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Buy now, pay later apps expected to 'grow 10-15x' after 2020 surge

Aarthi Swaminathan
·Reporter
·5 min read

Buy now, pay later products are seeing a massive rise in demand from consumers, fueled by a pandemic that pushed shoppers further toward online shopping.

These services — which allow the buyer to break up an online purchase into multiple payments that can be made over time — are seen as a “budgeting tool” that avoids high-interest rates that come with traditional credit cards, a recent survey by Bank of America (BofA) found.

BofA expects the market for these apps — like Afterpay, Affirm, Klarna, PayPal, and others — to “grow 10-15x by 2025 to eventually process $650bn-$1tn in transactions.”

SYDNEY, AUSTRALIA - FEBRUARY 29: Charisma Belle attends the Boohoo x AfterPay Mardi Gras Party on February 29, 2020 in Sydney, Australia. (Photo by Caroline McCredie/Getty Images for Boohoo)
Charisma Belle attends the Boohoo x AfterPay Mardi Gras Party on February 29, 2020 in Sydney, Australia. (Photo by Caroline McCredie/Getty Images for Boohoo)

Will become even more relevant in a post-COVID world’

BofA’s thesis that these companies have a long runway is predicated on several trends.

Primarily, as more categories are added to these services beyond apparel, beauty, and electronics while more countries around the world are introduced to the product, these companies have enormous potential.

And most buy now, pay later don’t make money through interest rates or consumer fees (such as with traditional credit cards), instead charging the merchant for transactions.

Merchants seems happy with paying for the increased demand that comes with convenience. For instance, on American Eagle’s Q1 2020 earnings call, the company’s chief operations officer Michael Rempell noted that after launching Afterpay on the company’s website, sales had “grown very nicely and carry a notably higher average order value” and added that the company was going to “continue to invest in customercentric capabilities, which we believe will become even more relevant in a post-COVID world.”

An American Eagle sweater for sale, with Afterpay payment as an option. (An American Eagle sweater for sale, with Afterpay payment as an option. (American Eagle)
An American Eagle sweater for sale, with Afterpay payment as an option. (An American Eagle sweater for sale, with Afterpay payment as an option. (American Eagle)

The trend is also part of a generational shift: The average user of buy now, pay later services is their 30s, BofA found, and the average amount spent was around $200 to $500 (as compared to $5,000 to $6,000 one would spend on a credit card).

The companies also have a small maximum limit per customer, such as $600 max for PayPal and $1,500 for Afterpay. Customers who can’t pay off their purchases are removed from the platform.

In the U.S., Klarna was the biggest player in this industry, BofA found, followed by Afterpay and Affirm. Sezzle has the largest number of merchants on board, followed by Afterpay and Affirm.

BofA noted that these companies are essentially “all attacking and disrupting the traditional credit card business.” And while the amounts spent are comparatively smaller, “the sector is rapidly gaining share.”

Klarna

Swedish startup Klarna has two million monthly active app users, the company stated.

The company reported that 11 million active customers in November 2020, a 106% increase year-over-year. The company has served roughly 85 million customers since its founding in 2005.

Klarna is active in 17 countries and offers its services to more than 200,000 merchants, including H&M, Etsy, GameStop, Macy’s, and so on. The company offers a few interest-free options to buy now and pay later, as well as a separate option which comes with an APR.

BERLIN, GERMANY - APRIL 22: The logo of Swedish payment provider Klarna is shown on the display of a smartphone on April 22, 2020 in Berlin, Germany. (Photo by Thomas Trutschel/Photothek via Getty Images)
The logo of Swedish payment provider Klarna is shown on the display of a smartphone on April 22, 2020 in Berlin, Germany. (Photo by Thomas Trutschel/Photothek via Getty Images)

The startup was valued at about $10.65 billion in September, making it the highest-valued private fintech company in Europe.

BofA noted that Klarna’s investors include Ant Financial, Sequoia Capital, among others.

Afterpay

Afterpay, founded in 2015, dominates the Australian market and has a foothold in the U.S. market. The company had 9.9 million overall users as of June 2020.

The company works with merchants such as eBay, Urban Outfitters, and Kylie Cosmetics.

Afterpay has one installment product: Buy now, pay four equal installments every two weeks.

The company also revealed this week that November was a big month for the company, crossing $1 billion in monthly sales just in the U.S.

(Afterpay)
(Afterpay)

Affirm

Affirm, founded in 2014 by PayPal co-founder Max Levchin, saw such explosive growth that it recently filed for an initial public offering on the Nasdaq.

The company said it has more than 5.6 million consumers and partners with over 6,000 merchants in the U.S. This includes companies like Walmart, Peloton, Oscar de la Renta, Audi, and Expedia.

Max Levchin, a Ukrainian computer scientist, poses for a portrait in San Francisco, Calif., on Friday, July 17, 2014. Levchin, who was the co-founder of PayPal and is the CEO of "Affirm", a financial services company offering consumer credit at the point of sale, and chairman of Glow, a women's reproductive health app. (John Green/Bay Area News Group) (Photo by MediaNews Group/Bay Area News via Getty Images)
Max Levchin on Friday, July 17, 2014. (Photo by MediaNews Group/Bay Area News via Getty Images)

Sezzle

Sezzle, which was founded in 2016, operates across North America and is a relatively new entrant to the industry. As of June, it had about 24,800 merchants and 1,500 customers.

Like Afterpay, it only offers one pay in four installment product.

In a press release, the company CEO recent noted that November was a big month for them, as they crossed 2 million active consumers.

Here come the big banks

Given the success of the startups, banks are now introducing their own versions of buy now, pay later. American Express launched a “Pay it, Plan it” feature and Chase introduced a “My Chase Plan.”

“These offerings are generally still being rolled out to customers so whether consumer elect to use them, issuers stick with them, and/or how well they perform remains to be seen,” BofA stated.

Aarthi is a senior reporter for Yahoo Finance. Follow her on Twitter @aarthiswami.

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