Americans are increasingly taking advantage of the buy-now, pay-later (BNPL) offerings thanks to a growing number of financial technology companies.
Splitting payments — as opposed to bulk purchases on credit cards that would accrue interest until being paid — is built on the premise that there is a “shift away from credit to debit,” Nicholas Molnar, co-founder and U.S. CEO of Afterpay, an Australian BNPL startup with more than 11 million customers that operates with 64,000 merchants, told Yahoo Finance.
“Young consumers are fundamentally and permanently changing the way they pay,” Molnar said in a follow-up statement, adding: “Consumers clearly want more flexibility and transparency in how they pay — and they want to use their own money to pay over time.”
A recent securities filing by Visa (V) referenced the shift: When comparing the period of October 1 to November 30, 2020 to the same time in 2019, the company noted a big surge in the usage of debit by 21%, as compared to a decline in credit usage by 4%.
“If we’re moving towards a world where more people hold debit cards than credit cards,” Sebastian Siemiatkowski, CEO of Klarna, a Swedish startup offering BNPL services, told Yahoo Finance. “I think that is a better world.”
The ongoing coronavirus pandemic has in part been a big driver of this phenomenon, as consumers are finding fewer reasons to spend money with their credit cards. Credit card balances have declined substantially, dropping $76 billion in the second quarter last year — “the steepest decline in card balances seen in the history of the report,” the New York Fed noted, and by $10 billion in the third quarter.
The shift is also generational, Bank of America analysts noted in December 2020.
“When you look at the opportunity ahead of us, you have to look out 5, 10, or even 15 years, the company isn’t focused on maximizing short-term profits,” Affirm (AFRM) CFO Michael Linford told Yahoo Finance Live (video above), adding that BNPL options offer a path away from “toxic tricks like deferred interest” and revolving credit products that “can trap consumers in never-ending debt.”
No interest, no fees
Klarna, one of Europe’s biggest fintech unicorns, told Yahoo Finance that the company is valued at $10.65 billion after another round of investments.
Affirm, a U.S. company, started trading on the Nasdaq on Wednesday, Jan. 13. PayPal (PYPL), the online payments behemoth, expanded into BNPL in late 2020.
In August 2020, Afterpay announced that it would be expanding to at least four continents as a result of the e-commerce surge driven by the pandemic.
Molnar explained that part of the value proposition from Afterpay, which doesn’t charge any interest or performs any credit checks when a consumer uses its platform to split payments, is that it tries to avoid any harm to the consumer when making small-dollar purchases.
“No one wants to take out a loan to buy a pair of jeans,” Molnar added. “Think about the finance industry: If 100% of people pay back a credit card on time, the industry doesn't work.”
But with Afterpay’s business model, according to Molnar, “if 100% of people pay Afterpay back on time, we make more money.” For instance, if a consumer split their payments into four and didn’t make all of them on time, they’d be locked out of the system until they repay what they owe.
In that way, there is a realignment of incentives for the consumer.
“The platform [then] ends up with far more good people… than bad people,” Molnar said. “It means that we can take the time, make decisions, like build a loyalty program that rewards good behavior, not just spending behavior.”
Molnar noted that Afterpay is now offering BNPL services to more types of merchants such as dentistry services, moving away from apparel and beauty.
The company is also pushing into physical stores, offering to divide up payments in person as well. So, mall shoppers would have an option to pay just 25% of the transaction with an Afterpay card in their digital wallet — just like how a consumer would use Apple Pay or Google Pay. According to the company, more than two million customers have used the Afterpay Card to shop in person since the fall of 2020.
‘Disrupting the traditional credit card business’
BofA previously noted that the BNPL model is “attacking and disrupting the traditional credit card business.” And while the amounts spent are comparatively smaller, “the sector is rapidly gaining share.”
As of November 2020, according the bank, four of the top 10 e-commerce portals — eBay (EBAY), Walmart (WMT), Etsy (ETSY), and Wayfair (W)— adopted BNPL technology.
In Australia, banks are jumping to offer no-interest credit cards in response to the popularity of Afterpay and others. One of those banks integrated Klarna into its banking app in July 2020.
“We’re in an industry where nobody’s cared about the consumer,” said Siemiatkowski, the Klarna CEO, who added that banks are suddenly “challenged by us, and others, who really set the customer first and who really try to build great services for the consumer.”
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Aarthi is a senior reporter for Yahoo Finance. Follow her on Twitter @aarthiswami.
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