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As a sector, financials are a conglomerate of many different business models. There are retail banks, investment brokerages, credit card providers and much more. However, over the past 20 years, fintech solutions have emerged to tackle a lot of the same needs. One market, which has seen increased attention as of late, is “Buy Now, Pay Later” (BPNL).
BNPL mobile apps work like credit cards in the sense that they allow consumers to make purchases at a particular time and pay for them at a later date. However, many BNPL’s offer loan approvals within seconds and use fixed repayment schedules rather than balances that accrue interests. Alongside ecommerce, BNPL popularity has grown dramatically throughout the pandemic.1
“We are still early in the game on BNPL. It is the preferred choice of payment among the younger generation of millennials and Gen Z as they look for easier, quicker, and secure forms of payment,” Saffaye says. “More businesses are moving toward online point-of-sale opportunities due to higher conversion rates and higher average ticket sales.”
However, this is not without its challenges. Some concerns with profitability around BNPL include the fact that many providers do not use credit bureaus for new applications, which introduces delinquency risks, and credit has been fairly benign so risks may build over time, according to Saffaye. At the same time, BNPL business models often depend on major retailer partnerships and there has been an influx of new competition.2 Many are also in their infancy, which means higher operating costs associated with staffing up and expanding to accommodate growing market share.
Although three of the largest players are not yet profitable,3 analysts forecasts BNPL’s North American ecommerce market share will grow from 1.6% in 2020 to 4.5% by 2024.4 But will that translate to higher margins?
“As competition heats up, you will likely see margins constrict. And if margins constrict, you better have scale and key partnerships otherwise you will have a hard time making money in that business,” Saffaye says.
Digital advertising is one channel BNPL companies have used to supplement revenue, but that in itself has become more competitive as tech companies facing comparable issues have flooded the space. Two of three leading BNPL companies have already introduced advertising programs following the path of big tech predecessors like Amazon, which increased its market share of US digital advertisement from 7.8% in 2019 to 10.3% in 2020. That same year, FAANG counterparts Google and Facebook controlled 28.9% and 25.2% of the market, respectively.5 As BNPL companies attempt to squeeze into an already-tight space to generate additional revenue, there may be another hurdle on the horizon, according to Bill Adams, investment strategist at Newton.
“Regulators might believe it’s good that banks are becoming less of the overall mosaic of the financial system. But it’s like pulling and pushing on a balloon, right? The risk goes somewhere else, and if you take it to its logical conclusion, there’s potentially a burgeoning risk profile that’s unregulated,” Adams says. “However, the second they have to play by all the same rules, the competitive advantage could shrink.”
Despite risks surrounding the profitability and longevity of BNPL, one of the world’s largest investment banks recently paid US$2.2bn for a leading BNPL lender, which specializes in home improvement loans. In other words, Wall Street is taking notice and striking while the iron is hot.6
For Saffaye, companies that provide payments infrastructure, and end-to-end platforms, which offer services like customer relationship management (CRM) and client onboarding, are some of the most exciting areas of fintech. These companies, which he describes as the “connective tissue” within finance, do not necessarily disrupt traditional financials so much as work alongside them and help digitize operations.
Despite only launching in 2010, one of these companies has already formed partnerships with a top ridesharing app to provide global cards and a payments infrastructure;7 a leader in mobile payments to power debit cards and peer-to-peer payments;8 and one of the oldest banks in the US to launch digital credit cards.9
“They’re more or less a modern debit/credit card issuer. They’re already technology savvy and they provide a lot of the Application Programming Interface (API)10 for major companies throughout various industries,” Saffaye says.
Separately, Saffaye highlights a communications platform provider as a prime example of “connective tissue”. The company has partnered with many of America’s largest retailers and financial service providers, where they enable real-time SMS (text messaging) and voice updates between vendors and consumers. It also captures customer service data, which feeds into analytics that help drive future business enhancements. So how does fintech come into play? Payments via text through its interface, according to Saffaye.
“The next step is payments through that system, where you no longer have to go through a digital payment app to pay the car dealership you just were just texting,” Saffaye says. “This company doesn’t care if they’re the ones that own the credit card so to speak. As long as they’re facilitating that transaction, they’re in a really unique position.”
While Saffaye, who works on growth strategies, sees possible opportunities, Adams, who is a dedicated value strategist, has a slightly different take:
“As investors in traditional large-scale financial institutions, these are all the critical inputs that we need in order to understand where the next big threat is coming from,” Adams says. “There are great management teams that are identifying these threats and doing something about it, but there are also those that are complacent and less aware, where one might question their competitive advantage,” he concludes.
1 Forbes: Will Buy Now, Pay Later Services Continue to Gro? Retail Experts Weigh In. July 14, 2021.
2 Finextra: BNPL – all of this hype for a not-so-profitable business? September 15, 2021.
3 ModernRetail: Feeling a profit crunch, buy now pay later services bet on advertising. September 1, 2021.
4 FIS Global: The Global Payment Report. March 2021.
5 CNBC: Digital as spend grew 12% in 2020 despite hit from pandemic. April 7, 2021.
6 CNBC: Goldman Sachs is acquiring buy now, pay later fintech GreenSky for $2.2 billion. September 15, 2021.
7 Pymts.com: Uber teams with Marqueta to issue global cards. November 17, 2020.
8 CNBC: Marqeta closes up 13%, topping $16 billion market cap in Wall Street debut. June 9, 2021.
9 CNBC: JPMorgan Chase partners with fintech start-up Marqueta to launch ‘virtual’ credit cards. July 28, 2021.
10 API is a software intermediary that allows two applications to talk to each other. It facilitates social media, texting, and other peer-to-peer communication applications.
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