What Happens to Buy Now, Pay Later (BNPL) in a Downturn? We’re About to Find Out

The last 12+ months have not been easy in the buy-now-pay-later (BNPL) market. What was once one of the hottest segments in fintech has fallen back to Earth after experiencing COVID-driven hypergrowth in 2020, when shoppers racked up $4.6 trillion in e-commerce transactions, nearly $100 billion of which were paid for with BNPL. In 2021 alone, Klarna reached a $46 billion valuation, PayPal acquired Paidy for $2.7 billion, and Square added Afterpay to its portfolio at a price of $29 billion.

Not that anything about BNPL is new. Installment plans and layaway options have been a part of retail for generations, but the rapid expansion of e-commerce shopping during the pandemic coupled with easy access to funds turned point-of-sale lending into a goldmine for BNPL providers worldwide over the last few years.

Klarna ran a Super Bowl ad featuring actress Maya Rudolph, and soon after became the second most valuable fintech in the world.

Affirm went public in January 2021, helped along by its partnership with another COVID beneficiary, Peloton.

Clearpay reached two million customers in the UK alone.

But the fun didn’t last. Rising inflation, stock market volatility, and an impending recession brought new concerns about BNPL providers and the long-term viability of their business models in 2022, not to mention potential regulatory attention. As prices continue to rise, more and more consumers are questioning the debt burdens associated with these services. Do we really want shoppers – especially young people – to become dependent on BNPL to help with their cash flow?

And the damage to the BNPL market has been swift.

Klarna’s valuation fell by 85% in one year, following layoffs that affected 10% of its workforce. Affirm’s stock price dropped more than 77% in 2022, and both PayPal and Square’s parent company Block saw their shares drop more than 60% over the same time period. To top it all off, at the end of 2021 The Consumer Financial Protection Bureau announced plans to investigate the BNPL industry.

What Happens to Buy Now, Pay

Now, amid economic times of uncertainty, the industry is staring down another challenge that could dramatically alter the landscape for both BNPL providers as well as end users. If a slowdown were to occur in 2023, and potentially extend into 2024, what will that mean for BNPL as a service? As a burgeoning space that essentially requires providers to constantly and significantly expand their risk appetite, a down economy could have huge implications, up to and including insolvency.

For starters, this could lead to a round of consolidation across the industry, as better funded, more established players snap up their weaker competitors to shore up their positions in the market.

Funding for BNPL firms could also become more questionable given the dropping valuations across the space. This could have far-reaching impacts for fintech as a whole, as BNPL lenders have been leaders in capital raising in recent years, driving what has generally been the hottest segment in technology venture capital. Given the ongoing down rounds and reduced valuations, that continued investment growth is at risk.

Finally, we could see an expansion of BNPL credit being issued to consumers at a time when everyday shoppers need more help than ever. This could potentially turn into an expansion of provider risk in a down economy, opening up the possibility that some BNPL firms actually fail. If that happens, valuations will fall even further and we’ll likely end up in a snowball situation, where the BNPL industry faces more and more fundraising headwinds even as their business prospects are looking up.

Meet the winners and losers

The fact is, no matter what happens in BNPL over the next couple of years, the market is going to experience its first major shakeout, allowing the major firms to jump ahead and grab market share from their upstart competitors.

Case in point: Established lenders like MasterCard and Visa are getting in on the BNPL game, and Apple recently launched Apple Pay Later to its suite of digital payment options, enabling existing users to access BNPL funds without ever leaving their wallet. Both offerings from MasterCard and Visa also make it easier for merchants to offer BNPL solutions to their customers without having to tack new vendors (and expenses) onto their systems, further streamlining the process for users.

But there are other implications of this consolidation that might at first go overlooked: a surplus of available fintech talent on the market as smaller BNPL providers are either acquired or shut down.

I view this as a positive side to what is overall a very difficult situation. The so-called winners in BNPL will need to staff up with top tier talent in order to meet the new demands on their businesses. In parallel, former employees from the less successful providers will be looking to make their next career moves. We could very well soon be seeing a surplus of experienced, subject matter experts with the backgrounds needed to help move BNPL forward, and it could lead to an industry-wide reshuffling similar to what we’ve seen in mobile technology, telecommunications, and other industries that have gone through similar consolidations over the years.

Whatever happens, BNPL as a concept and service is likely here to stay. But in what form, and what companies manage to ride out the rough seas, remains to be seen. Either way, we at JM Search expect to be at the forefront of top talent in the space.

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