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Buy-now-pay-later (Seedtable #124)

Today we are talking Apple, Facebook and more but firsdt …

Seedtable #124 | May 28th

Hey everyone,

This one is a fun one (although we might have different definitions of fun) but at least it pairs nicely with Klarna is the Ultimate Grower.

Lets dive in!

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Buy-now-pay-later startups, aka BNPL, are a sub-section of embedded fintech that offer Point-of-Sale financing for customers when buying things online.

Put simply: you log into to buy a pair of running shoes, and instead of checking out the normal way, you check out using the system one of these companies offer, and unlock financing for your purchase. This financing takes many forms, from paying in 3 or 4 interest-free installments, to full financing with interest across many months (6-12, for example.)

While these startups have been capturing European (and the world's) shoppers' imagination for quite some time (who doesn't want, after all, free financing for online purchases) — the Covid-19 pandemic was like throwing gasoline into this proverbial fire. The fire, in this case, would be the size and reach of BNPL companies.

Worldwide BNPL is a $24B industry. And the geography that has most adopted this payment methodology is… you guessed it: Europe.

In European countries, one-fifth of all retailers offer one form or another of BNPL. In Germany, to give one example, half the people that know what BNPL even is, have already used it. In the UK, £4 in £100 is spent using BNPL.

How BNPL works

In its simplest form, BNPL is just that: you buy something now, and you pay it later. In each transaction involving BNPL, there are three players involved: the customer, the merchants, and the BNPL firm. And in this world, it's a win-win-win transaction.

Customers get the obvious benefit of spreading their purchases across weekly or monthly installments (usually with little to no interest), while Merchants get to up their sales through higher conversion rates and fewer abandoned carts. What do the BNPL companies get? A modest percentage of the revenue from each of those purchases, of course. Similar to what UberEats charges restaurants for handling all purchases and fulfillment. Nothing crazy.

Now let's get a bit more granular. There are multiple types of BNPL, some of which I've hinted at already. There's:

Small-sized purchase financing, which usually takes the form of three or four interest-free installments for any purchase ranging from $10 to about $200 (think clothes, accessories, etc.) In this case, usually the first payment is made at checkout and the others are automatically deducted so as to avoid late fees (which are a thing, of course.) Oh and they come with an added benefit: no credit check or underwriting. Simply click 'check out with Company X', input your debit card details and you're good to go.

Point-of-Sale (POS) financing, which is becoming increasingly common. With POS financing, you can usually finance larger purchases at a zero-to-low interest rate across six months, or a year (think electronics). The one drawback to this type of financing is that it does require, in most cases, a soft credit check and, in some countries, failing to pay installments when due can impact your credit score.

And then there's another, less common type of financing, Delayed First Payment.

Delayed First Payment financing is just that: you can buy something, finance it through other forms of financing, or pay it in full — but start paying at a date later than the date of purchase.

The key players in the European scene are many. Foremost among them, by a lot, is Klarna, which I'll write about more in a later section of this piece — just know that, if you don't know who they are, you probably should (hint: their valuation is big).

Other players, some direct competitors of Klarna, others enjoying a monopoly of their own geographies, are:

It's also important to note that not all of this action takes place online. Many companies offer both eCommerce and in-person financing, following the same models mentioned above.

And in case you haven't figured it out by yourself, here are the benefits inherent to this model (for both businesses, and consumers): Businesses get to have their customers spend more, way more. In fact, recent data suggests that customers spend +55% more when BNPL is available. So, much like offering UberEats delivery as a restaurant is a good deal even despite the fee because of the increase in orders — the same applies to merchants offering BNPL to their customers.

For consumers, on the other hand, the benefit isn't just that they get to pay for stuff in multiple installments, but that they get to do it without succumbing to other forms of predatory lending (i. e. high interest rates), such as credit cards.

None of this is to say, of course, that you can just buy 150 new pairs of shoes in the space of two months, and then figure out how you're gonna pay for them later. That, clearly, wouldn't be in the interests of neither the merchants nor the BNPL companies; so most BNPL companies have 1) a limit on basket value for interest-free lending and 2) a personalized monthly credit limit per customer.

Now let's get even more granular and look at the different business models at play here.

BNPL, in short, seems like the perfect sector. Customers get to buy more, or buy things they can't afford; merchants get to sell more, and BNPLs get a cut of that transaction. So it only makes sense that investors are running towards it at full speed, check-books in hand, Euro signs written all over their naked bodies.

Investors' Apettite

I promise I would talk more about Klarna, so here's me keeping that promise. I'm gonna talk about, more specifically, about the appetite investors have had for this Swedish company over the last few years — and why that appetite is so big.

Recently, Klarna made the news after completing a $1 billion fundraising round. This round comes shortly after a $650 round back (September of 2020). These two rounds put together bring Klarna's fundraising total to $3.1 billion since its founding in 2015, at a 31 billion valuation — making it Europe's most valuable private company. Period.

The reason why Klarna is so attractive to investors is simple: the company dominates the space, at least in the countries where it operates. According to their website, Klarna boasts 90 million active consumers and 250,000 merchants using their services, with a record 8 million mobile downloads for their app in Europe in 2020 alone. Its closest competitor, Clearpay, got about 1 million downloads.

In terms of sales, Klarna is winning big: they recently reported $53 billion during 2020. Now compare that to Australia's Afterpay, its main world-wide competitor, which raked in a meager $11.1 billion.

But Klarna isn't the only BNPL player attracting investors' money in Europe. Italian-based Scalapay (launched in 2019), for example, recently raised a $48 million round (Jan 28, 2021) to scale its services, led by Fasanara Capital.

For context, 2020 was a record year for BNPL startups already — raising $1.5 billion worldwide, of which ~$1.2 billion went to European startups. But that's nothing compared to Klarna's $1 billion round a few months ago, or to the fact that in the last 2 months alone, European BNPL startups have raised €900 million. In fact, a recent analysis by Kaleido Intelligence sets the European BNPL market to grow to a grand total of €300 billion by 2025 (~30% of the eCommerce market).

Here's a list of the top funds and angels investing in the space:



  • Tim Ringel (invested in Klarna)
  • Victor Jacobsson (invested in Klarna)
  • Niklas Adalberth (invested in Klarna)
  • Karl Danowsky (invested in Klarna)
  • Didier Valet (invested in Alma)
  • Simon Nixon (invested in Zilch)

And yes, I did say that the BNPL seems like the perfect sector. But the key word there is "seems". Because while BNPL has lots of positives, it also has many many challenges to face before the model reaches mass adoption and/or total domination.

BNPL's Pitfalls And Challenges

First challenge: yes, you guessed it: regulation. This is fintech we're talking about, after all. And we all know how much governments like to regulate fintech.

EU Regulation

Here's the thing about the BNPL sector: at the EU level at least, it hasn't been regulated, but instead falls under the Digital Single Market Strategy and the Payments Services Directive. In simple terms, this means that BNPL startups are not considered credit companies like American Express, but instead electronic payment companies, with all the freedoms that implies.

But that's about to change, it seems. Why? Because, in part at least, Klarna got big, very big, and that drew regulators' attention.

First came the consumer protection groups, accusing the BNPL sector of too high a risk of consumer rights' violations and over-indebtedness. Then, in Sweden, the consumer protection group Berfort accused Klarna of mishandling customer data and misleading customers by not sufficiently informing them of the risks inherent to the model.

This in turn led to the first piece of regulation. The Swedish Consumers' Agency this past July set forth a law mandating that direct payments be the default option on eCommerce and other forms of online payment, which apparently Klarna violated, and got in trouble for it this past December.

And the trouble doesn't stop there. The European consumer rights group BEUC now wants to see all BNPL startups be regulated under the EU's Consumer Credit Directive, slated to come out at any time and currently under review. But what does this mean? It's hard to know since the legislation is currently under review — but the fear is that it might mean that BNPL startups would fall closer to traditional financing services, such as credit cards, which would add complications such as mandatory credit checks for all financing.

This much noise was meant to be heard by one of the major European countries. And it was. The UK had open ears, and decided to do a government review of the sector. Their conclusion? It needs regulation.

The Financial Conduct Authority (FCA) was asked by the UK government to set stricter controls for all BNPL interest-free financing, and to make affordability checks on customers mandatory for each transaction.

Other Challenges

BNPL faces many other challenges, some bigger than others. One such challenge is the possibility of customers getting in way over their financial heads, and buying more than they can afford because of how easy BNPL makes it. Overborrowing invariably leads to debt spirals, which mean unpaid installments. Unpaid installments = not good for BNPL startups.

Another challenge on the customer (or even the merchant) side is that, like any other financing vehicle, BNPL are quite open to fraud. The fact that, for example, many of the financing options offered by BNPLs require no credit check makes them very vulnerable to fraud. Yes, the amount per purchase in those cases is small, but scale that enough and suddenly these companies have a very, very big problem in their hands. On the merchant side, there's nothing stopping merchants from submitting falsified orders and collect payments on the products 'sold', but not actually fulfilled.

Finally there are two other challenges that BNPL companies need to be aware of: competition from within the sector, and competition from without the sector.

That's right. The BNPL sector behaves a lot like the winner-takes-all sector that is food delivery, meaning eventually there will be at most 3 players dominating the whole of Europe, perhaps the world. And there's no guarantee that whoever's on top now will stay on top ten years from now. In fact, Klarna's CEO Sebastian Siemiatkowski recently told sifted that what worries him most are the 'little companies' coming out of smaller markets such as Prague, and dominating them with an amazing product.

And then there's the threat from without the sector, meaning legacy companies and tech giants. BNPL startups are against some big players, notable Paypal, American Express, and Amazon, who have already started to offer 0% interest installment payment options in some European Geographies. While these big-tech companies may be a bit too late in the game to stop the large BNPL players like Klarna, they could very well kill all the minor players, such as Twisto.

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