This article was first published in the Payment Methods Report 2022 by The Paypers, the Netherlands-based independent source of news and insights for professionals in the global payment and e-commerce community.
Buy Now, Pay Later (BNPL) has been one of the most discussed trends in the payments industry in recent years. Despite not being a completely new phenomenon, fintech players have made the process and offer – interest-free instalment payments over a set period, available for large and small-ticket items – highly appealing to consumers. However, in Europe, the ever-evolving BNPL space has yet to see an expansion beyond the retail segment and consumer use.
BNPL explodes in popularity amid pandemic-induced online shopping boom
The surge in online shopping during the COVID-19 pandemic served as a catalyst for the acceleration and expansion of BNPL payments in Europe. According to Euromonitor International data, the value of e-commerce (goods) registered 60% growth between 2019 and 2021 in Europe, as consumers facing financial difficulties and those on limited incomes favoured BNPL as a no-cost financing alternative. The success of the payment solution, however, is rooted in being equally beneficial for customers and merchants. Retailers offering BNPL at checkout attract more tech-savvy millennials and Generation Z consumers, who are the key target group of the lending alternative. Thus, BNPL can lead to improved customer acquisition and loyalty, as well as conversion rates. In addition, BNPL also expands the number of consumers who are able to access goods and services that might have otherwise been beyond their means.
Despite BNPL’s growing in-store availability, the online channel still holds important growth potential, particularly as e-commerce hegemony builds. According to Euromonitor International data, European e-commerce penetration within retailing value is projected to increase from 16% in 2022 to 20% in 2026 – reflecting the ongoing transformation of the retail landscape.
New business models unfold amid intensifying competition
The BNPL landscape has evolved rapidly of late – fuelled by the skyrocketing BNPL demand and increasing supply from both new entrants as well as existing players. The European market is dominated by fintech firms specialising in BNPL. However, challenger banks and the key card operators, Visa and Mastercard, have recently joined the competition by merging their banking solutions with BNPL. Neobanks, such as Revolut, Monzo, and N26, were among the first to launch their own instalment payment solutions, which are no longer limited to retail purchases, but rather applicable to any payment transaction. This continuous evolution of offerings has contributed to intensifying competition within the BNPL landscape. While global players have a strong presence across Europe, local competitors are quickly emerging. The role of local players is crucial, especially in Eastern Europe, where it is mainly the smaller, regional players that serve tech-savvy customers with BNPL solutions.
The market has also witnessed the development of new BNPL business models. The need for a new revenue source emerges as rising interest rates and consumers reducing spending increasingly squeeze BNPL companies’ margins. Therefore, leading players, including Swedish firm Klarna and Australian firm Afterpay, have moved from being pure payment solutions towards fully integrated marketplaces. Consumers are not only able to select the BNPL option at checkout, but also browse from a list of retailer partners to purchase their products via the BNPL providers’ app. BNPL players are among the latest fintechs attempting to combine the functionalities of payment methods with other services such as banking, with these companies expected to play a substantial role in the potential blossoming of super apps in Europe.
Innovative BNPL uses promote growth despite imminent legislation in Europe
The European BNPL market has predominantly focused on the retail segment. Consequently, expanding offerings beyond goods holds growth opportunities for the BNPL space. In markets where the use of BNPL is already at a more advanced stage, consumers can apply for instalment payments when procuring hospitality services or travel deals. For example, the “Eat Now, Pay Later” model in Australia is enabled by multiple BNPL providers, including Afterpay and Payo. Travel booking platforms also promote BNPL as a payment option to attract customers, which can facilitate the recovery of tourism after the industry was hit hard by the global pandemic’s impact in the past two years. For instance, India-based Byond Travel offers travellers instalment payments with a 0% interest fee on holidays. Examples of services qualifying for BNPL are also emerging in Europe. In Ireland, ŠKODA has recently started offering new car owners a BNPL payment solution on servicing, repairs, and accessories through the third party platform Bumper. Partnerships between service providers and BNPL platforms are expected to gain increasing importance in Europe moving forward.
Expanding into and specialising in financing a particular service category could differentiate BNPL providers. One example is utility bills. Some financial institutions already allow instalment payments on any transactions, including bill payments. However, direct partnerships between utility companies and pure BNPL players are yet to be established. Such new partnerships could increase BNPL providers’ customer base and margin, and they have the potential to contribute to the financial sustainability of the model.
The dynamic expansion of BNPL, combined with the lack of thorough credit checking of consumers, is raising concerns over the risk of unsustainable consumer debt levels. In Europe, there is currently no regulation in place around offering and using BNPL financing. This is due to change. The European Commission and UK Financial Conduct Authority have already submitted proposals for new legislation covering the provision of short-term credit, with Europe-wide regulation expected to come into effect in the next year or so. While the industry expects regulation to be proportional to the amount of credit offered, legislation is likely to somewhat slow down the strong growth of BNPL in Europe by increasing the cost of offering this service.
What is next for BNPL in Europe?
Intensifying competition, emerging and developing business models, and expansion across industries have all contributed to the dynamic evolution in consumers’ use of BNPL so far. One might consider what else the future holds for the payment option. Looking forward, BNPL is expected to continue its transformation in the rapidly evolving space that is B2B payments, one which has also been undergoing significant digital transformation both prior to and since the global pandemic.
For further insight into the multibillion-dollar Buy Now, Pay Later landscape, take a look at the Buy Now, Pay Later: Trends, Challenges and Drivers webinar.