Buy Now, Pay Later: Global Primer [Infograph]
CEOs Grilled on Overdrafts, LendUp vs. Mission Lane, Nat'l Interest Rate Cap
Hey all, Jason here.
Happy Memorial Day to my American readers! Memorial Day is the unofficial start of summer, even if the weather in Chicago doesn’t seem to think so. With vaccines widely available in the States and COVID cases on the decline, there’s a palpable sense of excitement in the air, as restrictions are relaxed and things return to normal.
This week, I’m happy to present a collaboration I did with Dutch fintech consultancy Fincog. Many thanks to Jeroen del Bel and Benjamin Kral for working with me on this!
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Special Report on Buy Now, Pay Later with Fincog
Frequent readers of the newsletter are likely pretty familiar with “BNPL,” which I’ve covered previously and is arguably one of the hottest trends in consumer fintech in the last couple years. Since I first wrote about it, the pace hasn’t slowed, with new entrants seemingly launching weekly, and product and geographic extensions from existing players just as commonly.
That’s why I’ve partnered on this buy now, pay later global industry primer with Fincog, the fintech consultancy group, which works with fintechs and incumbents offering market research, strategy consulting, and guided implementation.
Buy Now, Pay Later: Global Phenomenon
It’s debatable in what country buy now, pay later first began. While Affirm began offering longer term financing in the United States in 2012, “split pay” offerings really began taking off in Australia with services like Afterpay in 2014, Openpay in 2013, and Zip 2013, and in Europe with Klarna as far back as 2005.
Looking at market penetration, Australia and the UK are further along the adoption curve and have already seen some regulatory scrutiny of the category, which may provide clues about the product category’s future in other markets.
While players like Afterpay and Klarna have successfully expanded across multiple geographies, BNPL remains balkanized, with discrete market leaders emerging in different countries / regions.
An emerging BNPL player that may change this is Paypal. While currently Paypal only offers “split pay” (pay in 4) and longer term financing (Paypal Credit) in the US, UK, France, and Australia, the longtime e-commerce veteran has made clear it recognizes the opportunity and is moving aggressively, leveraging its expansive base of existing merchants.
Why Has BNPL Gained Traction?
There are more payment options than ever — so what is it about BNPL that has attracted such strong adoption from both consumers and merchants?
For consumers, the overriding benefit is convenience. With the growth of e-commerce, “just in time” financing, provided contextually at checkout, has undeniable appeal. While the amount of information a user must supply varies by product, all BNPL providers provide a streamlined, low-friction experience — often requiring no additional fields beyond a merchant’s standard checkout flow.
As a financing choice, “split pay” and some longer term POS financing choices hold appeal vs. traditional financing tools, like credit cards, as they are interest free. Financing that is provided at POS, when interest bearing, is preferred by some consumers as being more transparent, as it is close-ended and thus allows them to understand the full cost of credit upfront — something that’s not possible when using a typical credit card to finance a purchase.
For merchants, the appeal of BNPL is in boosting conversion rates and average order value (AOV). By providing a built-in financing option, often with no interest, BNPL as a payment option can help lower shoppers’ hesitation and thus reduce cart abandonment.
This benefit for merchants doesn’t come without a price; the fee the merchant pays the BNPL provider, the “merchant discount rate” (MDR), can often by 2-3x the merchant discount rate of a typical credit or debit card used at checkout. Merchants are banking on lower cart abandon rates and higher average order values to offset this increased transaction cost.
BNPL Distribution Models
As the number of BNPL providers has increased and the space has become more competitive, with incumbent players like banks and card networks developing offerings, the approaches to product distribution have also increased.
There are four key distribution models:
via merchant: in this model, the BNPL provider is integrated directly at a merchant’s check out (Klarna as a payment method on Adidas’ site) or as part of a platform the merchant uses (Affirm as a payment method on a Shopify seller’s site).
via network: in this scenario, a merchant integrates with a network like Mastercard/Vyze or Visa/Chargeafter, which, in turn, has a network of lenders; financing type and fee structure will vary based on the type of lender for a given transaction.
via existing bank card (credit card): recognizing the competitive threat from evolving “split pay” and specialty POS lending options, existing credit card companies like Chase and American Express introduced the ability to ‘convert’ credit card charges over a certain amount into an installment-type loan.
via white label: basically, the BNPL version of the classic store brand credit card.
Buy Now, Pay Later Product Configurations Vary by Country & Provider
While exact product configurations vary by provider and by country, due to regulatory reasons, offerings tend to fall into three main categories.
Split Pay or Pay Later
The most common shorter term option is to split a charge into multiple payments, with a portion paid at the time of the transaction and the balance paid in subsequent installments over a period of about 6 weeks. This option usually carries no (or very little) direct cost to the consumer, though late fees may apply.
Klarna popularized an option to pay within 14 or 30 days (rather than splitting), which makes sense for ecommerce purchases a user could end up returning.
Longer Term Financing - at 0%
No cost financing on a longer term basis is also available from some providers. Most notably Affirm offers 0% financing on pricey Peloton bikes for up to 39 months. These are underwritten as loans (even with no interest), but the economics for the BNPL provider are coming from the merchant via the MDR rather than directly from the consumer.
Longer Term Financing - with Interest or Fees
Depending on the merchant and borrower’s qualification, longer term financing may also be available as an interest-bearing loan, something that Klarna, Affirm, and Zip offer, for example. In this case, the economics for the BNPL provider come from both the merchant and the consumer.
Who is winning the Merchant “Land grab”?
Because presence on merchant websites is a key distribution channel for BNPL providers, there has been a bit of a “land grab” to secure market share by inking deals with key merchants and even more so with platforms serving multiple merchants (Shopify).
While a merchant relationship with a BNPL provider needn’t be exclusive, there are often costs attached (technical implementation, monthly service fee) and diminishing returns that make it less worthwhile for a merchant to onboard more than one BNPL provider.
Thus number of merchants, amount of gross merchandise value (GMV) and exclusive partnerships are good indicators of the defensibility of a given BNPL company’s business.
Looking to the Future of BNPL
With interest from investors and consumers in BNPL continuing to grow, expect the category to continue expanding as VC-fueled BNPL providers battle to capture market share and expand to new geographies. As the trend ages, the sector may see exits or consolidation, with a handful of winners emerging in different countries/regions.
Big Bank CEOs Grilled on Overdrafts
The CEOs of six of the largest American banks faced a double header of Congressional testimony this week, appearing before Senate and House committees. Questions covered a wide array of topics, from the financial (lending practices, stock buybacks, share prices) to the social (voting rights, racial inequality) and beyond.
One particularly pointed question about overdrafts to Jamie Dimon from Sen. Elizabeth Warren (D-MA):
“You and your colleagues come in today to talk about how you stepped up and took care of customers during the pandemic, and it’s a bunch of baloney. Will you commit right now to refund the $1.5 billion you took from consumers during the pandemic?”
Unsurprisingly, Dimon answered in the negative.
Over in the House Financial Services Committee, things weren’t much friendlier. Via American Banker:
“I am concerned that the institutions led by our witnesses raked in billions in overdraft fees during the pandemic, at a time when individuals and families across the country are struggling through no fault of their own,” said Rep. Maxine Waters, D-Calif., the chairwoman of the committee.
Rep. Carolyn Maloney, D-N.Y., who authored the Credit Card Act of 2009, said the largest banks collected $8.8 billion in overdraft fees last year.
Some mainstream banks have begun rolling out basic accounts designed to help consumers avoid fees, like PNC’s “Low Cash Mode.” US Bank and Bank of America rolled out small-dollar loan products with far more favorable terms than overdrafts or payday loans.
But major banks continued to rake in billions in service fees in 2020, primarily from overdrafts.
With increasing pressure from unified Democratic control and challenger banks offering better products, some big banks are responding, but perhaps not quickly enough.
Sen. Brown Proposes National 36% Rate Cap
Fresh off a Senate victory in using the Congressional Review Act to move forward a reversal of the OCC’s “true lender” rule, Sen. Sherrod Brown (D-OH) has an even more ambitious goal: a national 36% rate cap.
According to Reuters:
“The Democratic head of the U.S. Senate Banking Committee, Sherrod Brown, is prioritizing legislation that would set a national cap on how much lenders can charge in interest, he told Reuters, as he ramps up pressure on abusive lending practices.”
While it sounds great in theory, a hard rate cap at 36% is a blunt instrument. Implementing such a cap won’t mean that borrowers that didn’t qualify for sub-36% credit before are suddenly able to do so.
Instead, because of the relatively high fixed cost of offering smaller loans, options for consumers with low credit scores or no credit score at all are likely contract.
LendUp Launches Banking Product While Its Spinoff Mission Lane Acquires One
Disclosure: I was an employee of LendUp from 2014-2016 and hold a tiny amount of equity in the company.
LendUp’s previously announced Ahead Financials challenger banking product went live this week. The product appears to offer little differentiation from existing players like Chime or Varo:
Chime has a significant head start, boasting over 12 million users, and a significant funding advantage. Varo has fewer users, but has gone through the arduous process of obtaining its own national banking charter, potentially giving it a competitive moat against the growing number of challenger products.
LendUp’s choice to launch a challenger product is a curious one. The small-dollar loan products it historically has offered require a bank account, meaning if LendUp is trying to convert its existing borrowers, it needs to convince them to switch from their existing bank account.
For instance, if a user’s existing account were Chime or Varo, what reason would they have to switch to LendUp?
Mission Lane Acquires Honeydue to Launch Banking Products
Mission Lane is the subprime credit card business that was spun off from LendUp in September 2019, serving an overlapping customer base with LendUp itself.
Last week, Mission Lane announced it has acquired Honeydue, which has over 500,000 registered users across six countries using its app to keep track of various accounts and bills, including sharing information with family members.
Honeydue also offers a banking product and debit card via a partnership with Sutton Bank.
According to Mission Lane’s press release:
“Mission Lane will leverage Honeydue’s strong digital banking capabilities to bring additional innovative and transparent financial products, such as debit cards, to consumers.”
This acquisition enables Mission Lane to begin offering a debit product to its consumers — potentially in direct competition with LendUp.
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