Evolution of BNPL

PIVOT TO PROFITABILITY: Evolving Your Buy Now, Pay Later Strategy

Table of Contents

How Did We Get Here?

A Global View of BNPL

North America

06 07 08 09 10

Europe

Asia Pacific

Middle East & Africa

Latin America

The Rise in Delinquencies

BNPL: The Next Generation

Sustainable Strategies for Success

Keeping up with the BNPL Evolution

The Pivot to Profitability

How Did We Get Here? Let’s set the scene: the year is 2020. We’re in the middle of an unprecedented global pandemic. Businesses are shutting down, people are out of work, and financial anxiety is through the roof. Workers worldwide will go on to lose a grand total of $3.7 trillion dollars in earnings during the pandemic, affecting consumers’ ability to afford basic living expenses, let alone retail purchases. In what seems like an overnight rise into the spotlight, Buy Now, Pay Later (BNPL) offers a new take on an old idea: breaking transactions into smaller, more affordable payments through point-of-sale (POS) microloans. Similar to the classic department store layaway plans, you pay in installments until the full balance is paid. No need for a credit check and no interest accrued. But unlike layaway, you receive the item before it’s paid off. With households’ cash flow greatly reduced, BNPL seems like a miracle solution to keep the economy running without forcing families to take on debt. Growth skyrockets. BNPL unicorns are born in rapid succession.

Cut to: it’s 2023 and the disillusionment with BNPL has set in. The New York Times called it “a victim of its own success.” Murmurs of losses have spread like wildfire. There’s debate about its longevity, whether to consider it a product or an industry in its own right. Valuations and funding have fallen. Regulation is coming. We are in the middle of another BNPL revolution, but this time we’re defining what the future will look like and who will be at the helm. Whoever lands at the helm will be a player that’s been able to make the pivot into profitability. And there certainly is profitability to be had. Despite the negative press, BNPL’s popularity is still growing. It’s expected to comprise almost a quarter of all e-commerce transactions globally by 2026, the same year the market is forecasted to reach a size of $565.8 billion, growing at a solid CAGR of 25%. The BNPL boom is not over - it’s just maturing. BNPL is expected to comprise almost a quarter of all e-commerce transactions globally by 2026 With regulation on the horizon, now is the time for savvy BNPL providers to learn from previous experiences. Now is the time to take the extremes from the past few years and shoot for a happy medium - a profitable medium. In order to get there, your BNPL product needs to be agile, scalable, and - perhaps most importantly - able to assess risk with unshakable accuracy. Learn how you can achieve all three with an advanced, AI-powered credit risk decisioning platform so you’re able to evolve alongside this dynamic market.

A Global View of BNPL BNPL is a global phenomenon, but that doesn’t mean it looks the same in the many different markets it’s disrupted. And to understand what works best in your market, you need to understand how BNPL works - or doesn’t work - in others. Get an overview of the usage, trends, and biggest players across the world.

North America

Europe

Asia Pacific

Middle East & Africa

Latin America

North America Growth

BNPL has gone mainstream in North America. The biggest providers are household names, and the region accounted for the majority of global sales, with an expected 88 million users by the end of 2023 in the US alone. And while the seemingly exponential growth of the North American market from the past few years has slowed, it will continue to expand. Forecasts put BNPL purchases at 8.5% of all e-commerce transactions by 2025, up from 3.8 in 2021. Trends As inflation remains high, BNPL users are relying on the apps to help manage household spend. Far from the origins of the micro-loans which were largely used for larger retail purchases like Peletons and new TVs, North Americans are splitting their everyday expenses into installments. In the US, 20% of BNPL users have split their groceries into installments, while 27% have used the microloans to cover them until their next paycheck. Whether for luxury goods, high-cost purchases, or essentials, BNPL adoption is a reflection of a continued move away from credit cards and

compounding debt. Biggest Players PayPal | Affirm | Klarna | Afterpay | Zip

North America

Europe

Asia Pacific

Middle East & Africa

Latin America

Europe Growth

Adoption of BNPL products is also high in Europe - leading provider Klarna was founded in Sweden, after all. As of Q1 of 2023, the European BNPL market experienced consecutive growth during the previous four quarters and accounted for 10% of all e-commerce transactions in 2022. Despite similar pushback on business model viability, that steady growth and regular usage is expected to continue at a CAGR of 11.4% to reach a market size of €300 billion by 2025. Trends Similarly to North America, the high cost of living across Europe is changing the way consumers are using BNPL. New BNPL players are popping up in unexpected areas, like car repairs, and - yes - groceries. But B2B lenders have also jumped on the bandwagon in an attempt to modernize a sector that has largely remained free of disruption for decades. On a broader scale, however, adoption of BNPL is so disparate across the region (it accounts for 24% of e-commerce transactions in Sweden while only 3% and 5% in Spain and France, respectively) that depending on market needs, financial behavior, and other cultural factors, different trends and innovations are likely to appear on a micro level. Biggest Players Klarna | Clearpay | Scalapay | Alma | Zilch

North America

Europe

Asia Pacific

Middle East & Africa

Latin America

Asia Pacific Growth

Another region with expected double digit growth is Asia Pacific (APAC). BNPL adoption is forecasted to accelerate at a CAGR of 13.6% through 2028 to reach a market size of $363.4 billion. With a mix of emerging and mature markets, progressing levels of e-commerce penetration are making BNPL an attractive digital payment option to consider. Australia (home of industry giants Afterpay and Zip) leads the region in adoption, as BNPL made up an enormous 20% of e-commerce transactions in 2022. India’s adoption, while smaller, is growing at the fastest pace in the region, jumping from 0.1% of e-commerce sales in 2019 to 4% in 2022. Trends APAC’s large population of underbanked consumers and low credit card penetration make it a ripe market for BNPL to fill in the gaps. Governments across the region are supportive of modernizing digital payment infrastructure to support payment innovation across the industry. Regulation has been coming in many regions, but it’s already arrived in APAC - Australia, to be exact. BNPL products are now considered credit (the UK is moving forward with similar regulation), and that means affordability checks will now be required for compliance. It will be interesting to see how providers pivot and make up for this newly added barrier. For other countries across APAC, however, as adoption continues to rise along with digitization and modernized payment infrastructure, BNPL will have room to grow (unregulated, for now). Biggest Players ShopBack | Atome | Akulaku | Pace | Afterpay

North America

Europe

Asia Pacific

Middle East & Africa

Latin America

Middle East and Africa Growth

BNPL is also taking off in the Middle East and Africa (MEA). In fact, it’s the region’s fastest growing e-commerce payment method, expanding at 43% CAGR through 2026. Within the Middle East and North Africa (MENA) subregion, 45% of the population is comfortable using BNPL. In the UAE, though it accounted for just 2% of all e-commerce transactions in 2022, usage doubled from 1% the previous year. Saudi Arabia is also projected to grow rapidly at 68% CAGR through 2026. South Africa’s BNPL growth is not far behind, at a CAGR of 63%. Trends The POS loans are gaining popularity across MENA with women and young people, due to low barriers to entry and its stronghold within the retail space. Emerging payment methods across the region are booming on the whole - 85% of consumers in MENA have used at least one. This indicates a receptive market to BNPL and its continued growth. Innovation is also springing from the region, creating solutions to account for religious restrictions on lending and other cultural factors. Biggest Players Carbon | Spotii | Tabby | Tamara | Lipa Later

North America

Europe

Asia Pacific

Middle East & Africa

Latin America

Latin America Growth

The story of BNPL in Latin America (LatAm) is not yet one of rapid growth, but potential growth. BNPL transactions accounted for a meager 1% of e-commerce payments in 2022 and will likely grow to 3% by 2025. Cash is still the most popular form of payment in the region, closely followed by credit and debit cards. Digital payment adoption is still taking off and the data required to power BNPL can still be hard to capture. In Brazil and Mexico, however, adoption rates are higher and expected to grow at a similar rate to those globally. By 2025, those markets are likely to see 3.8% of e-commerce transactions come from BNPL. Trends As is clear from the numbers, financial and consumer behavior is unique in LatAm - not just as a region, but within it as well. Across the 17 major markets, a financial product that finds success in one may fail in another. That is part of the reason BNPL providers have had trouble getting the micro-loans off the ground - the products need to be highly customized to meet the variety of needs and habits of consumers. What may be disruptive in Europe may not be in LatAm. That being said, there have been hefty investment dollars flowing to the region’s BNPL players. Biggest Players Kueski | Nelo | Creditas | Addi | Koin

North America

Europe

Asia Pacific

Middle East & Africa

Latin America

The Rise in Delinquencies The rise in BNPL delinquencies has dampened the excitement the disruptive payment option once had. So let’s talk about it. One of the major reasons BNPL’s popularity has grown so rapidly is the accessibility the product offers. You don’t need a credit check, you don’t have to pay interest, some providers don’t even charge late fees for missed payments - the risk checkpoints that have historically acted as barriers for the credit unserved or underserved no longer exist. And without the data and risk technology in place to fill in those gaps, delinquency happens. And it’s happening at a rate of 2.39%, up from 1.83% in 2020, says a recent report by The Consumer Financial Protection Bureau (CFPB).

Delinquency rate increasing, currently at 2.39%

But what accounts for the uptick? One potential reason is financial inexperience. BNPL’s accessibility makes it easy for younger consumers to use. Easy access combined with inexperience can often produce negative outcomes. But unlike other mistakes of youth, these have billion dollar consequences.

Another possible contributing factor is the loan behavior of the typical BNPL borrower. The same study from the CFPB found that BNPL borrowers in the US were more than twice as likely to have at least one reported delinquency on another loan than non-borrowers. They also had much higher usage rates of other loan products, along with subprime credit scores. However, as Consumer Finance points out, “The report cannot distinguish whether Buy Now, Pay Later usage leads to more delinquencies on other obligations or whether consumers who are already in distress are more likely to use Buy Now, Pay Later loans to pay off higher-interest debt.” It’s also important to remember the larger economic context fueling BNPL usage. The globe is in the midst of ongoing uncertainty. Both developed and emerging markets are grappling with cost-of-living crises. Inflation is high. Delinquencies across consumer lending are the highest they’ve been in over a decade. It’s not just BNPL. So how is the industry bouncing back? Read on to discover what the future could look like.

PERCENT OF AGE GROUPS THAT USED BNPL

Age 65+ Age 51-64 Age 35-50 Below age 35

10%

20%

30%

BNPL: The Next Generation

The next wave of BNPL is just getting started. And it’s in part being driven by the market - existing providers are following the lead of users who want BNPL options in new verticals, and banks, credit cards, and even big tech companies are responding to demand by launching their own products. What remains to be seen is how eventual regulation will impact the models and accessibility of the next generation of this game-changing payment method. The (Not So) New Players Many of the newest players on the BNPL scene are already household names. Big Tech has entered the game. Amazon has teamed up with Affirm and Apple has launched Apple Pay Later, and Walmart - once a provider of layaway - is entering the market with their fintech, One. These entrants can capitalize on a major draw to the payment method: access and ease. Especially in the case of Apple Pay, which already has over 500 million users globally, a BNPL offering already embedded in a user’s preferred payment method will be an easy conversion. As for Walmart and Amazon (the top two spots on 2022’s Fortune Global 500 ), while offering BNPL may bring in new customers, these retail giants can leverage the payment method as a customer experience boost - the millions of customers that already shop with them will find it faster and easier to make purchases, which improves loyalty and customer lifetime value (CLV).

Credit cards, aka the competition, have also begun to get in on the action. Cardholders can now benefit from BNPL options from card providers like Amex, Citi, and Chase. Mastercard has partnered with big name banks across the world like HSBC, NatWest, and Saudi National Bank, to name a few. As with their competitors, using the service doesn’t require additional credit checks and typically has 0% APR. Where the card companies differ, however, is in the business model. Most of the first wave BNPL providers make money from service fees their partners (aka retailers) pay. For many of the major card providers, the end user takes on a fee instead. And while hard credit checks aren’t required (this presumably has already been performed if you’re a cardholder), offers may be dependent on creditworthiness. How will the BNPL originators fare? With valuations falling and consolidation likely, it could propel card companies and banks ahead. Accenture predicts that banks could increase card utilization to 26% from 21% by 2025 with embedded BNPL, tripling the number of transactions. However, the financial inclusion gap that the largely barrier-free solution addressed looks like it will still be a prime area for differentiation. Partnerships like Amazon and Affirm’s could also become another popular iteration of maturing BNPL. The future is still largely unwritten, but a clearer view is on the horizon as regulation begins to appear across the globe.

Banks could increase card utilization to 26% by 2025

21 % 2022

26 % 2025

If It Walks, Talks, and Acts Like Credit...

We know that regulatory compliance will soon affect providers around the world, and in some cases, has already arrived. Australia has defined BNPL as a credit product and will be regulated as such. The same designation has been decided in the UK and the US , where regulation is pending. The EU is also in the process of bringing BNPL under the Consumer Credit Directive. As the Australian Financial Services Minister Stephen Jones said , “If it looks like a duck, walks like a duck, sounds like a duck, it’s a duck – and it should be regulated as a credit product.” “If it looks like a duck, walks like a duck, sounds like a duck, it’s a duck - and it should be regulated as a credit product.”

Stephen Jones Australian Financial Services Minister

What does all this mean? Proposed regulation aims to protect consumers from a financial standpoint and data standpoint. In the wake of defaults, governments want to help ensure that borrowers are not getting in over their heads, and that the lending criteria reflects the same standard for providers. This would not only affect the onboarding process, but include monitoring during the entire customer lifecycle. It also affects the information the providers must share with users about the loans, as well as the data they get from the users. Data protection under GDPR is robust, and Klarna has already been fined in Sweden for violating the guidelines. For some BNPL providers, new compliance requirements may not change a whole lot, but for fintechs with looser terms, risk mitigation, and transparency, overhauls may be likely, if they can operate at all. Ultimately, regulation aims to minimize losses for both the company and the customer. We’ll be looking to Australia and the UK to see how successful regulations are and how the US and other countries will follow suit. And as BNPL reaches new verticals and industries, the way we think about the microloans will likely impact regulation and user behavior alike.

BNPL Now and Later By now, everyone is familiar with BNPL for retail shopping, but as we saw with regional trends, what you think you know is changing. We’re moving into a new era of how we think about installment financing and other disruptive applications. There’s debate about whether we’re currently using BNPL 2.0 or 3.0, but from our perspective, we’re within 3.0 territory. Here’s why we agree with Bain’s definition: 1.0 was BNPL before we used that term - it was the original layaway and point-of-sale financing; 2.0 was the BNPL of 2019 until now - your typical retail purchase split into 3 or 4 interest-free payments; 3.0 is the expansion currently taking place.

The U.S. and the EU are both planning to bring BNPL under existing credit regulations.

3.8% 9%

BNPL’s portion of North American e-Commerce sales

BNPL’s portion of European e-Commerce sales

So what are the hallmarks of BNPL 3.0? One of the most exciting evolutions is the expansion into new markets like B2B and cross-border payments, automotive loans and repairs, medical expenses, and even charitable giving. Another defining feature will be the revised protections for consumers that come with regulation. There may be fees for usage, there may be stricter lending parameters, and there may be late payment penalties or interest. On the flip side, we’re already starting to see that BNPL financing can help consumers’ credit scores - some of the major bureaus are beginning to take these loans into account. And this will continue to help boost financial inclusion and financial standing, along with the impending consumer protections. At its core, this is the opportunity for providers to open new lines of business, reach new customers, collaborate with competitors, and finally pivot to profitability. Read on for strategies to get your business on the path to profitability.

Sustainable Strategies for Success What does it take to stay on top in a highly volatile industry? All you need is a sustainable strategy that maximizes process/cost efficiency and portfolio performance with AI/ML. But defining the sustainable strategy is only the first part - you need technology that reflects your goals and adapts alongside you. Data Efficiency When polled, 60% of decision-makers planned to invest in technology to solve their operational efficiency challenges. But why invest in additional technology when you can demand more from your decisioning solution? Your risk decisioning foundation helps ensure you aren’t losing revenue to default and fraud, but your technology should also ensure you aren’t losing revenue to unnecessary data calls and bloated processes. Get rid of excess data to make sure every data point is earning its place and adding value to your decisions. Use AI/ML to analyze your decisioning processes. Do you have redundant data sources? Are they the right sources for your target market? Is each data point coming at the right step in the process? In short, how effective is your data? With embedded reporting, you can continuously optimize your strategy to reflect your business goals.

Next, use machine learning to test tactics and help analyze your strategies. If you remove a data point suspected to be redundant, will it change the outcome of your decisions? If you call on a data source later in the process, will it reduce the cost of your process? How do these tweaks affect different segments? How can you complete your processes faster? These efficiencies are key to long-lasting success not only when it comes to reducing cost on the backend, but to minimizing both defaults and churn on the customer end. If you are running more efficient processes that can increase your application volume and more accurately define affordability, you’ll be able to serve more customers who are more likely to pay on time. Iterate as frequently as necessary to ensure you’re running accurate, efficient models to back you your lending strategy.

Maximized Portfolio Performance When you’ve optimized your processes for efficiency and cost, you’re ready for the next level: maximizing your portfolio performance and increasing customer lifetime value (CLV). Leverage data analytics to gain insights into borrower behaviors, trends, and overall portfolio performance. Use data to make informed decisions on credit limits, pricing, and risk management strategies. Separate your product lines to explore their performance individually. Are you using a catch all approach? Consider creating separate strategies for them all if so, based on your AI/ML-powered performance analytics. The BNPL product for e-commerce may be performing well but the one for auto repairs may need an adjustment in risk appetite or application processing to perform at its peak. You may also need to expand or reduce your customer segments. If you’re a global provider, you will likely have different strategies and processes already in place. Use AI/ML to help optimize your different customer bases and ensure you’re targeting the right customers in the right areas. Are there certain segments defaulting at higher rates? Are there low risk segments you could be reaching that you aren’t? Are there high loan value segments it’s worth leaning more into risk to capture? Optimize lending strategies based on performance data and identified areas for improvement.

Incorporate iterative performance analytics into your strategy to determine the effectiveness of customer-centric approaches. Predict how building in new segments will affect your risk or test out the viability of new business lines. Measure how CLV changes if you impose dynamic credit limits based on customer behavior or if you add more touchpoints to the customer journey. Regularly monitor portfolio performance and key metrics, such as default rates, repayment rates, and customer satisfaction. Go beyond portfolio monitoring and perform scenario analysis and stress testing for broader insights. Curious how your portfolio would perform in a recession? How about in a growth period? Explore likely impacts of different economic conditions and use insights from stress testing to develop strategies for mitigating potential risks. This allows your business to be truly future-proof. Go beyond portfolio monitoring and perform scenario analysis and stress testing... to be truly future-proof.

Strategy Powered By Insights No matter how you tweak and iterate your BNPL strategy, the most successful ones will be powered by advanced analytics. By cutting down on excess data and tightening your processes, you’ll save on cost and time. By measuring portfolio performance across the customer lifecycle, you can maximize CLV without increasing risk. That’s why flexible, easy-to-use tech should be the backbone of your strategy. The right tech will give you the insights you need to analyze your current strategy, identify areas for optimization, and be able to action those changes, all on a single platform.

By cutting down on excess data and tightening your processes, you’ll save on cost and time.

Keeping Up with the BNPL Evolution So how can you embrace the evolution of BNPL and make your pivot to profitability? Launch or optimize a product that’s future-proof. A BNPL product built to last will have three defining features:

Accurate Risk Assessment

Accessible Flexibility

World-Class Customer Experience Support

Optimize Accuracy and Reduce Risk Risk is top of mind, and accurately assessing the credit risk of your customers is the most effective way to minimize it. The best BNPL solutions stand on solid risk decisioning foundations that fight fraud, determine creditworthiness accurately, and still support financial inclusion. When building your own risk decisioning foundation, ensure your technology can: Return complex decisions BNPL products do not rely on the traditional methods of determining creditworthiness. That’s why you need to be able to analyze and action multiple types of data in multi-step processes that ramp up from broad to distinct. You should always look across identity, fraud, and credit for the fullest picture of risk - but keep in mind that the picture may look different for someone who is credit served with a prime or super-prime credit score than an underserved or unserved borrower. You’ll need to weigh different factors with that complex decisioning engine. Easily integrate data and analytics To return your complex decisions, you need the right data. Having the right data helps you make the right decisions, and the absence of robust bureau data can make that a challenge. In fact, three-quarters of decision makers cannot easily access data, while 60% have limited access to alternative data - the best tool you can have in your arsenal when you’re bypassing traditional data. Of the 40% that can tap into alternative data sources, 70% cannot integrate it into their decisioning solutions. Make sure that you’re not one of them. Look for a unified decisioning engine with alternative data and complex analytics to power the accurate decisioning that forms your risk mitigation foundation.

Deploy updates quickly We’ve all seen how fast BNPL and other disruptive solutions can take off. To remain competitive and (eventually) compliant, you need to be able to update and deploy your models in minutes, not weeks or months. One of the best ways to guarantee that flexibility is with simple-to-use user interfaces (UI), built for business users. With low-code UI, you can reduce reliance on IT or outside vendors, and sometimes bypass them altogether, which lets you adjust your risk strategy and deploy changes without the wait. Scale with ease BNPL is heating up and cooling down in different parts of the world, and your offerings should reflect that. Take into account the breadth of the market BNPL lenders are serving - if you’re in a market with narrower usage, your processes, models, and infrastructure power will look different than a platform supporting a wide range of verticals. Especially if you are or are planning to be a global provider, guarantee your risk decisioning platform can scale alongside your business. Stay Relevant with Accessible Flexibility As BNPL evolves past 3.0 and compliance becomes a core consideration, your technology needs to shift alongside it. That means if you want to remain relevant, flexibility is a must. And to be truly flexible, any business user needs to be able to access the technology and make changes quickly. Whether you’re accounting for changes in market demand, business verticals, compliance, or risk appetite, ensure your technology can:

Center the Customer Experience With so many new players entering the BNPL game, consumers can take their pick of provider. The BNPL lenders that really stand out will center the customer and provide world-class experiences across the customer lifecycle. To put your customer first, ensure your technology can: Personalize journeys McKinsey recently found that 71% of consumers expect personalization from businesses. Go beyond personalized offers and give customers personalized journeys across the lifecycle. Invest in AI/ML that analyzes data and identifies opportunities at onboarding as well as upsell/cross-sell to maximize that CLV and make the customer experience a seamless one. Intervene in an instant Centering customers doesn’t just apply to the ones who pay on time. The most successful BNPL provider can flag customers at risk for default and intervene quickly, before the first missed payment. Use built-in data integrations and powerful credit risk decisioning that learns as it goes, so it can identify changes in behavior and profiles that may indicate financial challenges. Work with these customers on payment plans or other options to prevent delinquency and keep the relationship in good standing.

With these core features, you’re ready to build BNPL technology that will stand the test of time.

The Pivot to Profitability BNPL has changed the world and it’s here to stay. It’s time to grow and mature with the industry - and you don’t have to sacrifice risk to do it. Expand into new markets or verticals, promote financial inclusion, and achieve profitability. Build or optimize a BNPL product that can compete now and in the future. All it takes is the right credit risk decisioning platform. You can compete in any market, follow any trend, and do it all without the worry. By choosing technology that can juggle highly accurate credit risk decisioning with exceptional customer experience and accessible flexibility, you’ll be ready for BNPL 4.0, 5.0, and beyond.

Pivot to Profitability with Provenir

About Provenir Provenir’s AI-powered decisioning platform enables faster, more accurate risk decisions across the entire customer journey. With purpose-built technology for data orchestration and risk decisioning processes across identity, fraud and credit, the Provenir Platform offers embedded machine learning to give you the flexibility to iterate, expand, and scale on your timeline. With our low-code, cloud-native SaaS offering, you can reduce vendor reliance (and the burden on your IT team), power instant credit decisioning at onboarding and beyond, and get new products to market faster than the competition. Discover how Provenir’s AI-powered decisioning platform provides the foundation for more accurate, automated risk decisions across the entire BNPL customer journey - enabling superior experiences, profitable growth, and reduced losses.

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