Hey Jason - great piece on breaking down the space. I feel like many of these companies are now just trying to jump on the bandwagon around BNPL/POS financing and they are no different than many payday lenders once you look at the terms around late fees and interest rates. Does not seem like there is substantial innovation in the space after the first few entrants (ie. Affirm) aimed to solve the problem around how traditional credit reporting works that leaves behind a large percentage of the population access to such financing options. Have you seen anything interesting on the BNPL model on the enterprise side targeting SMB businesses? There seems to be a big need in emerging industries where many of these companies are not bankable from a traditional bank's standpoint. Interested to hear your thoughts.
On the SMB side, there are a number of specialist financing instruments that can help serve similar purposes - from supply chain finance, to trade finance, and invoice finance/factoring - these can help capital-constrained small businesses better manage their cashflow (for a price).
I am somewhat familiar with the specialty finance space - factoring/PO financing,, etc and have not found a digital-first experience that can aggregate private capital and help to unstick markets. This is especially prevalent in the climate space where emerging technologies are not very bankable from traditional standards.
BNPL provider. But they do track these rates by merchant. If, say, Asos has way higher fraud or credit losses than Louis Vuitton, the MDR (merchant discount rate) the BNPL provider charges Asos will be higher to cover the loses. Asos, in turn, would likely pass along this cost to ALL of its customers, in the form of increased prices (whether or not they're using BNPL at checkout).
Jason can you explain in a bit more detail how the unit economics of Affirm work. Given the 0% fee it means the merchant fee should cover defaults as well. Seems quite low to do that given the soft underwriting policy you mentioned.
Michalis - for Affirm, they ARE fully credit underwriting these loans (eg bureau data). The "pay in 4" type providers (Quadpay etc), to my understanding, are screening to prevent fraud, looking at loss rates by merchant etc, but, to my knowledge, are not actually doing credit underwriting - but instead validating that a given payment card works & belongs to the person making the transaction.
In the McKinsey chart you share, it appears there were $94B of outstanding POS lending balances in then US in 2018. Were all of these outstanding balances originated by the fintechs in the space?
McKinsey doesn't specify the category, beyond POS lending. It is based on TransUnion/Experian data; I'm guessing they created a list of lenders they consider to be "POS" (Affirm, GreenSky, etc.) and looked at those balances. Note that "pay in 4" options aren't reported to credit bureaus and wouldn't show up, based on my understanding of the data source they used.
What I mean by that is, a merchant going from offering 0->1 buy now/pay later options at check out may add a lot of utility of users by providing an alternate financing/payment option; but going from offering 1 BNPL option -> 2 doesn't necessarily add much value for the merchant, especially if users are largely BNPL provider agnostic.
My sense is that choice of BNPL is opportunistic - someone is choosing a merchant, and then will use the BNPL option offered.
While most/all BNPL companies I surveyed offered links to shopping on their sites & apps, I haven't seen anything to suggest this is a major source of traffic to merchants at this point.
AfterPay claims the merchant has potential of 30% new customer acquisition by offering BNPL option (https://www.afterpay.com/for-retailers)> again the way these players do that is by cultivating upstream relationships in terms of co-marketing options. Hard to verify if this true and neither have I seen any reports reflecting on this new customer acquisition kpi/metric. Please do share if you find any down the line!
Basically, this item is not 100% true: "BNPL services do not furnish data to credit bureaus (this debt is invisible to other creditors)"
https://www.refinery29.com/en-gb/2021/07/10580038/buy-now-pay-later-mortgage-eligibility
https://www.aviva.co.uk/aviva-edit/your-money-articles/how-buy-now-pay-later-affects-mortgage-applications/
https://www.thisismoney.co.uk/money/mortgageshome/article-9807015/Turned-mortgages-using-buy-pay-later-shopping-deals.html
Hi Jason, excellent article. Few questions...
1. Generally what is the method followed for collections/ recovery? any idea on avg. NPA's?
2. What are typical charges to merchant by the BNPL provider? understanding that to consumers it is more or less free....
3. Why do you think providers like Klarna or AfterPay are successful over any traditional Bank/ FII offering BNPL services?
Hey Jason - great piece on breaking down the space. I feel like many of these companies are now just trying to jump on the bandwagon around BNPL/POS financing and they are no different than many payday lenders once you look at the terms around late fees and interest rates. Does not seem like there is substantial innovation in the space after the first few entrants (ie. Affirm) aimed to solve the problem around how traditional credit reporting works that leaves behind a large percentage of the population access to such financing options. Have you seen anything interesting on the BNPL model on the enterprise side targeting SMB businesses? There seems to be a big need in emerging industries where many of these companies are not bankable from a traditional bank's standpoint. Interested to hear your thoughts.
On the SMB side, there are a number of specialist financing instruments that can help serve similar purposes - from supply chain finance, to trade finance, and invoice finance/factoring - these can help capital-constrained small businesses better manage their cashflow (for a price).
I am somewhat familiar with the specialty finance space - factoring/PO financing,, etc and have not found a digital-first experience that can aggregate private capital and help to unstick markets. This is especially prevalent in the climate space where emerging technologies are not very bankable from traditional standards.
great one. I am wondering, for BNPL / Pay in 4 models, who eats the credit loss and who eats the fraud loss? the BNPL provider or merchant?
BNPL provider. But they do track these rates by merchant. If, say, Asos has way higher fraud or credit losses than Louis Vuitton, the MDR (merchant discount rate) the BNPL provider charges Asos will be higher to cover the loses. Asos, in turn, would likely pass along this cost to ALL of its customers, in the form of increased prices (whether or not they're using BNPL at checkout).
Is that “pass through cost” really true? I mean I am sure hey would like to but do they do it via general pricing increase or a itemized fee?
Jason can you explain in a bit more detail how the unit economics of Affirm work. Given the 0% fee it means the merchant fee should cover defaults as well. Seems quite low to do that given the soft underwriting policy you mentioned.
Michalis - for Affirm, they ARE fully credit underwriting these loans (eg bureau data). The "pay in 4" type providers (Quadpay etc), to my understanding, are screening to prevent fraud, looking at loss rates by merchant etc, but, to my knowledge, are not actually doing credit underwriting - but instead validating that a given payment card works & belongs to the person making the transaction.
Hope this helps!
In the McKinsey chart you share, it appears there were $94B of outstanding POS lending balances in then US in 2018. Were all of these outstanding balances originated by the fintechs in the space?
McKinsey doesn't specify the category, beyond POS lending. It is based on TransUnion/Experian data; I'm guessing they created a list of lenders they consider to be "POS" (Affirm, GreenSky, etc.) and looked at those balances. Note that "pay in 4" options aren't reported to credit bureaus and wouldn't show up, based on my understanding of the data source they used.
Source article: https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/us-lending-at-point-of-sale-the-next-frontier-of-growth
Thanks for writing this. Can you share more light into this please...
<snip>For merchants, there is declining marginal benefit for adding additional POS lending or BNPL partners</snip>
What I mean by that is, a merchant going from offering 0->1 buy now/pay later options at check out may add a lot of utility of users by providing an alternate financing/payment option; but going from offering 1 BNPL option -> 2 doesn't necessarily add much value for the merchant, especially if users are largely BNPL provider agnostic.
Is this true even if BNPL payment type becomes a cheaper source of user acquisition for the merchant?
My sense is that choice of BNPL is opportunistic - someone is choosing a merchant, and then will use the BNPL option offered.
While most/all BNPL companies I surveyed offered links to shopping on their sites & apps, I haven't seen anything to suggest this is a major source of traffic to merchants at this point.
AfterPay claims the merchant has potential of 30% new customer acquisition by offering BNPL option (https://www.afterpay.com/for-retailers)> again the way these players do that is by cultivating upstream relationships in terms of co-marketing options. Hard to verify if this true and neither have I seen any reports reflecting on this new customer acquisition kpi/metric. Please do share if you find any down the line!