Loans have been around for almost as long as money has been around. Why specifically now has the concept of BNPL (Buy Now Pay Later) picked up so much steam and attracted investments (retail and institutional)? The answer lies in the insatiable consumption demand and prioritizing instant gratification over long term convenience (be debt free) of the buyer!
This is an old product with a new packaging. Worldwide the forms of this product are many. The model is pretty straightforward, reward the user (borrower) by not charging any interest and charge the retailer (seller) similar to credit cards. Here's the distinction and the real kicker - this product is omnipresent! It's a payment instrument without any physical form, a truly cloud native product which runs on APIs.
Here's an example for the uninitiated:
- Price of Product : $500
- Pay in 4 : $125 x 4 (i.e. interest free)
- Pay in 8 : $62.5 x 8 + Interest as applicable
- Here the 4 or 8 will depend on the tenure of the loan (can be 4 weeks, 4 months etc.)
Economics of BNPL Business
BNPL as a standalone offering is not too different from typical loans (invoice purchase, checkout financing etc.) to understand how the real value will unlock we need to look at the BNPL ecosystem which caters to:
- Consumer (Buyer)
- Retailer (Seller)
- Re-Financer (Bookrunner - the entity who lends money to BNPL companies)
- The Larger Company itself (BNPL Providers, called "Provider" hereon or it's Parent/Group Companies)
- Investor (VC / PE etc.)