The Buy Now Pay Later (BNPL) industry is booming, having generated over $90 billion in 2020, and projected to reach $3.98 trillion by 2030. Now, PayPal’s latest move to acquire Paidy – a Japanese BNPL startup – for $2.7 billion, and Square’s purchase of Afterpay, an Australian financial technology company, for over $29 billion, are only boosting the market and proving the success of partnerships and consolidation.
We’ve also seen a considerable increase in banks adopting BNPL as a scalable product to compete with fintechs, who are currently dominating the industry, at the point of sale (POS).
So, why are BNPL consolidation trends gaining so much traction?
The race between banks and fintechs
Fintechs have taken the lead to the point of diverting $8-10 billion in annual revenues away from banks, according to McKinsey’s Consumer Lending Pools data, making it almost impossible for traditional financial institutions to ignore their growth.
Rather than trying to out-innovate fintechs, banks can approach this marathon by leveraging their own strengths and partnering with fintech providers for technological capabilities.
Banks have centuries of expertise and an ability to offer lower fees to merchants. But their collaboration with fintech companies gives them the agility to provide their financing programs at the merchant’s POS to retain or acquire customers instead of losing out to the Afterpay’s of the world.
From a fintech perspective, BNPL can be seen as the first step in becoming a full-service digital bank. From BNPL, it’s not a massive leap to start offering other banking products and ultimately become a digital bank.
With open banking regulations, anyone could have access to the infrastructure of banks. Now, all they need to do is bring in customers. To do this, fintech companies need to tap into merchants because that’s where the customers already are. This is also where BNPL enters the picture. If a fintech company can take the payments aspect further and offer financing to consumers at the POS, BNPL is essentially serving as the segway into more products – and eventually fully-fledged digital banking.
Increasing interest in expanding into new markets and territories
Some may argue that the most successful companies keep their niche in terms of markets and products, while others favor expansion. It is really about achieving a balance between focus and scope. Global consolidation and partnerships help connect international companies and enable them to benefit from a larger target audience and reach.
For instance, Stripe and Klarna stated that they were strengthening their relationship in North America. Stripe is now used in about 90% of Klarna’s payment processing volume in the US and Canada. Through a true partnership based on shared values, entities can grow, thrive, and cross-pollinate. Stripe’s deal with Klarna could be a way for the payment giant to capitalize on the fast-growing BNPL space and expand its geographic reach, as rivals like Square and PayPal make great moves in the space.
Another great example is the newly-sealed partnership between PayPal and Paidy. “The acquisition will expand PayPal’s capabilities, distribution, and relevance in the domestic payments market in Japan,” said PayPal, “the third-largest e-commerce market in the world, complementing the company’s existing cross-border e-commerce business in the country.”
Competing in the BNPL land grab
Financial players that evaluate strategic and operational moves, gain critical ground early, and make the right collaborative partnerships will be the most successful. Those that are slow to the market may become acquisition targets and run the risk of disappearing, making consolidation trends the key focus of everyone in the industry for the near future.
