Is Australia ready for BNPL 2.0?
- Written by Paul Koopmans, Vice President, Australia & New Zealand at Worldpay from FIS
Bursting onto the payment scene in the early 2010s, Buy Now Pay Later (BNPL) has been making waves ever since. Bringing to life the latest twist on the centuries-long practice of extending free credit to consumers at checkout while collecting fees from merchants, BNPL has grown from a fringe payment method to one at the heart of the payments sector globally.
From helping consumers purchase big-ticket items and luxury goods, BNPL has now expanded into rent, legal services, restaurants and solar installations (just to name a few). It has also brought credit options to the otherwise underbanked, promoting financial inclusion. Despite this, BNPL is now facing headwinds that have stressed the foundations of the business model, even as consumer adoption remains strong. So, what’s next for BNPL?
BNPL 1.0
To understand where we are heading, we need to know where we started. BNPL was introduced nearly a decade ago and saw a growth explosion into early 2022. Key players in the space—Afterpay and Zip—were born out of Australia and are now household names along with Klarna from Sweden.
Historically, low interest rates resulted in abundant capital for fintech, and well-funded start-ups with large marketing budgets aimed to generate growth over profit. Limited regulatory structures accelerated this growth and Australia witnessed a spike in merchants offering BNPL and rapid consumer adoption. Global online transaction value grew five-fold between 2018 and 2022. According to Worldpay from FIS’ 2023 Global Payments Report, BNPL represented 5 percent of global e-commerce transaction value in 2022, or US$285 billion.
Consumers across Australia embraced BNPL as an accessible credit option. Across the nation, BNPL accounted for 14 percent of e-commerce transaction value in 2022, the highest in the APAC region.
Challenges facing the industry
While BNPL has been on a high for years, the start of 2022 saw confidence in the sector drop. Worsening macroeconomic conditions challenged the initial BNPL model that established its reign in an era of low-interest rates and intense e-commerce growth. A global post-pandemic economic hangover took hold in the form of rising inflation and interest rates. Rapidly increasing capital costs triggered an industry shift, resulting in lower valuations, slashed expansion plans and high-profile layoffs.
Today, regulators in Australia have introduced rules to address concerns around customer wellbeing. With products classified under credit products, providers must handle dispute resolutions and hardship claims whilst being subjected to scrutiny over questionable marketing tactics that advertise BNPL without properly informing consumers on risks. The tightening of lending standards, increasing transparency of interest and fees for late payments and aggregate lending caps are growing closer.
The cracks in the business model are showing. In July 2022, the world’s best-known BNPL brand, Klarna, took an 85% plunge in valuation in a single year while expanding well beyond pure-play BNPL with shopping super-app aspirations. Two Australian players, Openpay and LatitudePay, then both closed their doors in February this year before another player, FuPay, followed suit in May.
BNPL 2.0: What’s next for BNPL?
Yet, from a consumer perspective, while the number of players in Australia has decreased, customer demand has remained steady. BNPL continues to demonstrate strength when measured by consumer interest and rising transaction values. In Australia, the new regulations will bring BNPL more in line with legacy credit offerings, giving regulators reassurance that retailers can manage repayments. Meanwhile, increased transparency around fees and interest for payments will give consumers more control. Despite these changes taking place, this payment option is predicted to hold its e-commerce market share of 14 percent over the next four years, and its total e-commerce transaction value is set to increase 48 percent to US$10.3 billion by 2026.
Alternative payments and the convenience of splitting payments have moved from the “pay in 3 or 4 instalments” proposition initially offered by players and has increased flexibility to offer payments in smaller instalments or shorter repayment plans without interest charges. This is appealing, especially for cost-conscious consumers. Inflation and increased cost of living can put a financial strain on consumers, leading to a preference for credit-based payment methods. Consumers may find themselves having to rely more on credit cards or instalment plans to manage their expenses, especially for larger purchases. As long as consumer behaviour and preferences continue to prioritise convenience and flexibility, the trend towards credit and BNPL options is likely to persist.
Consolidation of pure-pay BNPL providers will emerge as a distinctive feature of the iteration of BNPL – BNPL 2.0 – given the expansion of providers, the entry of large and well-funded players, and a cycle of lower valuations for fintechs. This new BNPL era is also likely to be characterised by a diversification of vertical-specific BNPL players, such as “Fly now, pay later” for travel and will see providers beyond fintech pure-plays to be offered by (and embedded in) big techs such as Apple Pay Later and banks such as NAB Now Pay Later and more recently, PartPay from Westpac.
It is difficult to predict the outcomes of BNPL 2.0. Which players will come out stronger? Will pure-play providers pivot from growth and achieve profitability? Or is BNPL’s future one of a customer acquisition tool by banks, super apps, tech platforms and e-commerce giants seeking to monetise consumers in other ways? The questions are existential, and the stakes are high for the BNPL industry that’s continuously reinventing itself.
Authored by Paul Koopmans, Vice President, Australia & New Zealand at Worldpay from FIS
