Understanding the BNPL (Buy Now Pay Later) Business Model in Startups
Buy Now, Pay Later. BNPL. We’ve all heard these buzzwords recently.
BNPL services have exploded onto the scene, adopted rapidly by merchants and consumers.KLMKOP Startups like Affirm, Afterpay, and Klarna have ridden the BNPL wave to explosive growth and multi-billion dollar valuations.
But what exactly is BNPL? How does it work? And why is it suddenly so popular?
In this post, we’ll break down the mechanics of BNPL and analyze the pros and cons of implementing it in a startup environment.
What is BNPL?
BNPL stands for “Buy Now, Pay Later.” It allows consumers to purchase products and services immediately but pay for them over time in installments.
In a typical BNPL transaction, the consumer makes a small down payment upfront, usually 25-30% of the total purchase amount. They then pay the remaining balance off in fixed recurring payments over 6 weeks or several months.
For example:
- Sara buys a $1000 couch from FurnitureCo using a BNPL option at checkout
- She pays $250 (25% down) when she buys the couch
- The remaining $750 balance is split up into 6 weekly $125 installments
- Sara receives the couch right away but pays it off slowly over time
This delayed payment structure helps consumers purchase big-ticket items that might normally be out of budget. It also incentivizes higher cart sizes since the smaller installment amounts seem more affordable.
On the merchant side, BNPL provides increased average order values, higher conversion rates, and access to new customer demographics who appreciate flexible payment options.
The Rise of BNPL
BNPL solutions have seen rapid adoption in recent years. According to McKinsey, BNPL user growth was up 129% in North America in 2020.
Several factors have driven this growth:
Growing eCommerce market – With the shift to online shopping, BNPL solutions are integrated seamlessly into checkout flows.
The desire for flexibility – Consumers, especially younger demographics, appreciate the cost flexibility and interest-free installments BNPL provides.
Merchant incentives – BNPL providers offer merchants increased sales and conversion metrics that are hard to ignore.
Poor credit accessibility – BNPL gives consumers with little/no credit an option to finance larger purchases.
Economic conditions – During recessions and periods of uncertainty, flexible payment options become more appealing.
As a result of these tailwinds, BNPL has moved rapidly from a niche offering to a mainstream staple across retail, travel, healthcare, and more.
How BNPL Companies Make Money
Given customers aren’t paying interest, how do BNPL providers generate revenue? There are a few main methods:
Merchant transaction fees – BNPL companies charge the merchant 1-6% of the purchase price for providing the BNPL service. This compensates for credit and fraud risk.
Late fees – If a customer misses an installment payment, BNPL providers will charge a late fee, usually around $7-10 per late payment. These generate sizable revenue.
Interchange fees – A small interchange fee is charged (1-3%) when customers make debit card payments for installments.
Ancillary product offerings – Some BNPL providers make additional revenue on other financial products (ex. Affirm credit card).
The transaction fees from merchants are the primary revenue stream. Late fees help minimize credit risk exposure.
Pros of Offering BNPL in Startups
For early-stage startups, BNPL solutions can provide some nice advantages:
1. Increased cart sizes and conversion rates
The data shows that BNPL boosts per-order spend by 20-30% on average. Customers tend to buy more when offered installment payments.
BNPL also lifts conversion rates by 10-30% at checkout, reducing shopping cart abandonment.
For startups trying to scale revenue, BNPL can be an engine for growth.
2. Attract new customer demographics
Younger demographics like Millennials and Gen Z strongly prefer BNPL installment plans compared to traditional credit cards. BNPL attracts deal-seeking shoppers who might not otherwise purchase from you.
Implementing BNPL can help startups expand outside their core customer base into new segments.
3. Low risk of bad debt
Most major BNPL providers assume all the credit risk and chase down customers for late payments. As a merchant, you get paid in full after the customer confirms the order.
This means startups don’t have to worry about offering BNPL themselves and taking on credit risk. The BNPL partner handles it all.
4. Improved customer loyalty
Customers who use BNPL to purchase from you are more likely to return and buy again in the future. The payment flexibility strengthens your relationship and builds loyalty.
BNPL helps startups establish habitual repeat-purchase behavior, a strong retention driver.
Cons of Offering BNPL in Startups
BNPL isn’t a silver bullet, however. There are some potential drawbacks to consider:
1. Processing fees eat into margins
Those merchant transaction fees imposed by BNPL providers range from 1-6% of the purchase amount. This directly reduces your profit margin on each order.
For startups with tight margins already, the processing fees can take a bite out of revenues.
2. Requires customer underwriting
Before approving a BNPL transaction, providers analyze the customer’s creditworthiness and repayment risk. They want to minimize defaults.
Integrating with a BNPL partner requires building this underwriting process into your checkout flow. Extra steps could impact conversion rates.
3. Risk of abuse and fraud
A small percentage of customers abuse BNPL plans and skip out on repayment obligations. As a merchant, you may still be on the hook for chargebacks in some cases of fraud.
The increased credit risk exposure needs to be accounted for.
4. Brand association concerns
BNPL lenders still have a bit of a negative association with excessive credit lending. As a startup trying to build a brand image, aligning with BNPL could impact perception.
However, BNPL adoption has grown so rapidly that negative connotations are fading. This concern is likely minimal.
Examples of BNPL Startups Revolutionizing Consumer Financing
The Buy Now, Pay Later (BNPL) model has gained significant traction in recent years, with numerous startups emerging as pioneers in the industry.
These startups have disrupted traditional financing methods and transformed the way consumers approach payments.
Let’s explore some noteworthy examples of BNPL startups that have made a mark in various industries.
Afterpay: Empowering Retail Shoppers
Afterpay is undoubtedly one of the most prominent players in the BNPL space. This Australian-based startup has revolutionized the retail industry by allowing consumers to split their payments into four interest-free installments.
With Afterpay, shoppers can enjoy their purchases immediately, while spreading the payments over time. Afterpay has established partnerships with thousands of retailers worldwide, making it a go-to choice for fashion, beauty, and lifestyle purchases.
Klarna: Seamless Shopping Experience
Klarna, a Swedish BNPL startup, has made waves with its innovative approach to consumer financing. Klarna offers shoppers the ability to split their payments into installments or pay in full within 30 days.
With a user-friendly interface and easy integration into e-commerce platforms, Klarna provides a seamless shopping experience. It also offers personalized product recommendations and exclusive deals, enhancing the overall customer journey.
Affirm: Flexible Financing for Big Purchases
Affirm has carved its niche in the BNPL landscape by focusing on larger purchases. This U.S.-based startup allows consumers to split payments for expensive items into fixed monthly installments, often with low or no interest rates.
Affirm’s transparent and flexible approach has made it popular among consumers looking to finance electronics, home appliances, furniture, and other big-ticket items.
Splitit: Installment Payments with Existing Credit Cards
Splitit has introduced a unique twist to the BNPL model by enabling consumers to divide payments using their existing credit cards. This global startup works with major credit card companies, allowing customers to pay for purchases in interest-free installments.
Splitit eliminates the need for new credit applications or additional fees, making it an attractive option for consumers who want to leverage their existing credit lines.
QuadPay: Empowering Millennials and Gen Z
QuadPay has gained popularity among younger generations, catering specifically to millennials and Gen Z consumers. This U.S.-based BNPL startup offers flexible payment options, dividing purchases into four interest-free installments.
QuadPay focuses on affordability, convenience, and transparency, capturing the attention of young shoppers who value financial flexibility and prefer to avoid traditional credit cards.
Zip Co: BNPL Beyond Retail
Zip Co, an Australian BNPL startup, has expanded its services beyond retail, offering financing options for various industries. Zip Co allows consumers to split payments across retail, travel, entertainment, and more. It also offers a digital wallet feature, allowing users to make purchases at participating merchants with a single account.
Zip Co’s versatility has positioned it as a key player in the global BNPL market.
Exploring Different Categories of BNPL
The Buy Now, Pay Later (BNPL) model has expanded its horizons beyond the realm of retail. Today, there are various categories of BNPL that cater to specific needs and industries.
Let’s dive into some of these categories and explore how they revolutionize consumer financing.
Retail BNPL: Shopping Made Affordable
The most well-known category of BNPL revolves around retail, enabling consumers to purchase products and split their payments over time.
Whether it’s fashion, electronics, or home goods, retail BNPL platforms offer shoppers the flexibility to buy now and pay later.
By dividing payments into manageable installments, consumers can enjoy their purchases immediately, while startups benefit from increased sales and customer loyalty.
Travel BNPL: Wanderlust Without the Financial Burden
Traveling is a passion for many, but the expenses associated with it can be a deterrent. That’s where travel BNPL comes into play.
Startups in this category partner with travel agencies or online booking platforms, allowing consumers to finance their trips.
Whether it’s booking flights, hotels, or vacation packages, travel BNPL makes it possible to embark on that dream getaway and pay for it gradually over time.
Healthcare BNPL: Taking Care of Your Well-being
Healthcare expenses can often be unexpected and burdensome. To make healthcare more accessible and affordable, startups have introduced healthcare BNPL options.
These platforms partner with medical providers, offering patients the opportunity to finance medical treatments, procedures, or even elective surgeries.
This category of BNPL empowers individuals to prioritize their health without compromising their financial stability.
Education BNPL: Investing in Knowledge
Education is the key to personal and professional growth, but the cost of tuition and educational resources can be daunting.
Education BNPL platforms aim to remove this barrier by allowing students to split their education-related expenses into manageable payments.
From college tuition fees to online courses and textbooks, education BNPL ensures that knowledge and learning remain within reach for aspiring individuals.
Lifestyle BNPL: Enhancing the Way We Live
The lifestyle category of BNPL encompasses a wide range of services and experiences that enhance our daily lives.
It includes subscriptions for streaming platforms, gym memberships, beauty and wellness services, and even home improvement projects.
Lifestyle BNPL platforms enable consumers to enjoy these offerings while breaking down the payments into affordable installments.
Business BNPL: Empowering Entrepreneurs and Startups
For entrepreneurs and small businesses, managing cash flow and financing can be challenging.
Business BNPL platforms address this by providing financing options tailored specifically for businesses.
Whether it’s purchasing inventory, equipment, or funding marketing campaigns, business BNPL offers a lifeline to startups and SMEs, helping them grow and thrive in a competitive market.
Best Practices for Startups Adopting BNPL
If moving forward with BNPL, there are a few best practices startups should follow:
- Thoroughly vet potential BNPL partners on cost, risk exposure, and integration complexity. Don’t just pick one hastily.
- Analyze BNPL impact on margins and cash flow. Ensure processing fees don’t cut too deep. Model out impacts.
- Test BNPL selectively at first. Target it toward higher-AOV products or customer segments where it adds the most value before expanding.
- Monitor KPIs diligently. Track BNPL’s impact on conversion rates, average order value, margins, etc. Tweak as needed.
- Promote BNPL offers selectively. Don’t oversaturate customers. Focus on times where extra financing flexibility provides the most utility.
- Make the BNPL value proposition clear in marketing. Communicate the benefits prominently with crisp messaging.
Following these tips will help startups thoughtfully implement BNPL and maximize the benefits while minimizing the risks.
The Future of BNPL
BNPL adoption is still in the early stages, so where could it go from here? A few predictions:
- Omnichannel BNPL – Providing flexible payment options consistently across retail, online, mobile channels.
- Blockchain-based BNPL – Cryptocurrency allows global, decentralized BNPL platforms outside the traditional finance system.
- Vertical expansion – New verticals like healthcare, education, B2B, travel, etc will adopt BNPL solutions tailored to their needs.
- Bank partnerships – Banks will invest in BNPL lenders and integrate installment financing into their own payment products.
- Regulation – Governments will look to tighten regulation of BNPL lending, especially for younger demographics.
- Market consolidation – The crowded BNPL competitive landscape will consolidate into a few dominant players.
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Conclusion
The world of BNPL extends beyond retail, encompassing various categories that cater to specific needs and industries.
From retail and travel to healthcare, education, lifestyle, and business, each category has its own unique set of benefits, enabling consumers and businesses to thrive.
By embracing these diverse categories of BNPL, startups and individuals can navigate financial obstacles and unlock new opportunities for growth and success.
