Understand BNPL Business Models

Are you a budding fintech looking to capture utmost value from BNPL?

Then you need deep insights into business models, strategies, value propositions, and audience segments to target. Only then will you master merchant and consumer aspirations, and unlock maximum value from the fantastic BNPL phenomenon.

Top BNPL companies worldwide deploy one or more of the business models listed below.

1. Integrated shopping apps

2. Card-linked installment offerings

3. Off-card financing solutions

4. Virtual rent-to-own model

5. Vertical focused larger ticket plays

 Off-card solutions

 On and off-card

6. SME sales financing

1. Integrated shopping apps

Recording a 300% to 400% growth in 2020 alone, the integrated shopping apps model treats BNPL as more than just a credit product. It comprises a holistic ecosystem that drives engagement and value through every facet of the customer’s purchase journey. Leading pay in 4 players (i.e., companies that let customers pay in four installments without any interest) like Afterpay, Klarna, and Sezzle adopt the integrated shopping apps approach to BNPL. From pre-purchase to post-purchase phase, merchants interact with consumers, giving credit choices and EMI conversion options for low ticket purchases.

Here the BNPL players create super apps (a centralized, one-stop app that enables consumers to shop at different virtual marketplaces without the hassle of signing in and out of various apps) with well-integrated shopping, payments, financing, and banking ecosystems on a single platform. This form of buy now, pay later model is predominant in South-East Asian countries.

Klarna and Afterpay have adopted this integrated shopping model and have benefited from higher conversions, repeat high ticket purchases, Average Order Value (AOV), and lower cart abandonment rates. The super app persuades low and high credit history customers to spend conveniently using BNPL. Hence merchants worldwide deploy this BNPL model even if it means cannibalizing their card portfolio. Even though the duration of financing in smaller in this model, receivables turnover is about eight to ten times a year, resulting in 30% to 35% Return on Assets (ROA).

Still wonder why the integrated shopping apps model is most prevalent?

The key differentiators in this model (discussed below) are unique and very difficult to replicate by banks and other businesses.

Solutions to engage throughout the purchase journey – Today, over 17% of Klarna consumers begin their purchase journey from the super app. They log into Klarna super app, and then transition into Amazon or other ecommerce apps for further purchase. Thus there is more scope to engage consumers throughout their purchase journey.

Fresh revenue streams – The super app companies monetize customer engagement through loyalty and reward programs, attractive offers and marketing campaigns, and newer credit features throughout the purchase journey. They also earn significant revenue through affiliate marketing and advertising.

Lower customer acquisition cost – Checkout pages embedded with BNPL serve as low-cost customer acquisition channels. Most people sign up for the integrated shopping apps during checkout, and therefore companies can mint this area by cross-selling banking solutions, credit and debit cards.

Sophisticated technological capabilities – The technology stack of integrated shopping apps is robust and efficient in handling merchant underwriting, consumer frauds, payment intent, dispute mitigation, checkouts, real-time billing, customer service, and much more. For example, lenders require deep integrations into order management systems for SKU-level data access to enable advanced underwriting. This type of deep integration is quite a challenging process for banks.

Brand positioning – The integrated shopping apps model helps lenders position themselves as a part of ecommerce brand rather than just a credit service provider. This positioning is crucial for the growth of merchants and BNPL service provider

2. Off-card financing solutions

With a growth rate of 80% to 100%, the off-card financing model is perfect for industries such as electronics, furniture, and home goods, sports and home fitness equipment, and travel. Companies such as Affirm and Uplift cater to this mid and high-ticket, low-frequency purchase financing that requires monthly installment payments over eight to nine months.

Unlike the integrated shopping apps model, off-card financing solutions mandate consumers to pay a 0% APR for a certain period and then a subsidized Annual Percentage Rate (APR). Over 80% of consumers in this model have high credit scores with sufficient credit card availability. But they choose BNPL for cheaper credit. As a result, the off-card model cannibalizes credit card transaction volumes for card issuers who offer BNPL services.

Merchants choose the off-card financing solutions model when margins and customer acquisition costs are hurt, and cart abandonment rates are as high as 90%. Additionally, providing card-linked installments enable a smooth financing process that matches the 0% APR experience of the off-card financing providers. But card-linked installment payments present a severe threat to off-card financing players like Affirm. Hence they take significant steps to ward off the risk through major acquisitions (Eg: Affirm and Returnly) that help them stitch BNPL services with the shopping journey right from pre-purchase to returns.

3. Virtual rent-to-own models

The virtual rent-to-own (VRTO) is an arrangement where consumers make payments for items they wish to own. Once all the payments are done, the purchase is deemed complete. Over 78% of use cases in the virtual rent-to-own model are from home appliances, mattresses/furniture and electronics, and other goods that can be repossessed.

Growing at a 30% to 35% CAGR, the VRTO model targets the subprime consumer base with a poor credit score. Currently, over 95% of consumers have a credit score lower than 700, and 70 % have a credit score below 600.

Though there are no credit checks with super fast approvals, minimal deposits, and flexible payments, merchants do not reduce APRs for consumers. But large sellers tend to receive good discounts from VRTO players on prescribed conditions.

Companies such as Acima, Acceptance Now, and Progressive Leasing are leading players in the BNPL space with the VRTO model. Like Progressive Leasing in Best Buy and Katapult at Wayfair, VRTO players have integrated in-store and digital presence and serve as 2nd or 3rd level financing providers.

4. Card-linked installments

Growing at a CAGR of 200% to 300%, card-linked installments are a predominant form of Point of Sale (POS) financing in Asia and Latin America. It is basically a no-cost EMI option (using credit cards) with the capability to enable high ticket purchases of over $1000 through subsidized merchant offers. Though card issuers in the US like American Express Plan It and Citi Flex Pay have allowed post-purchase installment payments, their adoption rates are low compared to 0% APR BNPL payments at the purchase point.

Fintechs leverage this opportunity by introducing card-linked BNPL installments in the pre-purchase, at purchase, and post-purchase stage for EMI conversions. Companies like SplitIt are good examples of the card-linked installment model.

5. Vertical-focused larger-ticket plays

The vertical focused larger ticket plays model focuses on financing high-value purchases between $2000 and $50,000. Growing at 10 to 15% CAGR, they cater to high ticket industries such as elective and non-elective healthcare, veterinary, power sports, and home improvement. CareCredit in healthcare and GreenSky in home improvement are category specialists in this form of BNPL.

High value purchases usually happen in healthcare subcategories such as dental, dermatology, cardiology, etc. And in home improvement, high ticket purchases occurs in heating, ventilation, air conditioning (HVAC), home remodeling, and solar paneling. The category leaders in these sectors partner with original equipment manufacturers (OEMs) to achieve scale, manage margin pressure, and counter larger loan tenures and tax credit implications.

Before venturing into this model, BNPL companies need to carefully assess the subcategories and decide on the go-to-market approach and end-consumer relationship. This model and category are an excellent fit for banks that seek to acquire high-credit customers and cross-sell mortgage refinancing and other banking services.

6. SME sales financing

SME sales financing is a great deferred payments model for small businesses running low on capital. Players like CIT and Dell Financial Services deliver POS financing for Small and Medium-sized Enterprises (SMEs) that can be repaid in interest-free easy installments (if repaid before the prescribed period). Usually done as off-card payments, this instant credit helps small-timers manage infrastructure costs through custom financing and leasing.