Why buy-now-pay-later financing is so attractive
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Buy-now-pay-later, or BNPL, is one of the fastest-growing areas of finance.
Why it matters: The biggest player in the space, Klarna, on Thursday announced that it has raised $639 million at a valuation of $45.6 billion — an astonishing quadrupling in value in just eight months.
- For decades, credit cards have been the only practical way to borrow money to pay for big-ticket items that aren't quite as expensive as a car. Consumers liked credit cards for their convenience — and banks liked them for their high-interest rates. Now, finally, those cards have a competitor.
By the numbers: Klarna reported that its number of American customers is up 118% year over year; in the first quarter, it had $18.1 billion of transaction volume, mostly in Europe.
- Afterpay, its largest competitor, saw volume of $4 billion in the quarter, while Affirm had $2.3 billion.
Those numbers are tiny compared to credit card volumes, which means that potential growth remains enormous. Mastercard, Visa and American Express between them had $3.5 trillion of volume on their credit cards in 2020, just in the USA.
The big picture: BNPL has clear advantages, for consumers, compared to credit cards.
- It's often offered by merchants as a way to buy items interest-free.
- It's easy to use BNPL only for major purchases, and not for day-to-day spending.
- In the cases where you do pay interest, it doesn't compound as it does on credit cards.
How it works: Whenever you pay for an item on a credit card, you then have to pay interest on that purchase unless you make sure to pay off your credit card in full at the end of the month.
- With BNPL, you're never defaulted to making interest payments. Either there's no interest at all, or else the interest rate is clearly stated upfront.
The bottom line: BNPL will never be as profitable as credit cards. But that hasn't stopped founders like Klarna's Sebastian Siemiatkowski from becoming billionaires.
