«Buy now pay later» was a phrase on everyone's lips until recently. Fintechs have triggered a great deal of hype with low-cost and digital offers. But that is likely to cool down, for the time being, a market expert tells finews.com.
The pandemic coupled with low interest rates provided a fertile environment for the «buy now, pay later» concept breakthrough among payment service providers and retailers. Above all, up-and-coming Swedish fintech Klarna ensured that «buy-now-pay-later» (BNPL) became a hip buzzphrase.
But the turnaround in interest rates pushed up refinancing costs, making it more unlikely for providers to offer their customers favorable deferred payment terms. Seeing an opportunity, major players like Apple Pay, are entering the playing field, and regulators are also taking a closer look.
Hardly a New Idea
«The principle is actually not entirely new,» says Stephan Lohnert (pictured below), a consultant at consulting firm Capco. «It used to be called payment by installments. And even the option to pay by invoice with certain deadlines is also a type of financing.»
(Image: LinkedIn)
But BNPL has caught on and is actively promoted by many vendors and retailers as a growth driver, with the business delivering attractive margins while keeping risks manageable. «In Switzerland, the risk aspect is negligible,» Lohnert adds. «Capital has cost almost nothing. On the contrary, it was even more of a cost to have money in the account. Financing was very cheap, and given the low default rates, there is little risk.»
Payment Flexibility
In Switzerland, buyers like to use BNPL as long it costs nothing, and «what is appreciated is the flexibility with which you can stagger larger purchases,» he says.
But the era of negative interest rates is coming to an end, as central banks, including the SNB, jettison their easy money policies of years past to combat rising and stubborn inflation. Still, Lohnert says BNPL is here to stay. «Even if it is now more difficult to offer free financing with the end of the low-interest policy, BNPL will not disappear.» Rather, BNPL is one channel among several payment options, including credit cards and consumer loans, through which financial service providers and retailers will process payments.
But it also means that the credit card market will be reshuffled. The question, Lohnert says, «is how do I get to customers? That's where companies such as Apple have excellent access.» Payment service providers and card issuers could also more easily attract their existing customers to such services, intensifying competition and possibly making it more difficult for up-and-coming fintechs.
Growth Segment for Cembra
In Switzerland, Cembra is the BNPL partner for a number of retailers, including Swedish furniture retailer Ikea. Startups and newcomers would have a harder time in the current environment securing such a deal.
In the first half of the year, Cembra and its BNPL subsidiary Swissbilling registered a 62 percent increase in billing volume to 191 million Swiss francs with a corresponding 35 percent rise in fee income to 6.5 million Swiss francs, and the company working on concluding further contracts with retailers, according to CEO Holger Laubenthal. The strategy is that by growing organically with its partners, the company is less susceptible to external influences. Furthermore, the segment is still in its infancy in Switzerland, compared with Germany or Scandinavia.
Potential Debt Trap
To be sure, the trend toward installment payments also has critics. BNPL is seen as a potential debt trap for low-income groups, with the risk of default increasing with economic weakness and inflation eroding consumer purchasing power. These risks should ensure that regulators look more closely at the market and competition in the future.
In Switzerland at least, Lohnert does not see any major problems with this. «All financing over a period of more than three months falls under the Consumer Protection Act and is thus covered,» he notes.
He expects the growth of BNPL to normalize in the future. «BNPL is coming of age, in a sense.»
