How buy now/pay later pioneers plan to fend off Apple, Square | PaymentsSource


Working as an executive in one of financial services’ hottest new products, Veronica Katz was expecting competition. But Apple and Square at the same time?

“It feels like there’s an announcement or big news almost every other day in this space,” said Veronica Katz, chief revenue officer for Sezzle, a Minneapolis-based buy now/pay later company.

As BNPL is starting to take hold in the U.S., it already has the feel of a gold rush among providers. In just the past few weeks, Apple has announced it will use its partnership with Goldman Sachs, the issuer of the Apple Card, to offer BNPL; and Square has agreed to acquire the Australian BNPL firm Afterpay for $29 billion.

For existing BNPL firms, having Apple and Square at their heels heightens the challenge to use point of sale lending as a pivot to offer a broader menu of products for consumers and merchants. And since there’s still a lack of knowledge about BNPL among most consumers, incumbents and new entrants are battling for the same pool of newcomers.

Sezzle, for example, last week partnered with BigCommerce to expand Sezzle’s BNPL merchant network and profile among consumers, with BigCommerce as a preferred partner. Sezzle collects 25% of the order price at the point of sale, with three added 25% installments over six weeks. Merchants receive full payment up front.

The BigCommerce partnership follows the release of Sezzle Up, which enables consumers to build a credit profile as they use BNPL, a contrarian approach to most point of sale credit products that position themselves as a way to avoid credit.

As consumers use Sezzle more often, the company reports payment histories to credit bureaus, allowing a user base of mostly younger consumers to gain a track record of payments that can be useful in obtaining other credit later. Adding BigCommerce to the mix brings more retailers to Sezzle’s platform.

Companies frequently integrate with BigCommerce to quickly scale, given the vendor’s network of 60,000 online stores in more than 120 countries. Chase, for example, has partnered with BigCommerce to extend the bank’s digital buy button, Twitter has linked to the e-commerce technology firm to quickly scale online sellers, and Amazon integrated with BigCommerce to expand Amazon Pay to thousands of new merchants.

“Merchants are often undecided about BNPL and we’ll be able to point them to Sezzle,” said Mark Rosales, vice president of business development, payments, fraud, banking, financing and fintech at BigCommerce. “We’re seeing this category grow globally and in the U.S. Our hope is with BigCommerce and Sezzle’s joint resources we’ll be able to improve education and communication around the product.”

Apple’s BNPL move and Square’s deal to buy Afterpay come as other BNPL firms branch into new services. Affirm, for example, added a debit card and has more than doubled its merchant base in the past year. Splitit recently received $150 million in funding from Goldman Sachs to expand the BNPL firm’s lending business. The card brands have also invested in BNPL, and there are signs BNPL is diversifying into specific niches, such as travel.

More than half of BNPL users are “first time” users, according to research from Arizent, American Banker’s parent company. While Apple and Square have an existing consumer base through their other payment, consumer and merchant products, there’s still an opportunity for BNPL firms to capture new consumers with the right mix of products and marketing, according to Katz.

“There is a lot of room for all of us to play in,” Katz said. “We each bring slightly different consumers to merchants, so the merchants may decide to offer multiple BNPL products.”

Shopping spree


One of the largest BNPL firms, Klarna, has struck several partnerships and acquisition deals in recent weeks in an effort to stay competitive as the Swedish firm seeks to expand in the U.S. and other markets.

In July, Klarna entered a deal to acquire Hero, a New York- and London-based virtual shopping platform that uses text, chat and video to connect shoppers with product experts to provide context and the ability for shoppers to communicate and share their experiences with a group of friends. Hero’s clients include Levi, rag & bone, Chloe, Harvey Nichols and existing Klarna clients such as Nike and JD Sports.

The deal is part of a move toward an “invisible payment” for Klarna, in which the transaction that accompanies the BNPL loan is accompanied by shopping experiences designed to encourage repeat usage after the initial sign up.

“You’re enabling the payment. But how do you promote in different channels?” Matt Suraci, head of commercial in North America for Klarna, said in an interview. “We’re thinking of ourselves as a marketing engine to provide value to our retail users.”

After the deal closes, Hero will be available across Klarna’s merchant network, and is part of a strategy at Klarna to bring brick-and-mortar-style experiences — such as a virtual version of hands-on product testing and real-time interactions with brand experts — to e-commerce sites. Klarna is also working in the other direction as it attempts to build digital payments, multi-channel shopping and near-real time BNPL support to physical retailers. Klarna reports it serves about 250,000 merchants and 90 million consumers in 17 countries, with about 9,500 online retailers and 60,000 physical stores in the U.S.

As BNPL lenders build up their consumer base and merchant partners, they create opportunities to expand their services, according to Raymond Pucci, director of the merchant advisory services practice at Mercator Advisory Group.

“This not only diversifies lenders’ portfolio, but increases consumer touch points for both the lenders and their merchant partners,” Pucci said, adding many retailers have been adding artificial intelligence to their resources, either organically or through acquisition that can proactively suggest personalized shopping suggestions for consumers.

Social shopping’s definition varies, but it usually refers to shoppers sharing their experience with friends, creating an opportunity for merchants to reach larger groups of consumers.

It’s not without risk, according to Pucci. “Social shopping already happens among networks of friends, but merchants and their financial partners should be careful about force-feeding consumers on what already is an overload of digital marketing and promotional offers.”

By combining online and offline shopping technology with BNPL, Klarna is trying to appeal to stores that are gradually reopening, yet must remain flexible due to the shifting pandemic. At the same time, the growth of e-commerce of the past two years is likely permanent, making it necessary to continue to innovate online, according to Suraci.

Shortly after unveiling its deal to acquire Hero, Klarna announced it was buying Stocard, a German discount shopping app, for $133 million. Stocard’s app bundles bank cards and uses location-based data to power discount offers from its merchant clients. Stocard reports it has about 60 million users. Klarna would not comment on the Stocard deal, other than to confirm the deal for this story.

“With all of these new players coming into the BNPL market, our moves give consumers all of the options they would want,” and the rush of new competition “validates BNPL as a product,” Suraci said. “We want to position ourselves in this market as a brand for a new generation of shoppers. Our audience is millennials and Gen Z.”

Klarna entered a deal to buy Hero, a virtual shopping platform, to retain buy now/pay later users by embedding other services.

Klarna also recently partnered with Liberis, a London-based embedded finance platform, to provide additional financial services to Klarna’s merchants. The first product will be revenue-based financing, enabling retailers to borrow against future payments to solve short-term liquidity challenges.

Liberis offers small-business loans between about $1,300 and $350,000 via payment processors on a white-lable basis, with an agreed percentage of future payment flows repaying the loan.

“For small businesses, revenue-based lending has proven to be a way to deal with liquidity fluctuations without having to think as much about repayments,” said Rob Straathof, CEO of Liberis, which works with bank partners to allow the loans to be off balance sheet for the payment processors.

The Liberis partnership gives Klarna a product similar to merchant credit offerings from Square and PayPal, which package the service with other offerings. That creates variety as well as shields merchants and payment companies from any credit risks associated with BNPL.

“This is not just about facilitating payments, but exposing merchants to lifetime shoppers,” said Suraci. “We’re at the crossroads between being a payment provider and an enabler of shopping experiences,”

In another move, Klarna in July announced the first recipients of $40,000 grants that are part of a program to provide $4.5 million in free payment and media services as part of the BNPL firm’s coronavirus recovery strategy. Klarna’s research found 36% of businesses say their greatest concern over the next six months is finding new customers, 48% say they plan to invest in digital marketing and 44% said their biggest challenge is revenue loss.

Ceata Lash, founder of PuffCuff, an Atlanta-area hair care company, said the pandemic hurt her supply chain, which includes three businesses, making the grant a helpful stop gap.

“One supplier had four cases of COVID, shutting their company down for six weeks. The other two partners, manufacturer and co-packer, had to implement social distancing within their workforce, significantly reducing their output. This made it difficult to keep products in stock and tripled our lead times,” Lash said in an email, adding the company also received a Paycheck Protection Program loan and didn’t have to lay off or furlough employees. “We got creative and pivoted to compensate for missing pieces of our supply chain and developed additional revenue streams.”

Risk and reward


Klarna did not directly answer questions about the Square-Afterpay deal’s impact on the broader BNPL market. In an email statement issued through Klarna’s PR representative, CEO and co-founder Sebastian Siemiatkowski broadly addressed “fintech consolidation.”

“We’re not necessarily sad that other entrants in this space will be stuck having to figure out how to work together over the next year … bringing companies together and integrating applications and workflows takes time,” Siemaitkowski said. Instead of thinking about who might acquire Klarna, “we are thinking more about what our targets are at the moment. … Similar to asking Amazon 10 years ago if they would sell, why would we?”
Without naming Apple’s foray into BNPL, Siemiatkowski also claims the “tech giants” are overstretching by offering financial services.

“You can be very good or excellent at some stuff, but we’ve found that it’s very difficult to be great at everything,” he said.

By incorporating additional tools and features for merchants, Klarna appears poised to become more deeply integrated into merchants’ ecosystems, said Austin Kilgore, director of digital lending for Javelin Strategy & Research.

“This strategy is essential to the future growth of the buy now/pay later segment, particularly given that these transactions tend to cost merchants more than traditional credit card payments,” Kilgore said.

But there is a risk in merchants using revenue-based financing to raise funds, and in offering BNPL to consumers, Kilgore said. “Merchants will certainly have to monitor their borrowing habits to avoid becoming over-reliant on their buy now pay later partner,” he said. “There’s a risk of merchants overextending themselves using revenue-based financing and then having to take steps to encourage customers to use buy now/pay later in order to pay back loans faster.”

There is also a risk in adding projects in a way that dilutes or distracts from the primary BNPL mission of providing an alternative to credit card debt and a fast decision at the point of sale.

Firms or banks offering BNPL should keep adding new products, but more importantly focus on getting consumers into the cart and checkout and providing the user a frictionless experience, according to Daniela Hawkins, principal consultant with Capco’s banking and payments practice.

As BNPL becomes part of broader sets of financial services, engagement with consumers and product delivery will become more important, according to Hawkins.

“Dynamic offer delivery can be a firm’s best retention tool, this involves effective use of a rewards currency and an engagement mechanism,” Hawkins said. “Banks, merchants and buy now/pay later will have to form partnerships to best serve the consumer. This will be a challenge for the smaller banks and a huge advantage for the mega issuers.”





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