BNPL & digital trade credit: The story so far

Louis Carbonnier
Co-Founder and Co-CEO

The Buy Now, Pay Later (BNPL) market is experiencing skyrocketing growth: according to Precedence Research, its value topped US$125 billion in 2021, and is expected to reach more than US$3 trillion by 2030. 

The BNPL boom is largely attributed to the COVID-19 pandemic, which forced consumers to stay home and resulted in a massive growth spurt for e-commerce. As a digitally native solution, BNPL benefited from this trend.

But its popularity has also been driven by other factors. Consumers have long been looking for an alternative to credit card companies, whose high interests and late fees have been blamed for keeping customers in perpetual debt. In fact, research by the US Consumer Financial Protection Bureau found that credit card utilisation rates have declined across all age groups since the start of the pandemic – a historic change in an otherwise remarkably consistent rate.

BNPL has taken a bite of credit cards’ longstanding market share, particularly for younger shoppers: a 2021 report by Britain’s Financial Conduct Authority (FCA) shows that 25% of BNPL users are 18-24 years old, and half are 25-36. 

As a result of this popularity, the BNPL market is quickly becoming saturated. According to S&P Global Market Intelligence's 451 Research, there are more than 100 BNPL providers globally. Pure players like Klarna and Clearpay are facing increasing competition from technology providers like Apple and PayPal, neo-banks like Monzo and Revolut, and even traditional financial providers like American Express, Citi and BNP Paribas – the latter of which recently acquired French BNPL player FLOA.

Addressing the elephant in the room

In writing an article on the Buy Now, Pay Later model, we would be remiss not to dive into the current turmoil in the consumer BNPL market. 

Unable to generate enough profit, former BNPL unicorn Klarna was forced to return to existing shareholders to look for a US$800 million cash injection in July 2022, lowering its valuation from US$46 billion to US$6.7 billion in the process. This valuation drop was preceded by the laying off of 10% of its staff in May 2022, raising concerns that the BNPL giant’s business model was not profitable enough.

And Klarna is not the only company facing trouble. Australian BNPL player Zip was valued at US$5.9 billion last year, but at the time of writing has a market cap of US$499.1million. In the US, Affirm went from a valuation of US$47 billion in September 2021 to US$3.7 billion in November 2022.

At the same time, several governments – including those in Australia and the UK – have announced that they will begin regulating BNPL companies to protect consumers from bad debt. But will this regulatory burden, combined with lower access to capital, mean the end of BNPL for consumers? We think not.

Of course, this widespread devaluation of BNPL providers reflects badly on the industry, but business is still booming. Last year alone, Klarna added around 60 million users to its customer base, while both Affirm and Afterpay increased their sales by more than three-quarters.

That’s because BNPL creates genuine value for multiple parties, especially online: consumers get access to a more frictionless payment experience, and merchants improve their checkout process, increasing conversion rates and average basket size. Overall, BNPL meets the needs of a new generation of digitally-native consumers who like to purchase online and want to manage their budget better than they can with credit cards whose opaque interest rates compound over time, leading to severe debt issues.  

The current difficulties faced by Klarna and others are likely to lead to a certain degree of market consolidation, and these providers will definitely be forced to strengthen their business models, but BNPL is here to stay.

Bringing BNPL to B2B

Now that this solution has proved its efficacy in the consumer space, there is an opportunity to replicate its success within B2B trade. One could even argue that BNPL is more aligned with B2B than B2C: after all, businesses have been purchasing on trade credit for centuries. Globally, over US$30 trillion of B2B sales take place on credit terms every year, which means that businesses have been resorting to BNPL without realising it! And while consumer lending faces scrutiny, the B2B space follows a different logic and should remain subject to different due diligence requirements.

However, with much larger average basket sizes leading to increased fraud and credit risk, along with higher expectations from buyers, BNPL is more complex to implement in the world of business trade. This perhaps explains why B2B BNPL adoption has lagged behind take-up in B2C.

Startups and incumbents alike know that overcoming this complexity will bring long-term rewards and have begun to accelerate the development of B2B BNPL accordingly. In a recent white paper, we explore how fintech has helped drag B2B payments into the 21st century with digital trade credit solutions that share many characteristics with BNPL. Download the white paper for free today to find out more.