The current economic climate is affecting the technology industry severely, especially in its scaling strategy. As inflation continues to soar to highs that we haven't seen for decades, public spending has fallen and supply chains are raising their prices - but how is the BNPL market affected? In this blog, we discuss how the BNPL market has been affected since the pandemic and inflation crisis, whilst mentioning some of the threats it could be facing in the future.
The rise of BNPL was charged by the e-commerce boom during the pandemic, which has become the new way to pay for items in retail - this has now made household names of companies like Swedish payments group Klarna, which has been labelled as the most valuable private fintech start-up currently in Europe.
Although BNPL had seen a dramatic rise during the pandemic, the sector's business model is under major pressure - and with the current rate of inflation rising rapidly, it's forcing consumers to take new steps that they may not normally rely on to make ends meet. One of the main tactics is the use of Buy Now, Pay Later (BNPL) services for items that are necessities. In recent research, nearly 60% of consumers have said that inflation is driving them to use BNPL services. Additionally, 50% of survey respondents have stated that their BNPL usage has increased more than ever across the last six months.
The survey has also revealed that these users are relying on the services to pay for necessities like food and other household items - with 13% being used in supermarkets, 18% being used in warehouse stores and 17% at discount stores.
But what's the appeal of BNPL?
The most appealing aspect to BNPL services is that most offer no interest charges, the convenience of the service, the improved cash flow management so that they can prioritise other payments, and helping users to budget.
The majority of BNPL users are currently millennials and Gen-Z who are wanting to manage their money efficiently, whilst avoiding debt entirely. Research has suggested that most of the BNPL users are averse to debt in general. They want the option to buy what they want, when they want and only what they can afford, whilst also being aware of the dangers and cost of credit.
The whole BNPL model will assist with budgeting without having to resort to a loan, going into an overdraft or putting the expense onto credit cards.
According to Worldpay's 2022 Global Payments report, BNPL is projected to have been the world's fastest-growing payment method both online and in-store between 2021-2025. By 2025, this payments service is expected to account for 5.3% of global transaction value, or roughly $438 billion. Considering the current economic uncertainty and cost of living, this could all change quickly.
What are the threats that BNPL fin-techs are facing?
Inflation - The longevity of BNPL survive on low interest rates, as companies' margins come from the difference between what they actually spend when lending money to their consumers, and what they earn from providing their services to different retailers. As central banks rates continue to rise along with inflation soaring in many different sectors, providers are facing clear and present challenges - and their margins are going to feel the increase in the cost of borrowing.
However, that's not all. The global rising costs of living, driven by surging energy and fuel prices, higher food prices and rising interest rates, will continue to drastically reduce disposable income for most consumers - making them a lot more cautious about buying discretionary goods, which will slow down the growth of BNPL, potentially throwing the sector into reverse.
Credit Reference Agencies - BNPL companies taking on a large number of users with a low credit file is a risky game. These providers are risking consumers being unable to afford repayments and are having to rely on their own borrowing.
However, to counter this growing trend, a few different firms have started to work closely with UK credit reference agencies to start including BNPL borrowing on consumers' credit reports. With the likes of Klarna who are now reporting the use of its 'Pay in 30' and 'Pay in 3' products to TransUnion and also Experian since June - this is going to include purchases that have been paid on time, as well as late and outstanding balances. This action is going to help consumers with a lower credit file, to build a clear credit history - whilst giving providers a more accurate picture of an individuals 'creditworthiness', helping to mitigate against a customers default risk.
Lack of Trust - Despite BNPL's growth, consumers are still trusting banks more than they do the BNPL companies like Clearpay, Klarna and Affirm, according to the RFI Global Report. In the UK alone, 36% of consumers felt that a BNPL service offered by a bank would be a lot more secure, 31% felt it was more reliable, and 31% thought it would be more accepted. More than half of consumers would consider a BNPL service through a bank, compared to just 35% who rate a dedicated third party BNPL provider the same.
Strong Competition - High street banks are also looking into the BNPL market, especially with research suggesting that they would be trusted more with this payment option - and around these unprecedented times, people are relying on trust when it comes down to their money. NatWest looks set to be the first incumbent bank to enter into the BNPL sector, launching a new product in the next few months. They're promising to bring one of the main advantages of a credit card to BNPL - "consumer protection on all purchases".
With the likes of Apple and Monzo (Monzo Flex) also joining the BNPL space, who already have many loyal consumers and a trustworthy brand, this is going to make it extremely difficult for existing fintech companies to compete in this market.
Everyone's going to be keeping a close eye on the BNPL industry over the next few months as businesses are being forced to adapt to the changes that have been presented to us over the last few months. How these businesses manage with the cost of living crisis, rising inflation rates, whilst competing in a competitive market which now includes the likes of Apple, is going to separate many of the BNPL main contenders from the rest.
Not only is it going to be interesting to see how the market manages with the constant changes, but we will also be gaining an insight into how consumers shopping behaviours continue to change with the different payment options available.
Let us know your thoughts on this topic - will you continue to use BNPL services?