Buy Now, Pay Later: credit bubble, or the future of payments?

The idea behind Buy Now Pay Later (BNPL) – allowing consumers at the point of sale to split the payments into smaller, more “affordable” instalments – isn’t really a new one. So why all the buzz?

Well, BNPL is now revolutionizing the customer journey by being seamlessly integrated into e-commerce as a checkout option. Basically, it’s making it really easy, and adoption from merchants and consumers is booming. But this isn’t just about easy credit. BNPL startups are taking on more than credit cards, and VCs have clearly spotted the opportunity, with funding surging to billions in 2021, from near nothing just five years ago. There are now 170+ startups competing in the BNPL space, with new players being born every month. From investors to regulators, it’s growth that can’t be ignored.

BNPL landscape


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Adoption that can’t be ignored

BNPL leaders have been around for a while, Klarna launched in 2005, Affirm in 2012, Zip in 2013, Afterpay in 2014, but their business really took off with the pandemic. Covid-19 made online sales conversion a priority for all merchants. In the US alone, the volume of BNPL payments will reach $100B in 2021, a 4.3x increase from 2020. The growth is led by Gen Z and Millennials, but Gen X and Baby Boomers are rapidly joining in.

Merchants love it too, as it means a boost to sales, improved conversion at checkout and even savings on interchange fees.

Funding trends

VC funding in BNPL has gone from €150M in 2016 to €3.5B in 2021 YTD, a 23x increase. The increase has been led by megarounds (such as those for Klarna, Pine Labs, Scalapay, Sunbit, Paidy), but the early-stage scene is also booming, with the number of rounds at an all-time high. 

Chart showing VC funding to Buy Now Pay Later startups hitting a record in 2021BNPL funding
Most of the funding so far has gone into the consumer facing space, but BNPL is a scale game. The core elements are merchant acceptance and customer acquisition. Unsurprisingly, consolidation is already underway.

Chart showing majority of exit value from Buy Now Pay Later startups coming in 2021BNPL Exits

2021 has seen €67B of exit value across 9 events. AfterPay was acquired by Square for $29B, Paidy by Paypal for $2.7B, Zip acquired Czech startup Twisto Payments, Dubai’s Spotii and South Africa’s Payflex.

BNPL vs. credit cards

BNPL is presenting itself as the next frontier of consumer credit, challenging credit card payments. In reality, it is a parallel or complementary solution, since almost 50% of Americans in their 20s don’t have a credit card, and just 33.7% of European adults one.

Today, BNPL reflects a small portion of the overall spending on payment cards (including credit, debit, and prepaid cards), with $100B in 2021 compared to the roughly $8T in annual spend volume in the US.

BNPL Credit cards
Interest Most options have no late fees or interest High interest. Average of 16% APR in the US
Credit reporting No credit report pull and no  report payments, if paid on time Credit check and report of payments and balance
Acceptance Not all retailers accept it. Also dependent on the network Vast acceptance by retailers
Transparency Upfront transparency in repayments Less transparency in repayments
Benefits / rewards Usually not available. This is changing Often cashback, points or similar

The competitive landscape for BNPL

Competition instead is coming from other directions:

  • Whitelabel player which integrates with banks, enabling banks to offer BNPL. Goldman Sachs just announced its acquisition of the leading provider Greensky.
  • Credit card issuers such as Citibank and Chase are defending themselves by upgrading credit cards to allow BNPL for certain purchases. Startups like Zilch are also playing this card.
  • Challenger banks such as Revolut, Monzo, Curve and Lunar are also starting to offer BNPL. The rationale here is not to lose customers to BNPL players. However, the user experience is still playing catch up, as noted by Jason Mikula.
  • Multi-lender networks are being built by Visa and Mastercard. Visa has built a BNPL API called Visa Instalments in partnership with Chargeafter, while Mastercard has acquired Vyze a provider of POS financing solutions.

The major players

  • Klarna the BNPL behemoth

Klarna is the most valuable BNPL startup, after raising $639M at a $45.6B valuation in June. It has 87 million global customers and 18 million monthly active users and over 250K merchants onboarded. Its gross merchandise value (GMV) in H1 2021 was $39B, a 77% growth from 2020.

However, Klarna also understands that BNPL is a feature not a product. In their journey to becoming an all-in-one shopping destination, Klarna has been on an acquisition spree in 2021, snapping up: Hero, a social shopping platform for e-commerce; Stocard, a loyalty card app, and Toplooks and APPRL, shoppable content technology providers.

  • Paypal, the BNPL killer?

Even the scale of Klarna is orders of magnitude smaller than the payment giant Paypal. Paypal can boost 28M merchants, in the US, 80 of the top 100 retailers already offer customers PayPal as a checkout option, and nearly 70% of US online buyers have a PayPal account.
Paypal developed its in-house solution to compete in the BNPL space, launching it in France in Q2 2020 launching and then expanding in the US and UK, and last week it acquired Japan based Paidy for $2.7B.

The social impact

An interim report by Klarna claims that Buy Now, Pay Later “offers a fairer and more equitable platform for consumer spending than credit cards”. Though UK financial comparison site points out that on average, UK shoppers repay their BNPL debt in 9 months, much more than the 30-90 days of most schemes, and highlights how BNPL debt is invisible to other lenders, adding extra risk for consumers to fall into a debt spiral.

According to the latest report by CreditKarma, a third of U.S. consumers who used “Buy Now, Pay Later” services have fallen behind on one or more payments, and 72% of those said their credit score declined.

The availability of credit and potential lack of transparency about debt being engaged, is becoming an ever bigger topic of conversation as BNPL becomes a big enough force to be reckoned with.

Regulatory risks

One of the main risks the BNPL sector could face is a regulatory crackdown. BNPL has yet to see true regulatory scrutiny, while the credit card industry is heavily regulated (licenses, credit checks, credit reporting). Now that the sector is reaching a critical scale, this is slowly changing. The UK FCA published the Woolard Review in February to understand how to regulate the market. The aftermath of the pay-day lending crisis is still in the air.

BNPL is also heavily dependent on low interest rates, which are unlikely to last forever.

Opportunities for regional and underserved winners

With the presence of the leading BNPL players in several markets still relatively limited due to the market’s maturity, this has allowed for localized players to become regional leaders. Looking at emerging markets: Addi in Latam, Tamara in MENA, Twisto Payments in CEE (acquired by Australian leader Zip), Akulaku in South East Asia and Zestmoney in India are making important plays.

Another interesting case is Scalapay which raised $155M just last week at a $700M valuation from Tiger Global. It started by focusing on an underserved market: luxury goods and fashion in Italy and grew from there to a European and global challenger.

A flurry of megarounds, feature cloning, consolidation and media headlines about consumer credit health has led to talk of a Buy Now, Pay Later bubble. But with so much market still left to grow into, and the diversification opportunities new market share creates, it’s likely the real hype cycle has yet to begin.

Explore the (growing) landscape of 170+ BNPL startups.


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