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Banks are posing a threat to buy now, pay later players by offering merchants their own way to roll out the popular payment method

Business Insider logo Business Insider 2 days ago sbalogh@insider.com (Shannen Balogh)
a couple of people that are sitting on a bench: Buy now, pay later companies like Affirm, Afterpay, and Klarna are making big marketing pushes. Don Arnold / Getty Images © Provided by Business Insider Buy now, pay later companies like Affirm, Afterpay, and Klarna are making big marketing pushes. Don Arnold / Getty Images
  • Buy now, pay later players like Affirm, Afterpay, and Klarna are looking to boost customer loyalty.
  • BNPL is now much more than another payment method. It's a powerful marketing tool.
  • Barclays and Alliance Data are offering merchants a version of point-of-sale installments.
  • See more stories on Insider's business page.

Buy now, pay later was a breakout star in the payments world in 2020, with growth fueled by the rapid acceleration of e-commerce.

More than a third of US consumers used a buy now, pay later offering by July 2020, according to Insider Intelligence. It's the fastest-growing category in payments, projected to more than double its market share in North America from 1.6% in 2020 to 4.5% in 2024, according to Worldpay's 2021 Global Payments Report.

But as fintechs like Affirm, Afterpay, and Klarna have grown in popularity and valuation, their strategy has shifted from selling to merchants to trying to win consumers as loyal customers of their own.

"They've Trojan-horsed a marketing thing in through the finance department," Brian Barth, the founder and CEO of the travel buy now, pay later player Uplift, told Insider.

Much more than just another payment option, buy now, pay later services have evolved into consumer-facing companies, keen to establish their own brands.

Klarna has a loyalty program of its own, and Affirm recently rebranded in an effort to stand out from competitors and offers its users a high-yield savings account. Afterpay (which also has a loyalty program) was named presenting sponsor of New York Fashion Week, where attendees will be able to purchase outfits they see on the runway directly in the Afterpay app and on its website.

But now, banks and credit-card companies are developing ways to allow merchants to both offer point-of-sale financing and maintain the customer relationships themselves.

Barclays is one such firm, announcing a partnership with the buy now, pay later software company Amount in April that enables merchants to offer installment plans at the point of sale, under their own brands.

Armed with existing credit businesses and balance sheets, banks have the financial resources to manage the buy now, pay later loans. And with Amount's tech, the partnership could prove a compelling case for merchants to keep offering a popular way to pay while holding on to their existing relationship with customers.

"Our thesis has always been that banks really should be winning this space," Adam Hughes, the Amount CEO, told Insider.

Buy now, pay later is a powerful marketing tool

Fintechs like Affirm, Afterpay, and Klarna have spent years competing for merchant contracts. Beyond the thousands of small merchants and brands, they've also won deals with big-name retailers like Macy's, Peloton, and Gap.

And they've long boasted their ability to convert browsers to buyers and increase average order values for merchants. But now their user bases have grown as valuable as, if not more valuable than, the merchant contracts they've signed.

"We are not just a payment provider. We are fundamentally a marketing device for merchants," Affirm CEO Max Levchin said on the company's most recent earnings call in May.

In 2019, there were 7.3 million buy now, pay later app downloads. In 2020, that number more than doubled to 17 million downloads, according to Insider Intelligence.

Affirm says more than 30% of its sales originate on its app and website. Afterpay and Klarna, meanwhile, also have their own apps, and the pair launched loyalty programs in 2020.

The growth of these apps represents buy now, pay later players' efforts to become the starting point for every shopper's journey, which increases the chances that a consumer uses their buy button at checkout, thus earning them a fee.

Buy now, pay later products, while often interest and fee free to shoppers, come at a cost to merchants. Fees typically range from 3% to 7% of the purchase, higher than the average interchange fees paid on credit-card transactions.

For smaller retailers, a buy now, pay later provider might be an attractive way to boost sales and increase conversions, especially if they don't have the tech budget or talent to build out their own buy now, pay later plans.

BNPLs are also building out features to help merchants attract customers. In April, Klarna announced a new set of marketing tools for merchants, including social-media content and special offers. Merchants can also buy sponsored placements and content on the Klarna app.

But larger merchants that have existing customer relationships might not be willing to give them up to the likes of Affirm or Klarna so easily.


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"It's the bigger, enterprise accounts that are going to wake up and are waking up," Barth said.

But some big-name retailers seem happy to partner with BNPLs for the time being. Macy's, for one, signed on with Klarna in October 2020.

Early on, the partnership has been a success. With Klarna, Macy's has seen higher spending per visit and increased acquisition of new, younger customers, CEO Jeff Gennette said during the company's first-quarter earnings call this year. Nearly half of shoppers using Klarna at Macy's are under 40.

But Gennette also said he sees Klarna as a pipeline to the Macy's loyalty program.

"Our goal is to convert all of these new customers to Macy's loyalty customers who return for future purchases," Gennette said on the earnings call.

White-labeled buy now, pay later offers merchants both payments and loyalty

While big merchants might not be happy with the risk of losing loyalty to BNPLs, their options are somewhat limited in offering point-of-sale financing.

Building a standalone buy now, pay later button in lieu of partnering with an existing provider is a costly endeavor.

It's those merchants that Barclays and Amount are targeting with their new partnership.

"If we can deliver the same product that customers want with the same speed and slick integration and digital interface that fintechs provide but can do it in a way that enhances our partners' brand and relationship with their most valuable customers, we think that's a big deal," Denny Nealon, CEO of Barclays US Consumer Bank, told Insider.

Through its point-of-sale offering, Amount manages origination and servicing, which includes fraud prevention and account management through the life cycle of the loan. The bank uses its own balance sheet and credit-decisioning standards. Retailers are left to decide how they want to present the financing option.

Barclays is negotiating the cost of the buy now, pay later feature on an individual basis. Fees will vary based on merchants' existing deals with Barclays and the interest rate merchants want to offer shoppers for the point-of-sale loans, which will be offered only for purchases over $250.

"We believe our cost efficiencies; cost of funds and efficient customer service will enable us to be very price competitive in the market," Nealon said.

Amount's point-of-sale software is customizable, meaning customers can choose to offer interest-free "pay-in-four" financing or interest-bearing loans.

Spun off from Avant in February 2020, Amount just raised a $99 million Series D, its third fundraise in about a year, pushing its valuation above $1 billion. It's raised more than $240 million to date from investors including Goldman Sachs, QED Investors, and WestCap.

Barclays declined to name specific merchants that will adopt the tech but referenced its large network of travel cobrand partners as well as retailers. Across its current partners, which include American Airlines, JetBlue, and most recently, Gap Inc., 80% of new customers come through those brands' own channels versus Barclays.

What sets Barclays apart here, Nealon said, is its comfort with working behind the scenes.

"We are indifferent to what brand is used with this product," Nealon said. "Many of our partners I expect will be utilizing their brand because they want to use it as a means to extend their relationship with their customer."

And Barclays isn't the only one looking to give merchants an in-house buy now, pay later option.

Bread, a white-label buy now, pay later startup, was acquired by Alliance Data, a leader in the cobranded and private-label-card industry, in October 2020.

Similar to Barclays and Amount partnership, Alliance's Bread powers RBC's PayPlan product, offering Canadian merchants customizable point-of-sale financing solutions.

Focusing on integrating buy now, pay later services into merchants' existing credit offerings sets the company apart from other buy now, pay later players, Val Greer, EVP and chief commercial officer of Alliance Data Card Services, told Insider in emailed comments.

"This approach avoids sending customers to a third-party site and creates a seamless experience, an important distinction compared to other providers," Greer said.

Travel is the latest target for buy now, pay later

The travel industry is perhaps the best example of a market that values and protects its customer loyalty programs. As a result, some BNPL players looking to break into the space have had to acknowledge as much.

Uplift, for one, counts major travel brands like Carnival, Kayak, Southwest, and United as customers. Its buy now, pay later options are offered through its travel partners, and Uplift doesn't target consumers directly.

When a consumer gets a notification about paying down a loan for a Southwest trip, for example, Uplift works with Southwest to push that consumer to visit Southwest's website again.

"We're not saying, please start your shopping journey with Uplift," Barth said.

For Uplift, which was founded in 2013, working within its customers' existing loyalty schemes was key.

"If we ran off with Southwest's customers and promoted a bunch of other vacation opportunities to them, they would unhook us," Barth said.

Travel is a key focus for Affirm, too, its CFO Michael Linford said during the company's latest earnings call. Through partnerships with the likes of Expedia, Priceline, and Vrbo, travel spending accounted for 11% of Affirm's total volumes in April.

"Given the investments in partnerships we've made in the category, we expect travel to contribute meaningfully in the fourth quarter and beyond," Linford said on the call.

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