Martha Southall, Economist at CMSPI, presents three key lessons from Australia that US and European merchants need to hear before navigating their own BNPL strategy
Over recent months, Buy Now, Pay Later (BNPL) has flooded the headlines. Retailers across the globe have watched as suppliers scramble to take a slice of the BNPL pie, from strategic acquisitions by the likes of PayPal1 to newly built solutions from fintechs and traditional players alike.2 However, the trend isn’t new to everyone. Home to BNPL giants Afterpay and Zip Co, Australia’s market for this form of retail finance is one of the most mature globally. In this article, CMSPI selects three key lessons from Australia that US and European merchants need to hear before navigating their own BNPL strategy.
1 – A ‘debit card killer’?
According to Worldpay, Australians made 10% of their ecommerce purchases via BNPL in 20203 – a figure that BNPL suppliers suggest could be much higher. However, as Figure 1 shows, this usage was not evenly distributed throughout the population, with BNPL enjoying disproportionate popularity amongst 18–39 year olds.
Figure 1. Australian debit card usage as a percentage of transactions, and the percentage of respondents who used BNPL in the last 12 months by age group4
Many BNPL providers are well known for targeting these younger cohorts5, so what’s the problem? For merchants, the concern lies in the other line in Figure 1, which shows that BNPL usage mirrors that of debit cards by age cohort. That means BNPL options (despite being credit products) often replace debit payments in a merchants’ payments mix. In Australia – just as in Europe and North America – accepting debit payments can be significantly cheaper for merchants, meaning there can be two cost effects of accepting BNPL: one arising from its higher headline rates, and the other from the displacement of low-cost alternative payment methods. Both effects must be quantified and balanced against any revenue benefits to ensure that BNPL is implemented optimally.
There may be broader industry changes at work, too. In fact, in Australia, merchants fear they may be witnessing a shift away from debit from the banks themselves. Commonwealth Bank’s StepPay BNPL product, for example, is treated as a credit card for the purposes of merchant fees despite being interest-free for consumers. Responding to StepPay’s launch in a recent interview, PSG’s Bradford Kelly said of the product: ‘If you move debit customers to credit, you can make more interchange revenue. […] This is a debit card killer.’6
2 – Next stop: in-store
Although the most recent generation of BNPL contenders emerged in the ecommerce environment, in Australia they haven’t stopped there. Through either e-wallets7 8 or physical cards, Australia’s BNPL providers have been inching their way towards in-store retail through partnerships with more established players. The same pattern can be seen globally, with Sweden’s Klarna launching its own bank account in February 2021.9
As BNPL steps in-store, however, its hybrid role as payment-method-turned-marketing-platform becomes increasingly difficult to reconcile. For example, CMSPI has observed instances of BNPL providers requiring merchants to enter unilateral agreements to accept their in-store cards – an arrangement that would be highly unusual with any traditional issuing bank. These unilateral agreements can place BNPL cards’ average acceptance fee significantly above other in-store options. Expansion from the checkout to the POS is therefore a significant concern for merchants, particularly for a payment method that’s already typically the most expensive to accept (Figure 2).
Figure 2. Average acceptance cost by payment method in Australia10
3 – Approval rates
Australian providers such as Afterpay suggest that their merchant partners can expect a 20% increase in cart conversion and a 40% rise in order value on average – plus the chance to sell to a whole new consumer base.11 In truth, BNPL strategy means mastering this balancing act between increased cost and the potential for increased revenue through data-driven analysis and negotiation.
The most often-missed piece of this revenue calculation is represented by approval rates. An approval rate describes the proportion of attempted transactions that are ultimately successful, measured in terms of either volume or value. In CMSPI’s work with hundreds of merchants, we typically find that 1 in 5 declined transactions online are ‘false declines’ – that is, good customers with sufficient funds who are turned away due to a problem in the payments supply chain. These problems are rarely the fault of the merchant, and they can translate to millions of euros in lost revenue. That’s where BNPL comes in. Figure 3 shows the approval rates for BNPL versus other payment methods for a sample of merchants. For those merchants, although increasing, BNPL approval rates sat significantly below that of other payment methods – even months after implementation.
Figure 3. Approval rates for BNPL versus all other payment methods for a sample of merchants over time12
If a consumer’s payment fails and they do not retry (or they do retry, but with a competitor), then any boost to a merchant’s average basket size or conversion rate has no material impact on revenue. For CMSPI’s Australian merchants, fixing this has meant direct negotiation with BNPL providers, who often lack visibility over competitors’ approval rates and may therefore struggle to identify issues on their own.
What can we learn from Aus?
These approval rate calculations are crucial in building a BNPL strategy… but they’re also only the start. What Australian merchants know all too well is that a BNPL business case requires strong strategic planning, from quantifying long-term shifts in the payments mix to using BIN-level data to validate any claims over increased conversions and basket sizes. It also requires timing, as benefits such as new customer acquisition have the potential to wane for those who aren’t first-movers.
As some of the longer-term realities of BNPL come to fruition in Australia, the market finds itself on the cusp of a new equilibrium – one where it becomes increasingly difficult for merchants not to accept BNPL, even when the initial benefits have dwindled. The key lesson from down under, then, is this: merchants must guide the market while they can. That means collaborating with BNPL providers directly, cultivating agreements that drive competition wherever possible, and collaborating with regulators to ensure the hard-won benefits of card fee regulation are not lost to a close substitute over time.
The second article of CMSPI's BNPL series analyses the merchant perspective, providing pointers on how retailers can make the most of the BNPL opportunity without succumbing to its pitfalls.
See https://techcrunch.com/2021/09/08/paypal-acquires-japans-paidy-for-2-7b-to-crack-the-buy-now-pay-later-market-in-asia/
See https://www.cnbc.com/2021/09/10/monzo-and-revolut-to-enter-buy-now-pay-later-market.html
Worldpay Global Payments Report (2021)
Reserve Bank of Australia (2020). Payments System Board Annual Report 2020. https://www.rba.gov.au/publications/annual-reports/psb/2020/trends-in-payments-clearing-and-settlement-systems.html
See interview with CEO of BNPL provider Affirm: https://www.forbes.com/sites/jeffkauflin/2021/02/08/inside-the-billion-dollar-plan-to-kill-credit-cards/?sh=46d5516911d9
https://www.afr.com/companies/financial-services/cba-launches-steppay-lifts-payment-revenue-20210817-p58je4#:~:text=Around%20100%2C000%20Commonwealth%20Bank%20customers,to%20Afterpay%2C%20PayPal%20and%20Zip.
https://zip.co/au/tap-zip
https://www.afterpay.com/en-AU/afterpay-card
https://www.klarna.com/international/press/klarna-launches-bank-account-in-germany/
Reserve Bank of Australia (2021). Review of Retail Payments Regulation.
https://www.afterpay.com/en-AU/business
CMSPI estimates and analysis
About Martha Southall
An Economist at CMSPI as part of its ‘Insights’ team, Martha’s focus is tracking payments market trends, as well as reporting on emerging payments issues and regulatory changes.
About CMSPI
CMSPI is an independent, data powered, global consultancy advising merchants on how to improve the productivity of their payments arrangements by reducing costs, increasing sales and implementing innovative solutions.
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