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by Elena Ivanova

Perhaps we can forget credit cards…

… and make online purchases without paying anything upfront. With the increase in the number of online payment solutions, consumers are offered new alternatives for the flexible financing of both day-to-day and more high-priced items. Direct-to-consumer stores are also turning to fintech startups to make their retail payment plants more affordable and Buy-Now-Pay-Later (BNPL) platforms are becoming an attractive and convenient substitute for credit card borrowings. 

As a result of the pandemic, consumer payment and purchasing habits have significantly changed and the chances are the digital payments trend will stick around. According to the latest Capgemini Financial Services Analysis, 46% of consumers worldwide spend the bigger part of their monthly budgets online, which is a sharp increase from pre-Covid times when only 24% of customers used e-commerce as their main method of shopping. As more people are turning to e-commerce in 2020 and 2021, this unlocks opportunities for both merchants and shoppers to explore novel ways of financing their purchases and making credit sales. 

As retailers are reopening after the strike of the pandemic in 2020, they are now facing new challenges – customers have changed the way they live, work, and shop. The value of cash transactions has drastically decreased all around the world and especially in Europe, where buyers who shop with cash are 35% less as compared to before the pandemic. According to Deloitte, changing consumer behavior is closely associated with buyers becoming more conscious about going into debt and alternatively more eager to pay in installments. With this in mind, the numbers for the growth of the European BNPL market are optimistic and reports predict that by 2025 around 11% of the eCommerce purchases in the region will be handled through BNPL services. 

In January 2021 a quick Google search with the keywords “buy now pay later” ended up with more than 3 billion results and had more than 11 000 searches per month in the US alone according to Google Trends statistics. So, what stays behind this momentum? Conceptually, BNPL services differ from credit cards because they offer flexible financing, with no interest fee for the end-users, and allow customers to get quick and convenient credit approvals. When compared to the traditional method of layaway installment payments, which do not charge customers interest fee, BNPL solutions bring innovation by eliminating the need for the customers to wait to get their merchandise after all the payments are completed. Customers no longer have to wait to finish repaying all the installments before obtaining the products they have purchased. 

With no more compounding interest rates and fees for consumers, the model is swiftly transforming into an alternative for credit card financing, especially for the younger generations. In this deep dive, we will explore what makes BNPL so attractive to customers and what is the business case for merchants, how is the BNPL market in Eastern Europe developing, and who are the major players in the regional flexible financing sector.

Why is the Buy-Now-Pay-Later market growing so fast?

Also known as Point-of-Sale (POS) financing, the BNPL model is becoming increasingly appealing to customers as it is different from the traditional less flexible personal credit models. The fact that it offers installment payments at zero or close to zero interest rate and charges the merchants a fee per transaction means that the customers bear almost no additional cost for the credit. Compared to the customers-facing fees, which buyers pay when using credit card financing, the reason behind the rising adoption of BNPL models seems quite obvious. 

And with the swift increase in demand, there has been a corresponding increase in investors’ interest, high profile IPOs, and large investment rounds, which stimulates more innovation and boosts the development of the incumbent players. Nevertheless, in 2020 alone investments in European BNPL solutions grew 118% YoY reaching €1.08B, and keeping in mind that in Q1 there have already been some €930M raised, 2021 is about to break the record. 

Specifically in Europe, online retail sales have witnessed a 26% increase since the beginning of the pandemic and even though the growth trajectory might not be so steep in the future it is highly likely that the changes in customer behavior will remain permanent. Customers are now more inclined than ever to make digital payments and reports note that the volume of non-cash transactions might reach a record high of $1.1Т by 2023. Surprisingly, it is not just Millennials and Generation Z that are open to experimenting with digital payments as more than 40% of people aged above 56 have been reported to use digital channels for shopping post-pandemic. 

When it comes to the preferred payment method, digital wallets have become the leading choice in the five largest e-commerce markets in Europe – France, Germany, Russia, Spain, and the UK according to the Global Payments Report. Due to their rising popularity among younger generations, however, BNPL options are projected to see the largest gains in usage in the next three years and almost double their share until 2024, accounting for almost 14% of the spending on e-commerce in Europe. 

Explore buy-now-pay-later trends

What's the incentive for merchants and customers?

Customers have been allowed to make late payments for their purchases since the beginning of commerce. That is because the advantage of extending credit to clients increases sales volumes and revenues over time and allows customers to buy more than they otherwise would. But in order to fully understand the added value that BNPL offers its users and clients compared to traditional credit services, we need to take a more detailed look into the business model of the fintech credit service.  

Most of the existing players on the market such as Klarna, Afterpay, and PayPal charge merchants a very small base fee of around $0.30 and then charge a percentage of the sale per transaction. Therefore, a key benefit for the customers is the fact that they rarely get charged for paying by installments instead of paying in full upon making the purchase. Moreover, customers are further incentivized by the flexible and quick credit approval procedures – most BNPL providers even give out credit without doing a hard check on the credit score of buyers. This means that small credit is made available to people who are unable to use bank loans to finance their purchases because of their credit history. For another segment of customers, BNPL serves as an alternative of having great payment flexibility while preserving their credit history clean. A study of young customers highlights that over a fifth of buyers aged between 20 and 30 have not so “shiny” credit history and thus cannot get approval for future credit financing. 

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On the other hand, all of that does not mean that customers are offered unlimited access to credits no matter what their credit score is. Businesses are protected against extending credit to customers with bad creditworthiness as most BNPL providers have limitations on the basket value and use algorithms to identify what is the monthly credit limit for each customer based on their credit score. BNPL also allows businesses to maximize the value of their sales and stop worrying about accounts receivables because the flexible payments platforms pay the merchants upfront and in full. The biggest advantage for businesses, however, stems from the fact that they do not bear any risk for allowing their end-users to make purchases on credit. Providers of BNPL financing enable businesses to increase their competitive advantage and attract a wider customer base without worrying about the potential negative impact on their balance sheets due to unpaid receivables.   

In fact, it is quite the opposite and merchants actually increase their revenue when they offer BNPL credits. Data from the Buy Now, Pay Later Tracker report of Afterpay point out that buyers spend on average 55% more when they are offered the option to pay with BNPL installments – a statistic that shows the potential increase in revenue would outweigh the fee paid by merchants. Moreover, the same report highlights that 87% of the people between the age between 22 and 44 who normally spend the most are willing to pay for their larger purchases in monthly installments. Millennials are reported to carry twice as few credit cards as compared to the generation before them, which makes them the largest group using BNPL services. This is particularly important today, as SMEs face sales challenges relating to the economic downturn caused by COVID-19. 

Moreover, adoption across industries grows, and even though so far BNPL has attracted interest mainly from fashion, health, beauty, and toys retailers, providers of flexible financing services have begun to look for ways to expand their presence by entering new industries. This opens up whole new markets for customers as it allows many to afford higher-priced substitutes of the products they love. For example, people who only buy watches and handbags because they cannot afford upper-fashion models can switch to purchasing designer watches and handbags due to the opportunity to repay them in manageable and small installments. A survey conducted by WWD on European and US customers of the fashion and luxury sectors shows that more than a half of the respondents had used a BNPL for financing their purchases before and a quarter of them have used payments installments to pay for a fashion luxury item. 

 Adoption is going well beyond the fast-moving-consumers goods and some BNPL providers have started partnering with brands that offer more high-priced products such as bikes, electronics, and furniture. Even though BNPL is spreading across new verticals, there is still no option to use the service on perishable goods such as foods and drinks, which might turn into an opportunity for newcomers in the BNPL market. 

Inside the customer’s mindset - meeting needs and corresponding to different attitudes

Transparency, spending control, and convenience – these are the top motivators for using a BNPL solution according to data from various surveys and reports on European customers. When trying to break down the customer base into smaller segments based on age, Millennials who use flexible financing services tend to be conscious about their spending habits and keep a high responsibility of managing their budgets in order not to go into debt. For the younger generation, the option for late payments have even become a need instead of a want as they have been the ones who were most negatively shaken by the pandemic in economic terms. In spite of that, Millennials seem to be the most optimistic about the future, which compensates for their financial struggles and makes for a good balance.

Besides transparency, the other mindset factor that allures young generations towards BNPL services is that it gives them a sense of control over their finances. To some extent, Gen Z and Millennials have grown up paying for services in subscription-based models and paying for a product in monthly installments might seem natural. So, what are the implications of all these sentiments for businesses? First, brands might consider offering their younger customers multiple payment, financing, and repayment options and schemes that are tailored to their individual needs and preferences. And the numbers back up that statement as research has found that the opportunity to use a pay later option increases the confidence and loyalty of customers and has a positive impact on online shopping. Some 28% of European and US customers are more likely to make a second purchase with a merchant that offers a BNPL option, and 81% of the respondents have shared that they decide upon a payment method to use before even getting to the checkout. 

According to a survey on the rise of BNPL personal financing offerings in the UK conducted in the fall of 2020, 46% of the respondents who have used late payment services before excusing credit card users, would prefer to use a BNPL service over credit and store cards. However, out of all respondents, only 19% reported that they would like to have a BNPL on their credit card or in their current account, while almost half said that they do not want such an option, and a third were not sure about their preferences. 

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Who is who in the Buy-Now-Pay-Later Space in CEE?

Company on focus: NewPay

In order to hear the first perspective of a regional founder of a BNPL service, The Recursive team reached out to Ivaylo Ivanov, founder and CEO of the flexible payments fintech startup NewPay. The startup is part of the second season of the Visa Innovation Program for SEE fintech innovators that is managed by the Bulgarian early-stage venture capital Eleven Ventures.

The Recursive: What is the biggest problem NewPay is solving for its customers and what is the story behind the startup?

Ivaylo Ivanov: From the perspective of clients, NewPay allows for a product to be obtained immediately, while having an opportunity to delay the payment. The client completes the full purchase cycle from the selection of an item, through the check-out, to the delivery without paying a single cent. This allows customers to even order a couple of different products, or sizes of different clothing, try them out and return those that they don’t like. This was possible before the emergence of buy-now-pay-later solutions, but NewPay significantly simplifies the whole process and opens up new opportunities for buyers by making items more affordable. Moreover, if clients are paying with a card upon making the purchase and if they decide to return the products, they usually have to wait some time before receiving their refund, while with NewPay, this is not necessary. 

Another problem that NewPay solves is that it builds more trust between the clients and the merchants, which is especially relevant for retail businesses that are just entering the market. And the biggest value that we bring to buyers is allowing them to buy without charging them any interest fee, which in turn, is also a benefit for the businesses. Statistics show that on average clients shop more, the chance that they return to the retailer increases, and the percentage of abandoned carts decreases. Additionally, an important part of the value proposition of NewPay is connected to the fully online process – the whole verification and purchase process happens online and can be done in 2-3 minutes. 

And how about the benefits that it brings to businesses?  

The Bulgarian e-commerce market, in particular, is still predominantly characterized by the cash on delivery model. The whole process associated with this payment model may take longer than 2-3 days which means that the capital stays locked for the businesses. In comparison, when using NewPay, businesses are unlocking this capital instantly. The moment the buyers finish their purchase and the merchant sends the items, we make an instant settlement with the merchant and the business can add the money to its working capital cycle. 

Moreover, NewPay is fully integrated into the e-commerce platforms of the merchants and thus allows businesses to offer their clients the same UX. In contrast, other payment methods, such as credit and debit cards, may require clients to go to third websites, make additional verifications, fill in codes from text messages, and so on. And last but not least the credit risk associated with the delayed payment is covered completely by NewPay so that businesses can offer installment payments without worrying about having bad debt. 

How does the BNPL business model work and how do you go about monetizing your service at NewPay?

We monetize our solution with the “success fees” or the taxes and commissions that we charge merchants based on the success rates that we help them achieve in terms of revenue and KPIs. We are about to announce our first pilot partnership with businesses in the fashion apparel and home appliances industries, as well as with some services providers. 

At what stage of development are you in 2021 and what are your short and long-term plans?

Our product is ready and technically everything is tested and verified. We have developed plugins for all platforms in the local market, which are being used by e-commerce retailers. As for the eCommerce retailers who have made custom websites, we have developed an API that can integrate in their platforms as well. At the moment our main priority is to attract the right mix of merchants and product offerings that will satisfy the shopping needs of our clients. This includes electronics, fashion, perfumes and accessories, furniture, as well as beauty, traveling, and tourism services. After we create a good mix of merchants, we will start marketing our solution to clients, and the idea is that in the short term, the buyers will be the ones who will be looking for BNPL options when shopping online. 

Based on your experience and observations, what are the emerging trends in the payments sector? What are the biggest obstacles against the adoption of more innovation in the region? 

One of the trends that have been accelerated since last year is that clients are increasingly seeking convenience at all costs. Right now having a seamless UX and a perfectly optimized user path is no more only “good to have” and rather has become a must. The competition is one tab away and users can easily find the same items, with the same price but from different merchants, so the businesses which have the best user path are the ones that will differentiate themselves from the rest.

Another trend is that although cash on delivery is still the preferred payment method in Bulgaria, online payments are beginning to gain more traction. Right now they are mostly done with debit and credit cards, but alternative payment methods such as BNPL are also beginning to attract interest. In addition, online verification is becoming normalized and more and more clients feel comfortable with having to take pictures of their documents. People have become aware that in order to enjoy the convenience of shopping from their mobile phone or computer, this is a step that they need to take and not perceived as a hurdle anymore. 

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When it comes to the challenges in the way of more mass adoption of BNPL, one such is the need for BNPL payment models to be differentiated from the traditional stock crediting models. Merchants and buyers should keep in mind that this is more of an improvement of the shopping experience of buyers and a way to make the checkout method more effective. 

Can you share some examples of how the Visa Innovation Program helped you develop NewPay?

The program allowed us to further develop our service for online stores. In addition, during the Visa Innovation Program, we added an idea for new service in our product development pipeline and managed to validate it.

  1. Obtaining products without paying anything when making the purchase.
  2. No extra fees in interest for paying in installments.
  3. Convenient and fast return of unwanted products. 
  4. Enhanced and fully online user experience. 
  1. Builds more trust between clients and merchants. 
  2. Encourages clients to shop more and increases customer loyalty. 
  3. Immediately unlocks capital in the working capital cycle of businesses. 
  4. Can differentiate a retailer from its direct competitors. 
  5. Covers the credit risk associated with delayed payments. 
  6. Fully integrates with the platforms used by e-commerce retailers. 

Taking a look into the future of Buy-Now-Pay-Later

With the increase in payment opinions, it is possible that consumers will have rising expectations about the method they want to pay and this will have a key role in the revenue growth for businesses. In addition to removing complexity from the payment process, merchants are likely to seek novel ways to add value for their clients and maximize their earnings. Payment providers would use insight to help customers select the right merchant and would help merchants to optimize their business target based on the same insights. 

As of now, the biggest opportunity for BNPL providers is connected to bridging the SMEs gap and meeting the trading needs of businesses and small corporations. Although B2C payment services are much more developed, BNPL newcomers are well-positioned to build a B2B payment infrastructure and capture a huge untapped market. There are already some innovators such as the Norwegian Tillit, which is trying to make B2B shopping simpler and more flexible, but as of now the gap still exists, because incumbent players are focusing solely on invoice financing. Another first-mover in the field is the Greek neobank for SMEs Viva Wallet, which upon its latest $80M investment has revealed that it is testing the waters for expanding its product portfolio with a BNPL offering. 

Another emerging trend connected to the future of BNPL is that the demand for omnichannel experience is on the rise and customers are willing more than ever to use services and products that offer unity and all-in-one convenience. Incumbent and emerging players in the BNPL market might go about boosting their value propositions by offering additional layers of banking services such as physical cards, insurance, and P2P lending…And why not even digital wallets? 

Moreover, despite the decrease in face-to-face retail, customers globally seem to expect brands and retailers to provide them with a social commerce experience. Combining online shipping with social media and offering native sharing apps for payments are some of the ways in which players might go about boosting their social commerce efforts. 

All of these exciting possibilities for future innovation do not come without challenges. As of now, BNPL services are not regulated because of their relative newness and the fact that providers do not charge consumer interest. However, with the rise in popularity of BNPL solutions, providers may soon see a corresponding rise in regulatory scrutiny. A survey among over 2 000 UK customers, who have used BNPL. reveals that end users would actually welcome regulation in the flexible payments markets with 54% being for the regulation of BNPL products and another 52% supporting a regulation that would make providers consider credit history before approving the credit financing. The survey also suggests that the younger generation may be lacking proper financial education when it comes to using BNPL services and this could lead them into a cycle of debt. However, it is also true that learning how to manage small amounts of debt without negatively impacting their credit score may be helpful in improving the financial literacy of the youth. 

Therefore, an increase in transparency and focusing on building trust might be seen as an opportunity for incumbent BNPL providers. The lending ecosystem is developed on the basis of data-driven decisions and in order to remove the guesswork for customers and merchants, BNPL fintechs might start relying more on open data. This would enable businesses to make more sense of their clients’ payment habits and would also allow end-users to find out which products are best suited for them based on repayment frequency and other data points.  And finally, speaking of data, there is a chance that BNPL providers might become the owner of the traffic and the data of the end-users instead of simply being a “referral” which would mean that they might go about integrating the inventories of their business partners into their applications and platforms.