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On the Eve of Regulation, Five Insights from the UK Experience

On the Eve of Regulation, Five Insights from the UK Experience

Strong demand, favorable consumer perception, and merchant benefits are spurring growth.

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Report

On the Eve of Regulation, Five Insights from the UK Experience
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This article is part of Bain's report on Buy Now, Pay Later in the UK.

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Executive summary

Buy now, pay later (BNPL) is one of the hottest trends in financial services and retail today, attracting resources and innovation in many countries.

Significant capital is flowing into high-growth BNPL businesses, with Klarna’s $639 million funding round this year valuing the company at $45.6 billion and Square acquiring Afterpay for $29 billion.

Large technology and fintech businesses are extending their products further into BNPL. Apple recently announced it was adding a “pay later” feature to its mobile wallet, Affirm is partnering with Amazon to offer BNPL in the US, with Amazon likely to find a partner for the UK in the near future, and PayPal UK has introduced a “Pay in 3” feature to its growing array of payment options. Some of the biggest banks and card providers worldwide are moving into BNPL as well. Visa, for instance, will be offering BNPL application programming interfaces to its card-issuing partners to enable installment payment features for end users. Monzo and Revolut have also announced BNPL features in their digital banking apps.

Of the merchants surveyed, 75% said BNPL will be a key part of their growth plan over the next year.

In the wake of all this activity, demand, and growth, BNPL will soon become regulated in the UK as the Financial Conduct Authority (FCA) and UK government begin regulatory consultations. To help executives, regulators, and analysts better understand this fast-moving space, this report aims to define and estimate the size of the BNPL market, examine the benefits and challenges for consumers and merchants, and offer insight on how BNPL is likely to evolve. Much of the report’s data and analysis pertain to the UK, but the insights have relevance for markets in other countries.

While the report contains a wealth of detail, it can be distilled into five key insights:

  • High demand spurring sustained growth. BNPL has evolved into embedded digital payment and lending products used by 25% of e-commerce shoppers and 20,000 merchants. Transaction value in the UK reached £6.4 billion, or 5% of the e-commerce market, reflecting 60% to 70% annual growth. We expect this growth trajectory to persist, as BNPL appeals to a mass consumer market and is expanding to be used across a wider range of products and use cases.
  • Favorable consumer perception. For consumers, BNPL has quickly become a well-liked product, as evidenced by its Net Promoter Score℠ of 30, compared with 6 for credit cards and –15 for overdrafts. The simplicity of payment at checkout and the ability to manage their cash flow better by deferring payments partly account for consumers’ favorable opinions. However, the interest-free nature of BNPL serves as the biggest draw for consumers. Over the course of 2020, we estimate, people using BNPL in the UK saved £103 million in credit card interest costs.
  • A key ingredient of merchants’ growth plan. It’s not just consumer demand that spurs merchants to offer BNPL checkout options; merchants also benefit from improved checkout performance and new customer acquisition. Our new survey finds that 54% of merchants have their brand exposed to new customers through co-marketing activities, and 23% could track the direct referral of customers from their BNPL providers. When customers visited a store, 57% of merchants using BNPL reported an increase in basket conversion, and 46% experienced an increase in average order value. Compared to card payments, orders made through BNPL can be 20%–30% larger as consumers spread out the payments, and they like the convenience. Summing up these commercial benefits, 75% of surveyed merchants said BNPL will be a key part of their growth plan over the next year.
  • 54% of merchants have their brand exposed to new customers through co-marketing activities
  • 46% of merchants experienced an increase in average order value when customers visited a store
  • Upheaval in financial services. There has been a rapid shift to digital over the past five years, creating big structural changes in the financial services industry. Consumer expectations have shifted away from traditional lending and payment products toward low-cost or free services with convenient, intelligent digital experiences. Among online shoppers aged 25–34 in the survey, 49% reported using BNPL and 51% used credit cards; the generational shift toward BNPL is even more pronounced among younger cohorts. Winners in this market will be companies that combine strong consumer and merchant relationships into a robust value proposition and business model. Another attractive option is to create embeddable, white-labeled solutions that enable brands to offer financial products to their existing customer base.
  • Imminent regulation and the need for industry-wide debt data. BNPL will soon become a regulated product, and one key concern that needs to be addressed is the inadequate ability to share credit data between BNPL companies and other lenders. The current credit referencing systems and processes were not designed for higher frequency, low-value credit checks and reporting for each transaction. While debt levels currently are low among BNPL users, adequate consumer protection will require greater visibility as adoption continues to grow. Furthermore, the industry should build upon its promising start of improving education on responsible BNPL spending and creating the right environment to ensure that debts are repaid on time.

We look forward to continuing the conversation around how to expand a BNPL industry that’s healthy for all involved.

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