Buy now and pay back later! BNPL Captivates U.S. Generation Z

 

Recently, there is a service known as "BNPL" that has been established as a new trend among U.S. Generation Z.

Financial services that PayPal notices and Visa and MasterCard panic. BNPL is the main character.

BNPL is positioned as a new normal in the global payment market. What is BNPL and how can it change our lives in the future?

What is BNPL?

BNPL is an abbreviation of Buy Now Pay Later, a postpaid payment system with the concept of 'buy now and pay off later'.

When a consumer purchases a product, the BNPL company pays the product first, and after receiving it, he pays the product back to the BNPL company in installments for a certain period of time.

BNPL does not require complicated subscription conditions or authentication procedures for trading.

Any adult can join, regardless of credit rating, and immediately after joining, they can make purchases in installments within a set limit.

BNPL is much easier than the credit cards that require strict conditions such as a stable job, income, and credit score for issuance.

Due to the exceptional conditions, there are no financial transactions such as credit card usage history or loan records abroad, and it is very popular among thin filers such as housewives and beginners who have difficulty in issuing cards due to low credit scores.

As a representative BNPL company,

Clarna, Sweden (90 million users),
AfterPay in Australia (11.2 million users),
There is an American firm (6.2 million users).

Why did BNPL get attention?

How to make a credit card in the US?

1. Link bank account
2. SSN (Similar to Social Security Number / Social Security Number)
3. Proof of employment and income
4. A certain amount of deposit (about 200~1000 dollars)
5. Credit Score

After meeting the aforementioned five conditions, It has to go through a long review period and approval process.

Sweden and Australia only have slightly different conditions, but have the same conditions and procedures for issuing cards.

The personal bankruptcy is the main reason behind difficult card issuance process in abroad. When a person with a low credit rating, goes bankrupt, company pays the card price instead of the person.

The recent economic situation and socio-cultural changes are a major factor behind the rapid growth of BNPL.

Millennials, born in 1980-1990, suffered from unemployment and job insecurity during the economic crisis of the Lehman Brothers, financial crisis and the corona pandemic during the period of full-scale entry into society.

As a result, compared to the baby boomers generation (46-64), who experienced an economic boom in their 20s and 40s, the delayed start of economic activity and low wage growth rate made it difficult to build assets.

Due to low income and house prices rising like crazy, they give up on marriage and childbirth.

Millennials, having reduced social activities, become new filers (lack of credit score) due to their lack of financial transaction history.

The United States is a consumer kingdom, with consumption as a percentage of GDP reaching 70%.

It is no exaggeration to say that American consumption is feeding the whole world.

"The income is low and the house is too expensive, and I can't get a credit card because of no history of financial transactions. Let's pay it back."

Current of BNPL

An American market research agency C+R, conducted a survey of 2005 online consumers, using the Amazon survey platform. The survey showed 51% of the subjects used BNPL services to purchase goods, followed by clothing (47%), electronics (44%), furniture (32%), and home appliances (29%) as the main purchase items.

According to Morning Consult, an American survey organization, Millennials and Generation Z use BNPL the most at 27% (average of all adults 17%), indicating Generation MZ as leading the BNPL craze.

Thanks to the explosive growth of BNPL, many companies such as Walmart, Nike, Adidas, H&M, Dyson, and Peloton are rushing to introduce BNPL payment.

BNPL is a method of passing on the interest-free installment fee that a merchant should charge to the consumer.

Taking Clarna for example, when purchasing goods using Visa or MasterCard, compared to charging a 1.3% fee to merchants, Clarna charges a 6% higher fee for payment.

Depending on the company, they charge a fees, as low as 2x or as high as 3x or more than that of a card payment.

The rise in the Market

BNPL's expanded adaptation in market, despite its high cost, is due to its quick settlement, increased sales, and acquisition of new consumers.

BNPL can help you receive payment within 1 to 3 days compared to a  normal credit card that allows you to receive payment after a month has passed.

The fee is a little expensive from merchant's perspective, but BNPL is much efficient in terms of money flow.

According to Bain & Company, a consulting firm, merchants who have introduced BNPL have reported that their purchase conversion rate (the ratio of putting them in their shopping cart and paying for them in real money) has increased by 57% compared to before the introduction of BNPL, and the average purchase amount of buyers also increased by 46%. I did.

By introducing BNPL, customers who could not purchase goods without a credit card can purchase goods.

However, regardless of the growth rate and future potential, it is not just a flowery road ahead of BNPL companies.

Clarna, Affim, and AfterPay, commonly referred to as the Big 3, are all recording large losses.

This is the bitter side of the high growth rate. It is noteworthy that all three companies showed a greater extent of loss growth than sales growth rate.

In fact, BNPL is a less profitable business than you might think.

Income Review:

The main income of BNPL companies is the 5% commission received from the franchises.

According to Clarna's financial statements, about 40% of commission income is used for labor and operating expenses.

In addition, considering the large-scale capital raising cost and corporate tax, the actual operating cost is estimated to be about 50% of the commission income.

Assuming that you can manage your operating expenses and taxes by 3~40% through amazing financial management, it is calculated that if you manage the loss rate to 3% or less, you can barely lose money and make a profit.

This means that when 100 people buy a product, if 3 or more people do not pay its price, the BNPL company cannot avoid a loss.

BNPL companies must pay the product price for goods purchased by customers on credit in cash to the affiliated store.

Where can a BNPL company that lacks capital to raise capital? The answer is bond sales.

For example, a firm sells its customers, the right to receive payment in installments (bonds) to the bank or uses it as collateral to secure funds.

If you have 1 million won to receive from a customer, it's a bill-of-charge method that sells this right to a bank for 950,000 won to secure cash.

The BNPL platform, which started as a payment settlement, established its own credit rating model.

It operates savings and deposit services and is making moves to become a giant financial platform.

On November 3, 21, Clarna started providing all shopping-related services such as shopping, payment management, product, delivery, and return support.

We released a new shopping hub app. It is a compound plan to attract people with BNPL and create new revenue through the lock-in effect.

BNPL Encouraging over-consumption

On September 23, 21, an advertising campaign covered the streets of London.

"Now say goodbye to BNPL!"
"41% of adults live beyond their abilities"

British wealth management app Claro advertised this so called "anti-BNPL" campaign to warn of the dangers of BNPL.

In November 20, a study by British research institute of Money and Mental Health showed 41% of BNPL users having trouble controlling their expenditure due to BNPL, and 1 in every users had missed or overdue payments last year. Experience, 2 out of 5 said they had difficulty repaying their installments.

The fact, that BNPL is easy and available to anyone, is an advantage in terms of expanding the consumer base. But, People with insufficient income and credit can also enjoy using it, This encourages over-consumption and increase household debt.

BNPL companies use the credit rating model to evaluate creditworthiness of customers, which shows core competitiveness of the company.

This implies prevention of credit rating information sharing with each other. But, also no safety net to control usage of multiple BNPL providers simultaneously to buy more than customer's payment limit.

The reckless competition between BNPL companies for user acquisition and expansion can cause heavy debts unaffordable by the companies.

In the capitalist era, it is impossible to reduce production for economic expansion.

After all, the only way to sustain this abundance is by increasing consumption.

Since the beginning of mankind, we have been enjoying the greatest material abundance, that causes relative deprivation of young generation. Perhaps the younger generation is at the exposure of relative deprivation to compensate for the enjoyment of material abundance.

In the name of fintech and innovative technology, isn't the BNPL another monster created by the older generation and capitalists who encourage the youth to relieve their relative deprivation with consumption?