The BNPL size of the market is set to continuous growth, as a research by Kaleido Intelligence also confirms, with ecommerce spending in Europe via BNPL to hit USD 347bn by 2025. From your point of view, what are the driving factors of this growth?
I believe we could identify at least three key factors that are attracting more and more consumers to use these kinds of payment methods. First of all, as a buyer, you have a clear advantage in terms of liquidity. Ordering goods without having to pay in advance can be a big advantage, especially if we look at retail channels with high return rates like fashion. Settlement for the merchant can be easier as well if you do not have to process refund money.
Another important factor is convenience. As a consumer, you do not need to input a lot of information to be able to purchase goods via BNPL. Today, where an increasing amount of consumers is worried to use credit card or bank account information online, this frictionless payment method can have a clear positive effect on the conversion within the online checkout process.
The third factor is related to security. As a buyer using any BNPL product, you don’t need to trust the merchant and you don’t risk any product quality or delivery issues since you only need to pay for the product or service once it's delivered and you have been able to verify its quality. BNPL is a safe bet on the buyers side and it drives conversion for the seller. So, if you can provide a viable BNPL solution for your business, the chances for increased sales are always high. That is one of the key reasons why more and more retail sectors are looking into BNPL payment options.
Considering the popularity among consumers and a potential dominance of this payment method, are there any payment methods losing out?
First of all, a lot of payment methods could be classified as a ‘Buy now, Pay later’ model. Let’s consider a regular card payment. If I use a debit card, my bank account will be charged immediately. But by using a credit card I will postpone my payment to a monthly credit card settlement date. And then there are different offerings to split my credit card bill into monthly instalments. From a liquidity perspective, these payments are very similar to a BNPL payment, but from a technical perspective, I would not call them a BNPL transaction.
In another example, some neo-banks offer BNPL-labeled products as well, which are actually just regular instalment loans for consumers. The bank will lend you money and you will have to repay it, with no direct connection between the purchase of goods and the money lent, only that it can be granted at the moment the consumer is paying for the goods. But this will always require a bank account and a customer identification, and it will be treated as a loan, not as a payment transaction.
Generally, I believe there will be many different payment products offering a lot of flexibility in how consumers pay for their goods. Paying at a later point in time or paying by fixed or even flexible instalments will be part of any payment offerings, separate from the payment method used. At some point, the buyer will be identified, either by personal credentials or by a user account, a bank account number or a credit card number, and any of these identifications will be tied to their personal funds.
Nevertheless, BNPL providers have a clear advantage: they are experts in identifying good buyers, they know how to assess the individual buyer risk for the merchant, and they know how to streamline the checkout process so that any buyer can easily purchase goods at no risk and with little liquidity exposure. The risk and debtor management complexity within BNLP products is clearly on the seller side, to reduce any friction within the payment process. That is the real power within dedicated BNPL products as opposed to old payment methods.
At some point, clean BNPL solutions will likely be a standard payment method highly comparable to credit cards or any kind of bank account transfer. Consumers will have come to expect BNPL as a payment method for any kind of retail goods, and merchants will be demanding a BNPL product offer from their payment providers. So, any payment service company will have to make sure they can provide invoice and instalment payments apart from regular card payments processing.
There is one loser in the consumer retail financing market: Small consumer loans for retail purchases will be less relevant. People will simply have enough financing options at the moment of purchase. Moreover, there will be less requirements for strong identification since there will be enough purchase history tied to a consumer to successfully assess the individual credit risk for the merchant.
The BNPL is a diverse sector with multiple types of business models, such as white-label providers, direct providers, marketplace models emerging as well. What type of BNPL providers would you discern in the market?
First of all, we should separate clean BNPL products from products that mix credit card payments with some deferred settlement payments. In my opinion, BNPL is a payment method that relies on a buyer being identified as a person or entity, not tied to any card or account information.
There is also a clear distinction between the consumer brand BNPL providers such as Klarna, Affirm and others and the white-label products like PAYLA, Ratepay and a few more. In brief, the white-label BNPL providers are partnering with PSPs and merchants, while the consumer brand BNPL providers will likely always transform to a marketplace.
The PSPs always focus on the merchant – their own brand name is only important to the merchant and they differ by price and quality of services. But the payment service company brand name will be of no relevance to the consumer.
On the other side of the spectrum, there are payment companies that heavily invest in their brand name as a consumer brand. Visa, Mastercard, American Express, PayPal, and now even companies like Klarna spend increasingly more money to make sure their products are being actively demanded by consumers at any merchant checkout. And they want to influence end-consumers purchase decisions to make sure they receive a higher share of their overall payment volume. So branded BNPL companies will for sure venture into marketplaces and super-apps to get early access to consumers within their purchase decision.
You plan to launch a white-label BNPL solution early this year. Could you give us more information about the business proposition and the go-to-market strategy?
Indeed, this year in April we will be launching our BNPL-as-a-service product offering any kind of invoice and instalment payments in Germany, Austria and Switzerland, for now. PAYLA will not be a payment brand, as we rather support our partners out of the payment industry to offer their merchant customers great BNPL products out of the box. Our services include payments processing, risk assessment, debtor management, optional first and second level support for consumers and merchants, and we will be able to offer the whole refinancing of any invoice and instalment volume. Since we cover the risk on both the merchant and consumer sides, our partner will create a steady and risk-free flow of revenues solely based on the volume the merchant customers processes via our BNPL products.
What does it take to successfully launch and scale a BNPL solution across Europe? Moreover, what is the most challenging aspect of this endeavour?
Our team has spent a lot of time building BNPL products for Germany, Austria, Switzerland, Belgium and the Netherlands, to name a few countries, and what we could realize from the beginning is that every market is different. The regulatory setup is quite unique to every country, and this could affect the way you have to refinance the payments. There are differences in the amount and quality of consumer data you can obtain and how you can use it, and different risk models you have to define and develop, not to mention different methods on how end consumers are used to settling their bills and instalment payments. Furthermore, the market’s maturity also varies greatly. Dedicated BNPL products are known in Germany since the early 70s; for other countries, this payment method is still highly unusual, so you have to educate the consumer about its benefits and how to use it properly and wisely.
Therefore, in order to be able to offer your BNPL platform to different markets, you need to make sure it can work with different risk assessment models, different KYC processes for merchants and local requirements from refinancing partners. Then you should be able to work with separate languages and currencies, different payment processing and dunning runs. On the front side, at the checkout, you still want to offer one interface for the merchant and one payment and settlement process. While on the back end, you need a lot of expertise and a stable, still flexible solution for payment processing and risk. The bottom line is that it takes a lot of technological and operational expertise to run a successful BNPL product.
Our team has been spending years in payment and risk management, building or supporting solutions for all relevant European BNPL players. Yet we still find so many small things to improve on our newly created PAYLA platform so that we see a huge potential for new ‘BNPL 2.0’ solutions that run so much more efficiently with clear benefits for the consumers and merchants.
About Roberto Valerio
Roberto is the Co-founder and CEO of PAYLA, a true white-label ‘Buy now, Pay later’ solution provider for European Payment Service companies and Financial Institutions. Prior to this, he founded RISK42, a software startup specialising in credit scoring automatisation. The business was sold in 2020 to Unzer Group. From 2012 to 2018, he was the founder and CEO of RISK IDENT, a software company building sophisticated fraud prevention products within ecommerce, telecommunications and financial services. Customers included Otto Group, Deutsche Telekom, Vodafone, Billpay, Ratepay, Schufa and others. For the last years, he has played an active role within the online payment and risk management industry. He was also part of the European Advisory Board at the Merchant Risk Council.
About PAYLA
PAYLA is a true white-label ‘Buy Now, Pay Later’ service provider for European Payment Service Companies and Financial Institutions. The software platform is a complete turnkey solution covering all aspects of BNPL, including automated risk assessment, debtor management, any level of high-quality customer support and also the full refinancing of the invoice and instalment volume. So PAYLA's clients are able to provide fully integrated and white-labelled BNPL products to their merchant customer portfolio with little effort and no risk, generating steady and stable revenues solely based on the merchants transaction volume. PAYLA offers a comprehensive ‘BNPL-as-a-service’ product, easy to integrate and easy to handle.
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