White Paper

Buy Now, Pay Later: Too Good to Miss?

Markus Ampenberger, Inderpreet Batra, Jean Clavel, Prateek Gupta, Kunal

Jhanji, Sumit Kumar, Michael Marcus, and Michael Zhang

September 2021
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C
lick, buy, pay later: This new payments business model, in which consumers defer
and/or split payments or obtain instant credit on their purchases, is soaring in
popularity. Fueled by rising participation in e-commerce, many buy-now-pay later
(BNPL) operators have seen their valuations rise sharply over recent years. Still,
as is often the case with fast-growing technology plays, the outlook is far from certain.
Competition is intensifying and the industry’s relentless growth is attracting regulatory
attention. As a result, the BNPL segment presents financial industry players with risks as
well as opportunities.

BNPL fintechs such as Klarna, Afterpay, Affirm, Zip Co, and Sezzle are tapping into an
accelerating retail shift online—helping consumers make instant purchasing decisions
without immediate funds or savings. All that is required is to check out on a website or
app and commit to a payment plan — often with no interest to pay. From the consumer’s
point of view, there is a lot to love. However, online retail stores also benefit. They see
increased traffic, bigger shopping baskets, higher conversion rates, and repeat
customers—while their financial cost (so called merchant discount rate) is usually a
transaction fee of 1-6% depending on local market conditions and competitive
environment. Behind this “everyone’s a winner” formula are advanced analytics and risk
engines that manage borrower approvals and customer marketing in real time.

With many of the world’s best-known brands and retailers embracing BNPL, the market
is expanding fast. Total transaction value in five key markets (US, UK, Europe, UAE and
Indonesia) reached around $42 billion in 2020. In the UK, BNPL schemes are expected to
account for 10 percent of e-commerce payments by 2024, and EU penetration is predicted
to rise from 5.9% in 2019 to 8.9% in 2023.1 In Australia, around 20% of consumers regularly
use BNPL and more than 60% of merchants (online and offline) are signed up.

Given the success of first movers (Sweden’s Klarna, launched in 2005, posted $1.3 billion
of revenues in 2020), competition is heating up, amid strong venture capital interest. At
the same time, established providers such as banks and payment companies are looking
to catch-up, including offering BNPL-type financing for bigger-ticket transactions. In the
background, the regulatory playing field is evolving. The mature Australian market, for
example, is seeing increasing calls from highly-regulated credit providers for a more level
playing field.

Amid narrowing margins, the BNPL business model is evolving. Some players with the
necessary risk management capabilities are migrating from short-term loans and
merchant-funded business models to longer-term and consumer-funded approaches.
Others are expanding internationally to achieve scale, as well as building out their product
offerings beyond BNPL, and moving into physical retail. With a significant chunk of the

1
Growth projection for European Union according to FIS Worldpay “Global Payments Report 2021”.

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e-commerce payments value chain in play, incumbent banks and other financial services
providers face a dilemma. Do they hop on board now, or wait for a shake out on the
expectation that the regulatory and commercial playing field will become more certain?
Here we outline recent dynamics and discuss actions that traditional players may consider
before taking the plunge.

How Does BNPL Work?

The COVID-19 pandemic’s impact on consumer behaviors represents a watershed for
global retail, with digital channels seeing years of growth in just a few months. This, in
turn, has fueled demand for innovative payment and consumer finance solutions. With
the help of advanced data analytics, a number of fintechs have leveraged a conceptually
simple idea to create a convenient payment method combined with a new twist on
consumer credit. Under the BNPL approach, all that is required to obtain credit is a simple
sign-up process—a name and/or mobile phone number and address.

BNPL is popular among consumers who wish to defer payments without feeling they are
getting into debt. BNPL enables them to purchase instantly via products that are usually
structured as short-term, interest-free (pay in X) loans. These are usually paid back via bi-
weekly payments or full repayment after a few weeks (see Table 1 for a comparison of
BNPL variations).

The closest comparables to the “modern” BNPL products are “traditional” point of sale
and installment loans. The traditional PoS loan, however, is generally used for higher-
ticket purchases, with the cost spread over something like 12-24 monthly payments.
Installment loans can be facilitated as standalone facilities or via cards and would
typically also be applied to larger purchases.

BNPL momentum is being driven by multiple factors: the worldwide growth of e-

commerce, the fact that it is a simple, and often frictionless, way to pay, and the offer of
often interest-free financing available “just-in time” (i.e., only applying a near real-time,
soft credit check instead of any formal credit application and approval process). Moreover,
providers are able to leverage merchant and customer data to create additional services.
These value adds have enabled many BNPL providers to outperform incumbents over
recent years.

Of course, the rest of the industry is not standing still. One of the responses we’ve seen
from some banks – particularly in the US – has been to allow customers to convert credit
card purchases (typically $100+) to fixed-term installment loans, often for a fee. While this
is lower cost to the consumer, compared to the typical APR on a credit card, it is more
expensive than an interest-free offering. It does, however, offer ubiquity in terms of
merchant acceptance (any purchase can be split) and allows credit card users to continue
earning rewards for their purchases.

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In addition, BNPL faces rising challenges in its own business model. Amid increasing
competition, the space is increasingly commoditized, with pricing and margins under
pressure. Mature markets such as the UK and Germany, as well as heavily penetrated
industry verticals such as fashion and retail, face profitability challenges. The merchant-
funded segments of ‘Pay in X’ and ‘Pay in full later’, offering terms of less than six months,
are most affected, and these account for the majority of the market in Europe.

As a result of these dynamics, BNPL companies are exploring new revenue streams, with
some expanding into more traditional consumer finance. Fintechs including Affirm,
Afterpay, Klarna, and Zip/QuadPay are among those that are building (or at least
evaluating) a presence in physical PoS or entering less-crowded and slightly more
expensive online verticals such as white goods, electronics, and auto-financing. One
drawback of the latter is that these purchases are often exposed to higher levels of fraud.
There is also more general shift to longer-term (12+ months) installment loans. In addition,
some companies have launched credit cards, current accounts, and have strengthened
affiliate marketing programs to access new revenue streams.

Table 1: Comparison of BNPL variations (Non-exhaustive)

Credit card issuer
Pay in X Pay in full later POS lending Installment loan
plans
Typical ticket Low value Low to high value High value High value Above $100
size ~ $50-300 ~ $50-5,000 ~ $300–5,000 ~ $300–15,000
Typical Short duration Short duration Longer duration Longer duration Longer duration ~
Duration ~ 1-3 months ~ 2-4 weeks ~ 12-24 months ~ 12-36 months 3-18 months
Usual sales Smartphone Smartphone app / Offline in-store, Offline in-store Smartphone app /
channel app / Online Online phone Online
Usual Credit Instant Instant Extensive application Extensive Linked to existing
Check process affordability affordability incl. credit bureau application incl. cardholder credit
decision (soft decision (soft pull (hard check) credit bureau pull limit
check) check) (hard check)
Interest Interest-free Interest-free Interest-free or Interest bearing Interest-free, with
Rate interest bearing (in exceptional fixed monthly fee
cases, interest-free
with upfront
payment)
Typical Skews towards Skews towards Less credit Less credit Less credit
consumer and younger, digitally savvy constrained constrained constrained
transaction digitally savvy, and more credit customer, mostly customer, used for customer, used as
profile more credit constrained used for one-off one-off purchases an alternative plan
constrained customer; repeat purchases to usual credit card
customer; buyer T&Cs
repeat buyer
Popular Apparel, Apparel, health, Car service, Home furnishing, All purchases from
industry health, beauty beauty electronics, travel furniture, select credit cards
verticals electronics, jewelry
Example Fintechs: Open invoicing Specialised providers: Banks: BNP Credit card issuers:
players Klarna, Affirm, players: RatePAY, Synchrony and Paribas, or Chase (My Chase
Afterpay Mash, Divido Hitachi Personal Santander Plan), and Citi
Finance (Flex Pay)

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Six Drivers of Success

Companies leading on BNPL have unlocked a winning combination of technology and
product innovation that speaks to the needs of a connected, trend-driven, and digitally
adept generation. However, alongside solid core propositions, the best players have
developed capabilities to enable excellent performance along six key dimensions:
1. An exceptional UX: Leading players keep it simple at the customer interface,
offering an easy-to-use process, supported by best-in-class functionality such as
single sign-on, one-click checkout, and the option to buy on social media platforms.
2. Cutting edge risk management: While a common blueprint for early-stage
companies is to focus on growth, the key unlock for the sustainable business model
of the future will be effective credit and fraud risk management. Cutting-edge risk
capabilities will enable faster, more accurate decision making, based on advanced
analytics and the ability to speedily process large volumes of data. Besides KYC
capabilities for merchant onboarding and strong credit assessment, BNPL firms
require debt collection policies, including for dunning fees and collection agencies.
Meanwhile, a key component of the pay-in-X business is repeat customers. Their
high cadence of activity provides companies with the raw materials to fine tune
risk engines, compensating for a lack of hard credit checks and the low profitability
of individual transactions. There has not yet been a severe test of risk models
during a period of economic downturn, given the recent period of the pandemic
has seen extraordinary levels of government support to consumers and businesses.
However, most firms have probably accumulated sufficient data to be prepared.
3. Strong consumer brand: While some successful players offer white-label
solutions to merchants, the biggest BNPL companies have developed strong
consumer brands. This has helped them enrich their value propositions to
merchants, driving incremental sales through affiliate marketing channels. In
addition, it has allowed them to expand their consumer relationships to offer
additional products. Affirm, for instance, partnered with players in the travel
industry (e.g., Priceline) or fashion industry (e.g., adidas) to expand market
penetration and increase customer satisfaction/retention respectively.
4. Easy integration: In a business environment defined by digitization, networks,
and ecosystems, leading players have enabled efficient and effective digital
onboarding of merchants and integration of e-commerce providers. They leverage
multiple distribution channels, including direct integration with merchants, as well
as with technology providers for web shops (such as Shopify or Magento) and
PSPs/acquirers.
5. Prioritizing expansion: Leading companies are swiftly moving beyond the core
business to seek out alternative revenue streams. Afterpay Money is set to launch
in Australia, targeting younger consumers with money management, savings, and

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debit card solutions. These will serve both to expand the product offering and
enhance data-driven decision making. Klarna offers credit cards and current
accounts, and is moving toward becoming a neo-bank. It is also shifting into
commerce, for example via its recent purchase of German shopping app Stocard.
Recent reports suggests that Apple and Goldman Sachs will launch their own BNPL
propositions in the US, building on the success of the Apple Pay credit card and
digital wallet.
6. Bold internationalization: Some firms have been decisive in expanding across
borders, often acquiring competitors (for example Afterpay’s 2018 acquisition of
the UK’s ClearPay) to establish market position.

Finally, few BNPL players achieve sustainable growth without a business plan that
establishes a clear path to profitability. For most BNPL firms, revenues are derived from
the twin sources of merchant fees and interest payments/other fees paid by consumers
(e.g., for 12+ month installment loans). In addition, most leading players are positioning
themselves as partners and facilitators of merchant incremental sales. They are focusing
on value-added services such as loyalty and reward schemes, as well as targeting
consumers directly— as seen with shopping platform offers. Looking forward, affiliate
marketing could generate significant revenues, with high levels of merchant traffic
originating in BNPL apps. PayPal has leveraged its $4 billion acquisition of Honey, a
browser extension that searches for deals, to expand its ‘Pay in 4’ product, after deriving
significant affiliate market revenues from shopping traffic.

Increased Competition and Regulatory Scrutiny

BNPL creates a classic two-sided network, in which an intermediary platform hosts
distinct user groups that provide each other with network benefits. Indeed, the market’s
growth is testament to its utility for both consumers and merchants. Still, after several
years of expansion, there are potential challenges ahead. These include a significant rise
in competition and the promise of heavier regulation, amid concerns over potential
targeting of vulnerable consumers and encouragement of excessive spending.

There are also financial clouds gathering. BNPL is booming in Australia, US, Europe, and
some parts of Asia (key markets are UAE, Saudi Arabia, Indonesia, India, and the
Philippines). However, competition in the absence of consolidation is likely to compress
margins in the short term, particularly with players including PayPal and Apple offering
it for free or at a much lower price (PayPal’s recent pricing changes suggest an at-most 50
bps premium for Pay-in-4).

The dominant group of BNPL players is (mature) fintechs, many of which have built their
businesses after first establishing themselves in their domestic markets. The most

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successful have expanded into multiple geographies and product segments. Market leader
Klarna raised funding at nearly a $46 billion valuation in 2021, putting it among the
highest-valued fintechs in Europe. (See Exhibit 1) Square also reached a deal to acquire
Afterpay for $29 billion in August 2021. Still, international expansion is expensive (a
potential challenge to the current boom)— especially early on, when the company is
building a database in the “new” market to support credit decisions. On the other hand,
investors are usually willing to absorb losses in the growth phase to achieve scale.

Exhibit 1: Key BNPL firms including valuation

Note: Only main geographical areas are presented here, with a selection of BNPL firms (illustrative and not exhaustive), several other
players compete in these markets. Valuation is in $ billion per July 2021. Source: BCG FinTech Control Tower and Pitchbook, Enterprise
valuations from Yahoo Finance, Stockopedia

As the market evolves, two primary business models are emerging. Market participants
focus either on branded offerings or white label solutions that operate under merchant
banners. The latter tends to be prevalent in markets such as Germany, where many
merchants already offer BNPL via white label cooperations. However, in either case, as
market participants jostle for share, there is likely to be rising pressure on the bottom line.

From a regulatory perspective, the growth of BNPL presents a double-edged sword.

Consumers are offered more choice on how to pay, but easy credit raises a red flag, amid
rising concern that the fees paid by retailers are being passed on to consumers. (See side
box: BNPL: Risk of a downward debt spiral?). Australian and UK regulators are
responding, with Australia framing standards that include a voluntary code to promote
best practice in design, marketing, and distribution. The UK Financial Conduct Authority
in early 2021 announced a review of BNPL products, proposing firms carry out
affordability checks, ensure robust operations, offer sustainable financing, establish
complaints procedures, and draft wind-down plans. While legislation is not imminent,
these moves put market participants on notice of a maturing regulatory playing field.

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BNPL: Risk of a downward debt spiral?

Most online BNPL purchases can be both interest-free and fee-free,
especially for prudent customers who keep track of repayment dates.
However, if installments are not repaid in time, there are penalties. In the
UK, consumers are likely to be charged late (dunning) fees, e.g., £6-12 per
missed installment (max. £24-36 per purchase) depending on provider
(except for Klarna). Firms may also charge a penalty APR for the duration of
late payment. This is likely to be registered on the customer’s credit file and
will have a negative impact on his or her credit score. Repeat offenders are
likely to be blacklisted. As a last resort, BNPL firms reserve the right to
instruct debt collection agencies.

Strategic Directions for Banks, Networks and PSPs

The BNPL industry is at the steep incline phase of the product S-Curve, in which a new
offering picks up momentum by honing its proposition to meet real consumer needs. The
message to incumbents – banks, credit card issuers and networks – is that the segment is
here to stay. Our views is that, on the back of e-commerce, BNPL will continue to outpace
the wider consumer credit market, including credit cards. In addition, given pressure on
margins, companies will aggressively evaluate new growth opportunities beyond
convenient payment and easy access to consumer finance. While some will try to develop
a more comprehensive banking offering, others will aim to develop a consumer super-app
that connects merchants with consumers. The latter may enable a combination of
commerce, payments, and financial management—including lending and investment.
Finally, some fintechs may move toward banking-as-a-service, seeking either to partner
with incumbents or unlock M&A opportunities.

To remain competitive and protect revenue pools, incumbents are required to make bold
decisions, and to leverage their core strengths in terms of trust, data, and expertise.
Looking forward, a key success factor will be volume-driven growth, with high numbers
of merchants and customers engaging. Banks in a strong starting position—with an
offering that spans merchant services, SMB banking and retail banking products—should
evaluate development of their own BNPL offerings. An own BNPL offer would allow them
to participate in the growing BNPL market and offer a solution to their own merchant
customer base. They will need to build on their branding, existing customer relationships,
lending and risk management capabilities, as well as aim to match fintech products,
technology, and user experiences. Table stakes include a compelling digital customer
experience and real-time approval processes that are oven-ready to be integrated with
online checkout and/or physical PoS technologies (e.g., via cards or QR codes), as well as
consumer banking touchpoints, including debit and credit cards. Where banks and issuers

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lack the capabilities to build their own BNPL solutions, partnership is an option. Given
BNPL’s growth trajectory, this will be a better option than doing nothing.

In addition to evaluating merchant-centric offerings, banks also need to rethink their

consumer value proposition – their cobrand business, branded credit business and the
debit / checking value proposition. For the cobrand business, banks need to improve core
capabilities e.g., approval rates, fraud management, digital customer experience – to be
on par with the BNPL customer experience. For their branded credit and checking book,
they need to seek inspiration from Apple Pay Later – which effectively converts Pay in 4
into a product feature. The key question to address is how they can do a better version of
this across their entire customer base, while leveraging a much broader relationship.

Alongside banks and issuers, networks such as Mastercard or Visa are ramping up their
involvement. MasterCard and Visa are doubling down on their installment solutions to
make it easier for issuing partners to provide loans. Visa recently rolled out its installment
solution in Canada with partner banks to turn any card purchase into a potential BNPL
payment and is testing pilot BNPL programs in key markets like US and Russia. American
Express has expanded its ‘Pay It Plan It’ feature to its proprietary credit cards, all easily
accessible within its app. Networks are also expanding through M&A and strategic
partnerships, as evidenced by MasterCard’s 2019 purchase of Vyze and later partnership
with Quadpay/Zip. However, to remain competitive, networks will need to tap into in
their technical capabilities and leverage their unique positions in the payments value
chain, aiming to further simplify their BNPL merchant propositions. Networks may also
have to weigh the pros and cons of establishing deeper and more direct relationships with
key merchants. Until now, they have had relatively distant associations through acquirers.

Finally, Payment Service Providers (and acquirers) must be ready to integrate the most
popular BNPL offerings (which can vary by local markets) into their merchant offerings.
From BNPL players’ perspective, PSPs are important sales channels (against a referral
fee); in particular those with a strong position in relevant industry verticals. However, the
PSPs may also need to defend their own merchant relationships, particularly if BNPL
players provide checkout solutions themselves and connect directly to (large) merchants.

* * *
BNPL is more than an incremental addition to the payments and consumer finance
landscape. Our expectation is that it will become a mainstream e-commerce (and
potentially soon also in offline in-store) payment option in most major markets. Indeed,
it is already raising consumer expectations, and funding provider expansion into a range
of product opportunities. Despite the threat of tighter regulation and more competition,
there is a requirement now for incumbents to take stock, consider their options, and
develop robust plans to respond.

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Markus Ampenberger
Inderpreet Batra
Jean Clavel
Prateek Gupta
Kunal Jhanji
Sumit Kumar
Michael Marcus
Michael Zhang

Markus Ampenberger is a partner and associate director in BCG’s Munich office.

Inderpreet Batra is a managing director and partner in BCG’s New York office. Jean Clavel
is a managing director and partner in BCG’s Paris office. Prateek Gupta is a Knowledge
Expert in the firm’s London office. Kunal Jhanji is a managing director and partner in the
firm’s London office. Sumit Kumar is a managing director and partner in BCG’s Kuala
Lumpur office. Michael Marcus is a Senior Advisor in the firm’s San Francisco office.
Michael Zhang is a managing director and partner in the firm’s San Francisco office.

You may contact the authors by e-mail at:

Ampenberger.Markus@bcg.com
Batra.Inderpreet@bcg.com
Clavel.Jean@bcg.com
Gupta.Prateek2@bcg.com
Jhanji.Kunal@bcg.com
Kumar.Sumit@bcg.com
Marcus.Mike@advisor.bcg.com
Zhang.Michael@bcg.com

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