BNPL firms reported strong numbers despite rate hikes and margin pinch putting companies in a tough spot

Print

Email

Over the last 12 months, narrower margins and rising interest rates have been the major challenges faced by buy now pay later companies globally. The uncertain macroeconomic environment resulted in funding and significant valuation declines, even for major players like Klarna. Despite this, players in the segment have reported strong numbers in Q2 2023, largely due to the growing uptake of the payment method across different age groups.

• Klarna, for instance, revealed that the firm had amassed 100 million customers in Europe. This comes after a substantial increase in the number of shoppers using the deferred payment method in the region.
• For Klarna, the United Kingdom is leading the regional growth, with the value of goods sold through the platform rising 26%. In Europe, the number surged by 14% in Q2 2023, compared to the previous year.
• The growth in its gross merchandise volume has led by expansion into new sectors. The strategy has also enabled the firm to tap into shoppers across age groups, especially old-age consumers. The average age of Klarna's customers has jumped to 36 compared to 33 in 2021.

Alongside 100 million customers, Klarna has also amassed a merchant network of 470,000 in Europe. In the United Kingdom, alone, Klarna has 18 million registered users and a merchant network of 31,000.  With a presence in 11 European markets, including Romania and the Czech Republic, Klarna is expected to double down its efforts across the region from the short to medium-term perspective.

Affirm is another BNPL firm that has reported strong numbers in Q2 2023. Despite the high-interest rate environment, the company has delivered good credit results, unit economics, and gross merchandise volume growth. The firm reported a gross merchandise volume of US$5.5 billion, representing a growth of 25% up from US$4.4  billion a year before. The revenue for Affirm, on the other hand, increased to US$446 million compared to US$364 million. Net loss, however, also increased to US$206 million compared to US$186.4 million.

• The delinquency rates have also improved sequentially for Affirm during the quarter. The 30+ day delinquency rate was 2.3%, which is 0.3% better compared to the quarter before.
• Affirm also became the first BNPL player to be added to Amazon Pay in June 2023. The firms initially entered into a collaboration in August 2021, which was exclusive through January 2023. For Affirm, the extended partnership represents an opportunity to further scale its business. Already used by millions of shoppers in the United States and Canada, Amazon Pay and Affirm integration is expected to further boost the gross merchandise volume for the BNPL provider.

Going forward, the firm is also seeking to drive the growth of its BNPL business through in-store commerce. With as many customers shopping offline as online, the in-store segment represents a strong growth opportunity for deferred payment providers from the medium to long-term perspective.

Fintech companies, offering BNPL payments, have also reported strong growth in volume in Q2 2023. Major players like PayPal and Block are now seeking to rake up their market share in the highly competitive industry.

• PayPal and Block, which owns Afterpay, reported in their earnings call that BNPL is a fast-growing segment for their respective businesses and expect the payment solution to be a key growth driver going forward.

For Afterpay, the gross merchandise value increased to US$6.4 billion in Q2 2023, representing a growth of 22% compared to the previous year. Going forward, Block is also seeking to integrate Afterpay with the Cash App. The service will make use of the customer's Cash App balance or linked debit cards for installments. The integration with the Cash App will also enable Block to pursue new merchants to adopt Cash App Pay.

For PayPal, the overall second-quarter results showed weaker margins, and BNPL is emerging as the largest growth area. The firm is experiencing a growth of 25% to 30% in first-time users of BNPL. PayPal is currently finalizing an agreement with investment firm KKR, aiming to establish a multi-year European BNPL arrangement. Under this arrangement, KKR will acquire BNPL loans worth a maximum of €40 billion from European customers. Notably, PayPal will retain its role in underwriting and managing these loans. This deal is anticipated to generate cash flow for PayPal.

With PayPal and Block both leaning heavily on the BNPL sector, PayNXT360 expects more fintech firms to adopt a similar strategy to boost their gross merchandise value and business growth amid uncertain market conditions. This will subsequently drive the competitive landscape of the crowded BNPL industry.

Based on the estimates of PayNXT360, the global BNPL market is projected to grow at a compound annual growth rate (CAGR) of 12.7% from 2023 to 2028. During the period, the gross merchandise value will increase from US$433.7 billion in 2022 to reach US$ 960.6 billion by 2028. This shows that there is plenty of headroom for growth in the space.

To know more and gain a deeper understanding of the global buy now pay later industry, click here.