August 1st — when banking and payments giant, Square, announced that they were acquiring the Australian fintech Afterpay in a $29 billion transaction, it was more than business as usual in the heated tech M&A market. Square shares were trading at 50 times book value, leading them to be able to afford Afterpay, which maintains an impressive 16 million customers worldwide and profits growing at 96% each year. This purchase made headlines as a rare mega merger deal that makes sense on both sides of the company. Square is now able to offer merchants more purchase options as it expands with large global retailers, and for the consumer side, the company is able to integrate more credit and shopping volumes into their digital payment and banking services. The meaning of this deal goes far beyond the expansion of the competitive payments industry. Square’s transaction signified a new era in consumer behavior and credit usage: the upcoming Buy Now, Pay Later (BNPL) generation.
The BNPL Phenomenon
First, defining “Buy Now, Pay Later”: BNPL is simply the method by which a consumer can make a purchase at the point of sale (online or in store) and pay for it over time in pre-agreed installments without having to obtain a credit report. The financing is extended to the consumer, with shorter payback terms and without extra service fees or compounding interest. For example, Afterpay’s technology allows for users to immediately pay for goods in four, interest-free installments.
BNPL not only enables the purchase of goods with the flexibility of payments, but it empowers consumers to manage their finances more efficiently.
Despite these trends, BNPL usage still remains low. With an estimated global opportunity of $10T in online payments projected by 2024, the BNPL market globally today is only approximately 2%. In the US, consumer and merchant adoption of BNPL is approximately 3%, in Europe, it’s slightly higher at 15%. However, merchants are shifting to multi-channel marketing and increasingly using BNPL to facilitate their customer acquisition. Since expected eCommerce spending is projected to average 20% yearly growth globally through 2024, the potential addressable market for BNPL within the payments industry is enormous.
A New Generation of Consumer Behavior
Younger customers reflect the changes in purchasing preferences, as this new generation shows caution towards traditional credit use and banking relationships. Millennial and Gen Z consumers with growing spending power prefer more inclusive, flexible, and transparent ways to manage their finances. These consumers favor the increasing availability of financing without reporting to a credit bureau, and prefer flexible payment schedules with no compounded interest.
With BNPL, the consumer makes an immediate judgement of what they can afford, and whether they should buy something outside their budget or not. When breaking large purchases into smaller payments, buyers trick themselves into feeling more responsible. Consumers make their contracted payments on their installment loans though cash accounts (like Afterpay’s cash app or Paypal’s wallet) as opposed to determining what they can afford on payments to a traditional credit card. BNPL affirms that this next generation of consumers is transitioning from a credit to a debit world — which is beneficial for decreasing market risks and individual indebtedness.
All in all, the opportunities for BNPL are game changing: whether this means accelerating the recovery of economic activity in the retail sector, or forever altering consumer behavior and freedom.
Sources: Consumer activity and preference data — The Strawhecker Group and the American Fair Credit Council. Square and Afterpay business combination details — Afterpay (APT) Limited Transaction Summary, dated August 2, 2021.