As more players enter the market, BNPL is becoming a crowded space with innovative product variations. Other than the traditional pay-in-four model that pureplays offer, new entrants offer a variety of products that incorporate the fixed payments feature. Some examples in the market include splitting credit balance ( Scotiabank), splitting purchase into fixed payments - caveat: interest is included ( Citi Flex Pay & My Chase Plan), and using consumer's existing line of credit as the basis for installment plan repayments ( Apple Pay, Visa, Mastercard). With more providers and merchants offering BNPL, this product will become a commodity. To compete and grow in this space, BNPL fintechs can focus on different growth paths: organic (through strategic partnership & value-added service) and inorganic (acquisition to move upstream into shopping & e-commerce).

ORGANIC GROWTH

Strategic partnership:

BNPL news often revolve around partnership deals between pureplays and established merchants. For instance, within 2 days, Affirm and Klarna announced new partnerships with Amazon and Global-e respectively. The decision to embed BNPL option in the shopping experience is a crucial growth driver for pureplays as this move expands their distribution channels*. Looking at Affirm, the deal with Amazon will allow its product to integrate at check-out and reach over 1.5m active sellers on the platform1. In return, Amazon's sellers will have a new method to improve sales as BNPL lifts conversion by 20% while also increasing average order value by 60% 2. Traditional financial institutions (FIs) and tech companies have an advantage with their distribution model since they can cross sell BNPL product to existing merchants (FIs), cardholders (FIs) and easily access millions of users (Apple Pay). Against that backdrop, the partnership route will continue to be an organic growth driver for BNPL fintechs as it broadens product distribution channels and enables them to compete in this crowded market. 

Value added service (VAS):

As BNPL becomes a commodity, similar to card acceptance, fintechs will need to expand its product suite to capture merchants and consumer loyalty.

From the merchant's side, offering services to help develop and expand their business will be key. Merchants use BNPL solution range from SMBs to F500 companies so it's imperative for pureplays to assess and decide which vertical and size of business is the best fit. BNPL fintechs can start by choosing VAS that's industry and size agnostic and then narrowing down to a specific niche. This approach would allow pureplays to support merchants' growth without spreading themselves too thin. Some industry and size agnostic services are consumer analytics, fraud, loyalty, marketing, payroll management, supply chain management, etc. Afterpay recently introduced in-app ads, giving brands a new way to promote "via sponsored listing formats and pay only when a shopper engages"3. This instance is one of the first market movers and it's not unexpected to see other pureplays to start offering VAS to merchants down the road. On the consumer side, given that BNPL fintechs are able to use big data and AI for credit underwriting, they can also leverage this capability to assist consumer with customized personal finance services such as budgeting tips, shopping recommendations, spending analysis, etc. In the short term, these VAS will increase engagement and brand loyalty while down the line, they can become a monetization tool for BNPL fintechs.

INORGANIC GROWTH:

The recent increase of M&A activities in the BNPL space indicates that companies are looking to build an end-to-end solution for the shopping experience as part of their growth strategy.

Here are the recent transactions in the BNPL space for Klarna and Affirm:

1. Klarna acquired Apprl, an influencer marketing management platform
2. Klarna acquired Stocard, a software that allows consumers to bundle cards
3. Klarna acquired Hero, a "social shopping" platform that connects customers with in-store reps via text, chat and video
4. Klarna acquired Toplooks, an AI-driven shoppable content creation tool
5. Affirm acquired Returnly, a provider of digital return experiences and post-purchase payments

The common theme behind these acquisitions is the intention to integrate with merchant operations and improve consumers' shopping experience. From the end users' perspective, a good customer experience remains the most important aspect when conducting a business. However, a research study from Broadridge indicated that 59% of consumers in North America feel that businesses need to improve their customer services4.  Given that context, the acquisitions of Returnly, Hero, and Stocard demonstrate how fintechs are trying help merchants bridge the pre to post purchase gap. Additionally, these acquisitions bolster the digital shopping experience, which cater toward millennial & Gen Z - the main customer demographic for BNPL companies. Overall, M&A activities complement the VAS strategy and aim to improve merchants' sales, which would trickle down into pureplays' top line.

Since BNPL option is becoming a commodity, pureplays will find a combination of different growth paths - organically through channel expansion and providing VAS or inorganically through M&A. Continuing on this path, BNPL fintechs have the opportunity to go beyond being a payment method and move upstream into shopping and ecommerce.

* In 2021, Affirm added ~2000 new merchants while that for Klarna and Afterpay was around 50,000 and 35,000 respectively (press release)

1. Number of Sellers on Amazon Marketplace - Marketplace Pulse
2. The Benefits of Adding a Buy Now, Pay Later Option to Your E-commerce Store - Mutesix
3. Afterpay introduces in-app ads (finextra.com)
4. Consumers in North America Who Believe that Most of the Companies They Do Business with Need to Improve the Customer Experience, 2019 & 2021 (% of respondents) | Insider Intelligence (emarketer.com)