Online shopping has seen rapid changes in the last two decades. The majority of businesses are on the path of digital adoption in a bid to survive. Consumer behavior has shown drastic changes with the majority of shoppers shifting to online ways of shopping. Digital payment across the globe skyrocketed due to ease of usage and decentralization.
However, amid the cacophony of a digital economy, there has been a severe rise and fall of a genre of startups ie. The (Buy now, Pay later) BNPL startups. This article will provide strategic insights into the rise and fall of BNPL start-ups
How it works?
A BNPL is a model of the payment system. This is divided into various verticals with start-ups and organizations providing their own customized BNPL model with various iterations however the core philosophy behind this payment model is it enables cashless financing options. This financing option allows you to leverage the facility of short-term credit for various online purchases however the payback should be initiated in a matter of 15 or 30 days. Sometimes the total payment is divided into four or six minimal chunks which have to be paid back across payments.
Why was it so successful?
The primary reason why the BNPL model is successful across the globe is that various rules and regulations constituted by lawmakers for credit and lending companies do not touch the BNPL model. As a result, these companies can get along by evading a majority of laws required to institute credit. This helps the consumer who can easily avail credits without going through the overall bureaucratic hurdles
Another major reason behind the rise of the BNPL model is it attacks human psychology. By dividing the price tag into chunks of payments it creates an illusion in the human mind that you are paying less although it does create a dissonance in the mind however the dissonant feelings are trivialized thus strengthening the thought around how such models are good as it doesn't get us rid of all the cash at an instant.
The BNPL model also satisfies our "present bias" which in turn directly affects our cognition. We tend to see the benefits while trivializing the potential losses. Although the probability of losses and profits are equal and a majority of times the probability of a loss is higher in a BNPL payment model but as it affects our psyche we tend to ignore the risks in our thirst for instant gratification.
The Fintech sector immediately jumped up on the BNPL bandwagon and we immediately had a range of BNPL start-ups operating across the market. Some of the prominent names across this sector Afterpay, Klarna, and Affirm are all around the online shopping ecosystem convincing buyers to adopt this payment model.
BNPL start-ups immediately developed quick systems wherein all you had to do was enter your proprietary information regarding your debit or credit card and immediately the organization will access the risk associated with lending you money through an analytical model. After this procedure, it is a matter of minutes wherein your request is accepted within seconds. After your request is accepted you have transacted a loan and an email drops on your mail with a link to the payment app which will help you track your payments.
How do they make money?
The primary modules through which a BNPL start-up earns money are the customer and the merchant. Merchants operating on the BNPL platform have to pay a fee that can range from 2% to 8% depending on the platform.
Apart from this, the customer helps the BNPL start-up earn in two ways. The platform issues an interest on the credited amount and earns through the interest payments. Secondly, if a creditor misses a payment the platform levies a hefty fee on the creditor and various options like auto- debit etc. ensure that the payback is initiated.
Rise of BNPL
Klarna founded in 2005 in Stockholm is one of the biggest BNPL providers. This company which started as a start-up entered the market in a very ripe phase when digitization was at its peak. This period saw an aggressive rise of BNP startups and they immediately saw major attention from Silicon Valley.
The entrepreneurs from Silicon Valley immediately termed these start-ups as a mission project which was trying to solve the problem of credit by letting people from marginalized sections with a low credit score or such get access to credit.
This statement saw aggressive funding from Silicon Valley and identified it as a potential market. Some of the examples of aggressive funding include Affirm which was founded in collaboration with Palantir technologies. Apart from this various startups like Afterpay saw aggressive funding from American counterparts with an eye on conquering the market.
Fall of BNPL
In recent years, various BNPL payment platforms have taken a hit with Klarna the most prominent platform slashing its valuation from $46 billion to a meager $6 billion. This has been followed by a massive cut across its workforce.
Apart from this Zip from Australia saw its overall share price fall by a record 90% which led to the company calling off its merger with Sezzle terming the merger as unsuitable due to problematic macroeconomic conditions.
Analysts are of the view that the whole BNPL sector had built up a massive hype around itself however gradually it became to die out as investors realized that BNPL couldn't provide value for money. This resulted in severe funding cuts as the markets began to dry out of funds for prospects thus sucking the money out of the sector.
Apart from this, the sheer number of startups and companies operating across this space has massively increased competition. With every individual eyeing a piece of the cake it has become a race to the bottom with massive discounts across the various platforms with companies downgrading in a thirst for survival.
Due to the recent economic conditions paired with rising inflation, consumer behavior has changed with the majority of them trying to downsize aggressive spending. Apart from this even if a customer initiates a payment the chances of payback seem to be low.
Apart from this, A slew of regulations has plagued the sector, and now in order to survive these companies have cut down on instant loans thus downsizing the BNPL platform for ease of doing business. All these factors have initiated a slow death of various BNPL startups spread across the market.
Future of BNPL
BNPL start-ups have started looking beyond European markets and are aggressively targeting the markets in third-world countries which have a huge scope for growth. Apart from this, they are shifting from the traditional BNPL module to various innovative models.
BNPL organizations are trying to get into contract partnerships with various banks eyeing their technical expertise in the credit sector along with the funds.
Apart from this a section of BNPL players is moving towards a B2B model and eyeing to initiate a partnership of credit across businesses and not the consumer. However, the scope of providing funds to various businesses has its own set of risks with businesses having the highest probability of closing shop in one year.
Although BNPL pictures itself as a fabulous game changer model it also comes along with its set of challenges. These start-ups had a phenomenal start however the market became saturated and competitive therefore it is completely unpredictable about what the future holds for the BNPL payment sector.
