How will we be using buy now pay later one year from now?
The market is changing every day, so what will happen in 2021?
This time last year, Afterpay and Zip were the two main buy now pay later (BNPL) platforms in Australia. Both were signing up retailers and growing quickly, with the norm being for retailers to partner with one or the other. Customers would often beg retailers to offer a BNPL service and celebrate on social media when they did.
But a year is a long time in tech, and now, things have changed.
These new players are doing things a little differently. Instead of partnering with individual retailers they're offering a "shop anywhere" service. Klarna lets you shop online with any Australian retailer using a virtual card that it preloads at the checkout while bundll gives you a Mastercard to shop interest-free with any merchant that accepts Mastercard. Zip is now beta testing a "Shop Anywhere" feature that lets you shop anywhere with a debit card.
With the market shifting so rapidly, what will BNPL look like in another year's time, what will become of the players and the people using it and how will it be regulated?
A replacement for credit cards?
Nearly 2 million Australians (1 in 10) used a BNPL product in 2019 according to the Worldpay from FIS 2020 Global Payments Report, released Thursday 12 March. BNPL payments represented 8% of all payments in 2019, an increase of more than 166% from 2018.
The report predicts 4 million Australians will be using a BNPL product by 2023.
"With their unrivalled convenience, 'Buy Now, Pay Later' products have emerged as an attractive option for consumers seeking an alternative to traditional credit cards and have surged in popularity over the past year," said Phil Pomford, GM for Global eCommerce, APAC at Worldpay Merchant Solutions, FIS.
Co-founder of Australian BNPL platform Zip Peter Gray agrees.
"Zip and buy now pay later more generally has made significant inroads into mainstream Australia, where alternative payment methods are no longer the alternative," Gray told Finder.
The number of Australians taking out credit cards is in decline. According to the Reserve Bank of Australia, there were 14.65 million credit cards in circulation in December 2019, a 7.9% decrease from the previous year. Gray expects this number to continue to decline as they become aware of "better payment options".
"Australians want fairer, and more flexible credit models. The credit card model is broken."
A crowded market
When Klarna launched in Australia in January 2020 it entered a crowded market. Zip and Afterpay were no longer the only players; Humm, Openpay, Brighte and Laybuy had already started up and were jostling for retailers and customers. And then a week after Klarna launched, so did Flexigroup's bundll.
The competitive nature of the market has seen providers constantly innovating to get customers signed up and keeping them using their service. With so many choices now available, BNPL providers have to ensure they are listening to what consumers want and anticipating where the market is heading to stay ahead.
Fran Ereira, Klarna's general manager of Australia and New Zealand, doesn't seem concerned about how to stay ahead of competitors.
"Klarna moves beyond the everyday transactions of other providers to deliver an intuitive service that is about the consumer experience," she told Finder. "To allow them to move seamlessly, create their own wish lists, receive price notifications, above all a service that feels personalised to their needs."
While she remains tight-lipped on new features Klarna will be launching, building new solutions for how Australians shop online and interact with their money is the goal.
Zip's Gray believes a number of Zip's features set them apart, including letting customers make multiple purchases up to their credit limit, a BPAY integration which lets customers pay bills with the platform and a flexible repayment structure. But he believes the key lies in the onboarding.
"[...] Our assessment process is comprehensive," he says. "Zip consumes more data at the point of application than any other credit provider in Australia – regulated or unregulated. This ensures that our products are suitable and that each customer has the capacity to comfortably afford the repayments."
Gray says Zip is constantly investing in its product innovation and experience to give customers greater value. He also said it has exciting initiatives coming out, some that will be shared in the coming weeks.
Regulation has been an area of contestation in the BNPL space as soon as the market started to gain traction in Australia. Currently, BNPL providers are not credit products and so are not regulated in the same way as other financial products, such as personal loans or credit cards. This means they aren't required to go about things the same way as banks, such as conducting a credit check on all users.
In January, 95% of the BNPL industry, including Afterpay, flexigroup, Zip and Latitude, came together to develop a new code of practice. The aim of the code was to "go above existing laws" and provide customer safeguards.
The code is currently in draft with the six-week public consultation process closing this week. Proposed aspects of the code included a cap on fees, providers monitoring their products to ensure they remain suitable for customers and giving customers 40 days notice before charging fees.
While this code is not live yet, other regulations are being considered for the BNPL industry. The Reserve Bank of Australia (RBA) announced it will be investigating the "no surcharge" rule which is currently applied by BNPL platforms and does not allow retailers to pass on the costs of offering the service to customers the same way they do with credit cards.
Offering a BNPL service can be costly for merchants, as much as 7% per purchase, but currently, they cannot add a surcharge onto purchases. The RBA will examine this rule and whether it should be changed as part of its 2020 review of card payments regulation.
What will happen in a year?
The BNPL space is constantly shifting. The hyper-competitive market means consumers benefit from innovation, but because the space is new, regulation is still catching up. The question of what that regulation will look like – from within the industry or an external body – is still open.
The BNPL space we see next year will be changed from the current one, but the question is how.
For Gray, he's confident Australians will continue shifting away from credit cards and BNPL volume will continue to grow.
"We're certain BNPL products, debit cards and digital wallets will continue to outpace the credit card sector in the next year. Consumers can also expect more options in the market and potentially more partnerships with BNPL providers and major players like banks or financial companies."
Ereira believes online shoppers want more than a transactional relationship and so will start gravitating to brands that resonate with them the most.
"For Klarna, we will continue to see growth with increased usage from a broader range of consumers looking for better, smarter and more transparent ways to pay."