BNPL buttons seem to be everywhere and are becoming a must-have for ecommerce.
In the past six months in particular, BNPL fintechs have seen explosive growth. In May, Afterpay reached five million active buyers in the US after just two years in what is now a larger market than its native Australia. The coronavirus has undoubtedly played a significant role. Afterpay gained a million new customers in just ten weeks in the second quarter when the pandemic peaked.
Affirm and Klarna also have more than five million users.
Fintechs that have won customers for years are now trying to increase branding with their own apps and loyalty programs.
Established companies like PayPal and American Express, endowed with brand awareness and loyalty, rely on their own versions of a POS financing product.
While BNPL products from fintechs and incumbents vary slightly in terms of interest rates, fees, and credit decisions, one thing is clear: consumers are looking for ways to extend payments over time, even with small purchases.
It remains to be seen where the industry will go next. Currently, retailers are entering into exclusive contracts with BNPL fintechs and paying them fees between 3% and 6% for each transaction. BNPL's promise is to increase order values and the likelihood that an online shopper will actually buy. This economy can be compelling at a time when overall retail spending has declined and advertising budgets are tight.
But traditional players like PayPal offer retailers the option to buy now and pay later at no additional cost. And many credit card companies like Citi and American Express offer installment financing options after the transaction, so merchants only pay the typical fees for payment processing.
"The economy has changed a bit," said Savage.
For many BNPL providers, offering POS financing for retailers becomes a cost. Merchants could offer their own financing options like branded credit cards, but the cost of building and maintaining that finance could be prohibitive for smaller retailers, even if they are generating revenue from the loan book.
"Merchants are now essentially paying in ways that weren't part of point-of-sale funding 10 years ago. Or to the extent that merchants paid for it 10 years ago, it was all handled through a promotional discount." said Savage.
As retail outlet financing such as credit cards grows in popularity, merchants may no longer be willing to pay these fees.
Be it through higher prices for the goods sold or a surcharge at the point of sale for using a BNPL solution, merchants could start rethinking the way they manage the cost of offering these services.
"If you play the film forward five years and buy it all now, you pay later, and let's say it all still looks like something to the consumer with about zero interest rates, someone is paying the cost of the money. If it's the dealers , the payment." The cost of money will eventually show up in higher prices, "said Savage.
Here's a look at some of the key moments in the BNPL space over the past six months:
- Sezzle is partnering with Marqeta to launch its platform for issuing cards for in-store point of sale funding use.