As retail reinvents itself (New Retail) in real-time, there is a simultaneous battle happening at the checkout as BNPL (Buy Now, Pay Later) battle it out in the world’s biggest retail market, the USA.
Retail is an enormous market globally, and yet even with the massive digital acceleration, only a fraction of retail sales are still happening online.
Further to that, less than 1% of payments volume in the USA was related to BNPL. Putting 2 and 2 together, we can see that there is a huge opportunity for market penetration of both online payments and BNPL solutions at the checkout.
Klarna is the pioneer in the space, having started the company in 2005 and scaling it across Europe, where BNPL has by far the highest amount of market penetration (5.8% in 2019 in the EMEA region). The company, which boasts about 2M transactions per day, only entered the US market last year, and currently has more than 15M Users, while adding about 1M per month. The US market is expected to grow from 0.9% market penetration in 2019 to 3.0%E in 2023, making it the fastest-growing market in the world at approximately 233% per year.
The BNPL model has evolved since its inception, from 4 Installment payments (2 weeks apart) interest free and no fees, to now offering a Financing payment program spanning 6 – 36 months with APRs (annual percentage rates) that are within credit-card range (15 – 20%) for higher-value goods.
Where BNPL started
Where BNPL started
The core Installments product originated as an innovation out of Sweden – a debit culture – to help Swedish people purchase products in their local market because ~25% of people didn’t have money in their account until Saturday. The original idea, thus, centred around creating a trusted eCommerce product around debit in the Swedish market, bearing the risk for the retailer and taking ~6% of the GMV (Gross Merchandise Value).
In the Swedish market, Klarna started with small and medium-sized merchants and scaled that strategy across Europe, where almost all the cultures are debit-centric. In the UK, they had their first breakthrough with large eCommerce retailers who sold products to the younger generations, the early adopters of BNPL in every market globally.
In Sweden, over all 50% of all eCommerce transactions are processed through Klarna. In Germany, Klarna’s largest market heading into 2021, Klarna has 80% share of its merchants’ checkout. Despite these being debit-centric companies, BNPL is much more of a primary payment method than simply a payment option.
The game is about to be taken to a whole new level with BNPL moving into the world’s major credit-card economy – the USA – with all three of the major BNPL disruptors (Klarna, Afterpay, and Affirm) vying to be #1, along with firms in adjacent payments spaces like PayPal. Klarna, with more than 15M customers currently, claims that its merchants receive 25 – 30% of merchant checkout share in the US currently, thanks to several new innovations such as their browser extension. The question is, will BNPL become a majority share of checkout for eCommerce platforms and eTailers in the US as well?
The pandemic has not been kind to retail. Undeniably, not only has the retail business model shifted online – permanently – but now the entire retail experience is evolving, thanks to the digital channel becoming the principal sales channel.
But there are still many different problems involved with the CX (Customer Experience) of online vs. offline:
- trying goods on in-store/returns online
- product discovery in-store/algorithmic curation online
- a physical relationship with the retailer/loyalty programs online
As we go forward, the blending of the online/offline experiences will create a ‘New Retail’ experience that is something like what we saw more than a century ago with the blossoming of Department Stores and iconic brands like Woolworth.
Many of these problems can be solved with data. And while BNPL is clearly a Fintech innovation at the core, it has seen its explosive growth in partnership with the Retail channel. There is a lot that can be done with new innovations like BNPL to combine the best of both worlds – rapid expansion and growth, combined with customer loyalty and trust.
Despite the fact the BNPL provider carries the financial risk, the retailer still manages the customer relationship. Roughly 1% of Klarna’s customers into default, whereas Affirm has a delinquency rate in the same range (trailing 36-month delinquency rate of 1.1%). As BNPL balances are typically lower than credit card ($200 – $500 vs. $5,000 – $6,000) it is not an apples to apples comparison. Furthermore, almost 80% of BNPL transactions are debit-based. Sufficient to say that BNPL companies do not have an incentive to simply in-debt consumers and leave. The relationship carries value beyond 1 or 2 transactions. Especially since the majority of early adopters are youth, and the industry is just now coming into its hyperbolic growth phase globally.
What many retailers like about BNPL are the increased PoS (Point of Sale) rates of:
- AOV (Average Order Value)
- and lower Return Rates
Consumers prefer it because of convenience and the optics of it being interest free (presuming they make all payments on time):
The 4-6% of GMV that BNPL providers typically charge retailers (for the Installments/Pay in 4 product) is as much a marketing cost as it is a payments cost (the payment fee is blended into this cost).
The original ‘layaway’ concept of payments, by which modern-day BNPL is modelled after, was born in the Great Depression. They allowed consumers to pay ‘bit by bit’ at Department Stores and pick up the item when they were done paying. It was a win-win for retailers and consumers, and the product was popular right up until the ’80s when credit cards came along. Will we be going back in time or forward into the future with BNPL & Retail?
New Retail & BNPL
As the economy begins to re-open in certain parts of the world, consumers and retailers alike will be excited to greet customers physically. The question of what ‘normal’ looks and feels like in retail remains to be seen, but for many ‘retail therapy’ is long overdue and that means in-store experiences.
The idea of the ‘multi-channel’ or ‘omni-channel’ experience is part of the ‘New Retail’ world. Along with throwback options like ReCommerce (ReSale) to increase engagement, and futuristic options like Augmented Reality (AR) to increase in-store conversion, there are no shortage of strategies that will be deployed in this new world of retail.
But retail has always been about the customer relationship, and the major BNPL players all have a lot of very salient data points on customers. As major retailers and brands are partners in many ways – as opposed to simply customers – we see new innovations in BNPL + Retail such as the one below by Klarna.
This type of combo innovation between payments + retail can make a big difference in the experience between online and offline shopping. In the case of shopping for certain goods like luxury fashion items or other similar high-end goods, customers may prefer to buy online and pick it up in stores. This type of ‘Try Before You Buy’ could reduce anxieties around returns, and since the BNPL provider bears the financial risk, it is a net win for retailers in most scenarios.
All of the major BNPL players – Klarna, Afterpay, and Affirm – are branching into the creation of debit cards and corresponding virtual wallets, enabling these companies to connect the eCommerce checkout experience to the physical retail environment. If companies like Klarna and others are able to bring new payments innovations to market that help retailers bridge the gap between online and offline, then retailers can more efficiently adapt to changing market conditions.
In a world where some economies are re-opening and others remain locked-down, this type of versatility and adaptability between online and offline is exactly what retailers need. Other new technologies and channels will emerge to help retailers innovate and evolve their business models, but BNPL is a relatively new innovation in payments in North America that hales back to a century ago where layaway payments were used as a way to help customers buy goods during the Great Depression. Does technology bring this innovation back full circle to help retailers and consumers alike, or is this another Fintech fad that will fade away?
Time will tell. As we watch the retail experience being reinvented in front of our eyes – in-sync with a new era of finance built around Fintechs – we will see which innovations lead towards a better customer experience and greater loyalty between consumers and the brands they love.