Is “buy now pay later” a rebranded debt for the Instagram generation?

How many times have you bought something, that couldn’t wait for a payday? From a new pair of “must-have” sneakers, to the latest gadget simply because it is the newest thing. It has happened to all of us, so don’t cheat! Sometimes our desires make our payday irrelevant. But this is only one side of the coin. Home repairs and car breakdowns will not wait until the end of the month. Emergencies usually happen when you did not see them coming. 

Don’t wait, buy now and care about bills later

In emergency situations we used to turn to banks. But the new generation of customers have more choices nowadays. Fintech made borrowing sexy, its not seen anymore as a debt but a different payment method like any other. Borrowing or rather paying later using a fintech app is much more appealing than in bank branches. 

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“Buy Now Pay Later” (BNPL) services could tempt some consumers to spend more than they can afford to but isn’t there a similar worry associated with credit cards? We could say the same about short-term loans and instalment plans. All those financial products allow users to avoid paying upfront for purchases. The difference that many incumbent providers point out, is the fact that BNPL is under-regulated. Whose fault is that?

Despite the criticism, modern layaway gave rise to the fintech unicorns. Afterpay, achieved market valuation of $1 billion in 2018 only to reach $18 billion just two years later. Klarna recently doubled its valuation to $10 billion and Affirm is rumoured to be planning an IPO that aims to achieve $10 billion. If this is not enough, PayPal recently began cramming themselves into the market space . Together with other emerging rivals this space is already crowded. 

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Putting enormous valuations aside, how likely is it that BNPL will kill the old and good credit cards? That’s a good question, answering it by myself would be criminally foolish, so I thought I should consult with someone who introduced deferred payments to Central Europe. I believe Michal Smida, CEO and founder of Twisto, can shed light on the fact that “paying later” is not just rebranded debt for the millennials.

The truth about new credit products for Millennials 

[Piotr Pietrzak] Pay later” is cheaper for consumers than other types of credit because users are generally not charged interest and there are limits on the fees that can be charged. With the exeption of the price, what are the main differentiators between buy now pay later” and other credit options?

[Michal Smida] BNPL in its simplest product form is servicing one-off payments online. There is a clear due date and a variety of repayment options, including easy instalments in case of customer need. That makes this product much easier to understand in comparison to traditional credit cards and simple to use (with no long onboarding and simple 1-click payment online with Twisto). The biggest benefit for customers is flexibility, single purpose and a much bigger control over the spending. Conventional credit cards tend to be more complicated.  

Customers can postpone payments for high-value purchases such as travel and electronics but also spread the costs for daily necessities such as groceries. Is there any desired customer behaviour that is a dream goal for Twisto and other similar services?

Twisto has a diversified stream of income. From merchants (paying a % from every transaction via BNPL), to customer monthly fee for using the Twisto Account, card interchange (0.2% on every transaction) and lastly interest paid by customers who freely choose to go over the grace period and pay for example in instalments. Healthy customer mix is 50:50, where 50% of customers always pay within the grace period and the other 50% choose some form of a payment deferral. We are not reliant purely on APR and long term we are exploring ways to make the product “subscription based” like Spotify or Netflix, where for a fixed monthly fee paid by customers we will offer instalments and payment deferrals free of charge for specific purchases. Similar business model is observed in players like ZIP Money.

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Online merchants all over the world are giving their shoppers the option to pay over-time. Asos, eBay and Walmart to name few of big players who offer the service. Is buy now pay later” already a must-have for online shops nowadays?

Buy now, pay later is experiencing a bonanza moment during COVID. Merchants started to look for ways to help customers pay later as this could ease the strain on customers cashflow or help to the next pay cheque in case it gets delayed. On the customer side we see a similar trend as customers seek to optimise their spending habits and want to shop in a smart way. BNPL offers this option – free of charge payment deferral by 21+ days is a no-brainer for many. In CEE the market is still fresh and in development, where BNPL represents less than 5% of the overall e-commerce market. In Western EU, this can be as much as 30-40% of all e-commerce volumes. Merchants like Zalando or Amazon are just a few examples where BNPL is a major source of customer differentiation and business model of the merchant. I believe we will get there, but it will take another 3-4 years to catch-up to the West. We are already seeing adoption by the biggest retailers in the region which is driving the trend of BNPL adoption among the wider public. 

The market for deferred payments is diverse, evolving, and growing rapidly. How can you stand out in this competitive landscape when all players lure customers with zero-interest rates, frictionless check-out experience and modern user interface?

It boils down to customer trust and impeccable UX. Great UX comes with technology and data collected over several years that helps calibrate scoring models and ultimately deliver a 1-click BNPL payment experience. For example, if you are buying on your mobile, let’s say groceries, you don’t want to input in 5 fields of personal data, including your national identification number. This would be the case with new entrants to the space or BNPL being provided by banks or traditional financial institutions. The trick is in super simplification for the customer so that it becomes as seamless at swiping a card with NFC in brick & mortar. This is what we are offering in the market today to online retailers, back by our leading risk engine Nikita built over the past 7-years.

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Investments in buy now pay later” companies have been wildly successful bringing enormous returns. Other FinTech’s dream about it while struggling with robust revenues. Is it just a matter of credit product characteristics or something else?

BNPL providers – likes of Klarna, AfterPay, ZIP Money, Paypal Credit or Affirm benefit from robust economics and monetisation via credit and distribution via online merchants. The former is key to any financial product – credit is the only way today you can successfully monetise customers. The latter – merchants, open up a great distribution channel at low CAC that other financial institutions fail to reach as they either go direct to customers or spend a lot of money on performance marketing. Neobanks are great at getting millions of customers for a debit product at super low CAC, but at the price of thin margins on card interchange (0.2%), free FX is a standard feature (=no revenue here) and crypto trading is a niche product, not a driver of top line. As such NeoBank saw revenue drop by 50-70% as their key source of income (travel/card payments) has dropped substantially during COVID. Conversely, BNPL/credit providers have seen rise in payments and profitability as a result. Cracking credit and monetisation are key to survival, some Neobanks will ultimately not make it as the pace of equity funding has slowed down and not recovered to pre-COVID levels.

Financial bodies, especially in Australia and UK, warn that pay later” is under-regulated. Fintechs arent a subject to the same level of government scrutiny like banks (yet). What can we expect from regulators to promote the strong and innovative development of the financial system?

We are regulated by the national bank both in the home and local markets we operate in. Not regulated as much as a bank, but that’s natural, as we are not taking customer deposits, but ultimately put our money to work – money of professional investors and funds financing the portfolios. Regulation around interest rate caps, late fees and way of identifying and onboarding customers apply equally to us. As such I believe the regulation is sufficient and on the contrary sometimes lagging behind the technological innovation. One example is customer onboarding/KYC-AML process, where traditionally you would need 2 IDs and penny transfer to onboard a new client online. There are new models of onboarding – Bank ID or PSDII which are opening new possibilities, but not yet fully reflected in the legal framework across the EU.

In social media users tell stories about difficulties in making scheduled repayments. Some consumers borrowed money from friends or even another loan provider to settle bills. Is it a result of soft credit checks on applicants, or general lack of basic control in making impulsive purchases?

I would not attribute this to soft credit checks, especially looking at the high approval rates of BNPL providers (70-80%) and low NPLs (single digit p.a.) you are seeing very healthy portfolios of BNPL providers vs. other non-bank providers. As such it really boils down to the individual customer who overspends and does not control their own cash flow. Fortunately, we did not experience issues like this in our markets, perhaps because we choose to start with a very low credit limit and we only grow it over the time as we get to know the customer. This reduces the risk (both ways) substantially.

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Its difficult to compare consumers use of credit cards to their use of buy now pay later”, due to differences between these products. The credit card market is still significantly bigger, but are you expecting that pay laters” will make people to cancel their credit cards?

Credit cards & BNPL both fulfil different customer needs and, in some ways, can be complementary. However, as is the case of Twisto, we started off as a pure play BNPL provider and evolved into a fully-fledged daily payments credit card/wallet. We are seeing a similar trend with Klarna, PayPal, ZIP Money and others who started issuing virtual & plastic cards along the lines of VISA and MasterCard. From day 1 this offers global acceptance and becomes relevant to customer’s daily shopping – capturing customer’s wallet and daily spend is the mantra for every FinTech. Such an omni-channel offering is truly rivalling the traditional credit card. The key is also offering “other features” e.g. in-built PFM function, great UX, insurance products, bigger payments options, connecting merchants-customers… all in one single app.

What is coming next?

Let’s give it a try with 3 of the most probable scenarios for future of “buy now pay later”. 

Scenario no. 1

These players will continue to disrupt use of credit cards and traditional loans. New “pay laters” will appear in the market as entry barriers will stay relatively low. Service will slowly take over other credit options, especially credit cards. In the mid-term it becomes another payment method next to bank transfers, PayPal and cards. 

Scenario no. 2

The evolving ecosystem will bring new opportunities for incumbents and encourage them to move beyond traditional products in order to meet changing customer needs. Banks will collaborate with “buy now pay later” providers through partnerships, investments or takeovers. “Pay laters” will still disrupt the loan market with the help of incumbents.

Scenario no. 3

A tighter regulation may be forthcoming, as currently in most markets “buy now pay later” providers do not need a banking license, and many will not need a credit license either. In the case of other fintech which made a move from e-money or payment institution license to banking license, this may weigh down and limit innovation. “Buy now pay later” will still be around, but not any where near as hot as it is now.


Piotr Pietrzak

Product Director - Opera