I have previously covered the development of the BNPL market with its many ups and downs, reflecting both rapid growth and emerging challenges. With Klarna’s IPO coming up, it is time for a recap on the state of the union for BNPL. What is the market outlook, who are the key players, and how will regulatory changes impact the industry?
Market Trends and Consumer Behavior
Growth Projections: According to Fortune Business Insights, the global BNPL market is expected to grow from $37.19 billion in 2024 to $167.58 billion by 2032, with a compound annual growth rate (CAGR) of 20.7%.
User Demographics: In 2023, 14% of Americans used BNPL services, up from 12% in 2022. However, 18% of users reported making late payments, with higher rates among younger and lower-income consumers.
Consumer Spending Trends: Research from Harvard Business Review indicates that BNPL availability increases both purchase likelihood and average order value by approximately 10%. This suggests that BNPL services encourage higher spending by offering budgetary control through installment payments.
Valuations – there and back again
Over the past five years, BNPL valuations have gone through a rollercoaster ride with significant growth towards its peak in 2021 followed by a market correction.
- 2018-2020: In the initial years, BNPL players such as Afterpay, Klarna, Affirm, and others saw explosive growth. Investors were highly optimistic about the sector, with BNPL startups offering consumers flexible payment options without interest, fueling widespread adoption.
- 2021: Peak valuation. The COVID-19 pandemic accelerated the adoption of digital payments and e-commerce, which further fueled the growth of BNPL platforms. BNPL companies raised substantial amounts of capital, and many saw their valuations peak in 2021. Affirm, for example, went public in January 2021 with an initial valuation of around $11 billion. BNPL players expanded into new markets and diversified their product offerings. Companies also started offering services in different sectors, such as travel and healthcare.
- 2022- Present: Valuations dropped as growth slowed, profitability concerns grew, and regulatory scrutiny increased. The sector began consolidating, with larger companies acquiring smaller ones. While BNPL is still growing, valuations are more tempered, with a focus on profitability and sustainable business models. The sector is maturing, and investors are looking for more stable growth.
Overall, BNPL saw explosive early growth, but recent years have seen a correction with more focus on profitability and stability.
Regulatory Landscape
CFPB Findings on BNPL Usage: A Consumer Financial Protection Bureau (CFPB) study found that over 20% of consumers with a credit record used BNPL loans in 2022, with most borrowers having subprime credit scores. Additionally, more than 60% of BNPL users held multiple simultaneous loans, raising concerns about accumulating debt.
How the Second Consumer Credit Directive (CCD2) Will Impact BNPL
The European Union’s Second Consumer Credit Directive (CCD2) introduces new regulatory changes affecting BNPL providers across Europe.
Key Changes Under CCD2:
- Expanded Scope of Regulation:
- Removal of the minimum loan amount threshold – meaning smaller BNPL loans now fall under regulatory oversight.
- Increase in the maximum loan amount covered by regulation from €75,000 to €100,000.
- Mandatory Creditworthiness Assessments:
- BNPL providers must conduct thorough credit checks before extending credit to prevent consumer over-indebtedness.
- Enhanced Transparency and Consumer Protection:
- Stricter requirements for loan terms, fees, and penalties disclosure to ensure borrowers are fully informed.
Implications for BNPL Providers:
- Operational Adjustments: Implementing credit assessments and improving transparency will increase operational costs and complexity.
- Technology Integration: Many BNPL firms are leveraging Open Banking to automate compliance with CCD2’s new creditworthiness requirements.
Timeline: EU Member States must adopt CCD2 into national law by November 20, 2025, with enforcement beginning November 20, 2026.
Key Players
The Buy Now, Pay Later (BNPL) sector has experienced significant growth, with several key players emerging as leaders in the market. Notable companies include:
1. Klarna is the leader of the pack with over 150 million active users globally. Klarna partners with major retailers such as H&M, Saks, Sephora, and Nike. Recently, Klarna secured an exclusive partnership with Walmart, becoming its BNPL provider in the U.S
2. Affirm provides point-of-sale loans for consumers to finance purchases. The company has established partnerships with prominent retailers, including Amazon, Shopify, and Apple. Affirm offers transparent, fixed-term financing options without hidden fees.
3. Afterpay enables consumers to pay for purchases in four equal installments without interest. It has a strong presence in markets like Australia, the U.S., and the U.K., partnering with numerous retailers. Afterpay was acquired by Block, Inc. (formerly Square) in 2021, enhancing its reach and capabilities.
4. PayPal entered the BNPL space with its “Pay in 4” offering, allowing users to split purchases into four interest-free payments. Leveraging its extensive user base and merchant relationships, PayPal has quickly become a significant player in the BNPL market.
5. Sezzle is a U.S.-based BNPL provider that allows consumers to split purchases into four interest-free payments over six weeks. It focuses on providing flexible payment options to younger consumers and has partnerships with various online retailers.
6. Zip (formerly Quadpay) in the U.S. offers BNPL services that enable consumers to split purchases into four installments. Operating in multiple countries, Zip has a growing network of merchant partners and aims to provide flexible payment solutions globally.
These companies have established themselves as leaders in the BNPL industry, providing consumers with flexible payment options and driving innovation in the financial technology sector.
Strategic Partnerships as a vehicle for growth
Klarna’s IPO and Walmart Partnership: Klarna recently secured an exclusive partnership with Walmart, replacing Affirm Holdings as Walmart’s BNPL provider. This move underscores Klarna’s competitive pricing strategies and its expansive reach, with over 150 million active users globally and processing 2 million transactions daily.
BNPL in Food Delivery: Klarna has partnered with DoorDash to allow customers to split payments for food orders into four interest-free installments. While this expansion into everyday spending increases convenience, concerns remain about rising personal debt, especially among consumers already facing financial constraints.
Klarna set to IPO
Klarna, the Swedish fintech company known for its Buy Now, Pay Later (BNPL) services, has filed for an initial public offering (IPO) on the New York Stock Exchange under the ticker symbol “KLAR.”
While the exact IPO date has not been officially announced, reports suggest that Klarna aims to go public in April 2025. The company is targeting a valuation of approximately $15 billion, which is about one-third of its peak valuation of $45.6 billion in 2021.
Challenges and future outlook
Despite growth, BNPL providers face several challenges:
- Regulatory Scrutiny: Stricter regulations, such as CCD2 and potential new U.S. rules, will require BNPL providers to introduce more comprehensive credit assessments, impacting ease of access and operational costs.
- Rising Default Rates: Increased consumer debt has led to higher default rates, posing risks for BNPL providers relying on transaction fees rather than interest.
- Competition: Traditional banks and big tech firms like Apple and PayPal are entering the BNPL space, intensifying market competition.
- Profitability & Interest Rates: Rising interest rates raise funding costs for BNPL firms, impacting profitability.
- Retailer Pushback: Some merchants are questioning high BNPL transaction fees, leading to potential shifts in partnerships.
The BNPL market continues to grow, but challenges such as regulatory changes, economic pressures, and rising competition are shaping its evolution. To stay viable, BNPL providers must refine their business models, enhance risk management, and explore new revenue streams. As the industry adapts, consumers and merchants alike will benefit from more transparent and sustainable BNPL solutions.
