Of the many fintech sectors, retail finance offers investors the most promising opportunity. The market for retail finance has more than doubled over the past five years, and is currently valued at US$2.5 trillion. The market is not showing any signs of slowing down, with an annual growth rate of 20%.
Among retail finance, there is a shift from traditional payment methods to Buy Now, Pay Later services. Buy Now, Pay Later (BNPL) is one type of short-term financing that allows consumers to make purchases and pay for them at a future date on instalments. BNPL services are often interest-free and makes it easier for individuals to take on debt. Within Australia, providers include Afterpay, Brighte, Humm, Klarna and more.
Today’s biggest BNPL players entered the market years ago. Klarna launched in 2005, Zip in 2013 and Afterpay in 2014. The Covid-19 pandemic certainly skyrocketed the need for these players. Lockdowns turn individuals into online shopping and e-commerce.
The abundance of old and new players in the market meant only one thing: that some will fall. We can expect strategic partnerships and consolidation to occur over the next few years. Affirm and Amazon, Klarna and Global-e are just some of the examples of this trend.
Building on customer loyalty is another aspect these businesses must strive for. Strong loyalty delivers more cross-selling opportunities, which will lead to more value-added services and an ever-expanding scope of personal finance services. This includes spending analytics, shopping recommendations, daily banking products and insurance.
Despite its past performance, the future for BNPL services may be steered in a different direction. There has been growing concern by government bodies and consumers on the regulations of these services. The size of the industry makes it almost impossible for BNPL services to escape the public eye.
The Financial Conduct Authority (FCA) in the UK released the Woolard Review outlining its plans for regulating the market in early 2021. Since this pivotal moment, authorities and regulators have started to take necessary steps to ‘protect consumers’. While it is still unclear what policies will be implemented, there will certainly be a significant impact to the way BNPL providers operate.