With demographic changes, digital transformation, and a global pandemic all contributing to the rapid evolution of the payments landscape, two developments, in particular, stand out as having the potential to affect long-term change. First, the rapid rise of BNPL (buy now pay later) payments is permanently changing the ways in which individuals access and use consumer credit and, by extension, how they prioritise the products and services they purchase in their daily lives. On the other, the continued buzz around cryptocurrencies continues to gather steam despite the current bear market putting its many growing pains on full display. But it is the prospect of the fusion of these technologies that could well pave the way for the next wave of financial innovation in payments and beyond.
The rise of BNPL
BNPL is a type of short-term financing that allows consumers to make purchases and pay for them at a future date. Its rise has been the most significant development in the consumer payments industry over the past five years, and one whose adoption has been fuelled by its sitting at the intersection of digital payments and the demographically-led shifts in spending patterns.
Having initially gained traction in the clothing and apparel domains, Fintech providers such as Klarna, Clear Pay, Laybuy, and others have tapped into the aforementioned trends and offer payment solutions that are now bleeding into every consumer sector, from furniture and consumer electronics, to healthcare and home improvements. Indeed, having reached a market size of $120 billion in 2021, the global BNPL spending is projected to reach $576 billion by 2026 according to GlobalData, a 260% increase.
Figure 1: Global online BNPL market value ($ billion)
The reasons for this growth are multifaceted. By tapping into the younger demographic’s appetite for more convenient digital payments solutions and deferred payment options, (Figure 2), Fintechs have been upending the traditional consumer credit market that has been dominated by credit cards and unsecured personal loans. Additionally, in an increasingly uncertain macro environment of low growth, high inflation, and bleaker employment prospects, traditional forms of credit may become harder to access. This will make adoption trends in BNPL even more entrenched as the originals adopters of the technology mature and progress to larger-ticket items.
Figure 2: Survey of 2,002 UK consumers who shopped online in the past 12 months
However, there were signs that the BNPL niche had already reached an impasse some time before the current global contraction in the tech sector accerlarated amid worsening macroeconomic conditions. In May 2022, Klarna announced it was shedding 10% of its workforce, with the Swedish industry leader's valuation plunging to $6 billion in July, down from $45.6 billion a year ago.
As a result, BNPLs are looking at new ways to attract and up-sell customers by simplifying big-ticket purchases, engaging in new partnerships with merchants and card providers, and other avenues. Zip, for example, has pursued strategic differentiation by targeting well-known high street brands and niche verticals such as Air Travel, as well as developing partnerships with digital distribution platforms such as Microsoft Store.
Most interesting of all, perhaps, is how these Fintech companies are now increasingly looking to integrate crypto services as a key selling point going forward.
Crypto payments are on the move
While the adoption of BNPL has been relatively rapid, retail payments made in cryptocurrency have proceeded at a more modest pace, particularly when viewed in context of the rapid pace of development seen in the broader digital assets space. However, there is evidence that this is changing. For example, a recent report from Crypto.com showed that while only 4% of US merchants currently accept crypto as a payment method, around 60% are interested in accepting crypto before the end of 2022. Additionally, merchant acceptance for bitcoin rose from 16,221 in May 2019 to 29,6711 three years later, an 83% increase (Figure 3).
Figure 3: Heat map showing US merchant acceptance of bitcoin, May 2019 – May 2022
A critical part of the adoption of crypto payments is the rise of financial cards that allow for cryptocurrency transactions online and in brick-and-mortar establishments to be executed seamlessly at market rates (for more see: why crypto cards are revolutionising payments). . Here, major payment network, Visa, has already announced it will release crypto-enabled cards that will allow users to spend and purchase crypto where Visa cards are accepted.
BNPL and crypto: synergies and solutions
With both BNPL and crypto largely drawing from the same user profile/base we're seeing more Fintechs have started to aggressively investigate ways to pair BNPL solutions with crypto payments. For example, the XRP-hosted currency, XRPaynet, announced plans to allow customers to buy goods and services in crypto to be paid back in monthly installments in exchange for said crypto to be locked up as collateral over a fixed time period.
It is important to observe that crypto-BNPL fusion projects are multi-faceted and not limited to crypto payments. For example, BNPL company, Affirm, recently announced that it would be adding crypto trading as a new app feature in a bid to attract the crypto-savvy users of the same demographic that aren't yet users of BNPL solutions.
Furthermore, the cross-pollination of application and implementation ideas between the two industries is very much bidirectional in nature. For example, in an apparent homage to the BNPL space, Miami-based startup, Pipe, announced in March 2022 the launch of its ‘mine now, pay later’ scheme, the bitcoin mining industry’s first alternative financing solution. The offering allows bitcoin mining hardware firms to offer payment terms to customers on mining equipment and services via a bespoke API.
The fusion of BNPL and crypto is the future of payments
These developments are but the tip of the iceberg of a new wave of innovative projects and partnerships that are blurring the lines between BNPL and digital assets, and this trend will only accelerate as more such 'fusion' projects get underway. For Fintech providers of BNPL technologies, the integration of crypto applications will open up interesting avenues for diversification in what is a rapidly maturing market. For crypto payment/platform providers, BNPL provides an opportunity to tap into a larger pool of captive consumer bases that will pave the way both for the evolution of cryptocurrency as a form of payment, and the broader adoption of the underlying blockchain technology.
Disclaimer: The information contained within is for educational and informational purposes ONLY. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision. No no commercial relationships or partnerships exist with any of the technology providers, manufacturers, or suppliers herein.