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Inside the ‘Buy Now, Pay Later’ Business Model

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Allowing customers to delay payments for immediate gratification is nothing new. Companies have extended credit to their clients for this purpose since commerce began. The ability to make installment payments over time allows consumers to afford more now than would otherwise be possible. And for businesses, it increases sales volumes and revenues over time. While buy now, pay later companies are therefore not new, those targeting online e-commerce have appeared more recently. And this is one industry where competition is clearly heating up.

As e-commerce has grown over the past year, buy now, pay later companies recognized a shift was needed. (Read more about the state of e-commerce in this Bold story.) Rather than traditional programs, customers needed to be given the option for installment payments at e-checkout. Thus, many startups formed that partnered with retailers to extend such options to their customers. But as the industry is evolving, it’s clear that different approaches using such a model may be needed. And at the same time, it’s also evident many industries besides retail could benefit from these services as well.

“The future of Buy Now, Pay Later usage suggests an even more nuanced picture, as the retention rates reported by some companies are astonishingly high. For example, Afterpay reported 91% of sales during the first quarter of 2021 were from repeat customers.” – Jared Drieling, Senior Director of Market Intelligence and Insights at TSG

An Overview of Current Buy Now, Pay Later Companies

There are literally dozens of buy now, pay later companies on the market today with some better recognized than others. Those dealing in e-commerce primarily include Affirm and Klarna among others. In essence, each of these companies work with a variety of retailers to offer customers the option of making installment payments. For each retailer, these companies integrate their offerings into the online checkout process. And in doing so, retailers enjoy increased conversions. According to industry reports, purchases tend to be roughly 27 percent higher when such installment payments are available.

From a traditional sense, buy now, pay later companies earn revenues from financing fees and late fees on installment payments. In general, these businesses operate like any bank, lending money to customers for repayment later. But unlike banks, as well as credit cards, specific regulatory oversights have not yet been well defined. Many countries, including the U.S. and the U.K., are currently reassessing how this sector should be monitored. In the meantime, however, these companies are doing quite well as customers increasingly utilize their services. Surveys have now shown that nearly 40 percent of all consumers have tried these buy now, pay later companies. And on average, they tend to spend about $300 more as a result.

“We go to [customers] and say, pay over time, and use us anywhere you like. We built this technology plugging them in on one side and plugging retailers on the other. We can now build up any way to pay and can use it anywhere they like without being restricted by retailers.” – Philip Belamant, CEO and Founder of Zilch

New Companies Taking a Different Approach

Existing buy now, pay later companies certainly offer retailers increased opportunities to attract clients. But the standard approach tends to require integration of the company’s services into the retailer’s platform. Because of this, such companies are dependent on their relationship and agreement with retailers. Understanding this, some companies are considering a different approach that allows them to connect directly with customers instead of retailers. Specifically, Zilch now offers customers the option of installment payments by way of an agreement with Mastercard. As a result, Zilch can interact with customers on any site offering Mastercard payments without ever dealing with the seller.


An app facilitating the Buy Now Pay Later business model
The ‘Buy Now, Pay Later’ business model is having a renaissance–and it’s being fueled by innovative technology.

Zilch is unique in other ways as well. Because Zilch operates through a Mastercard platform, it collects credit card fees from the retailer. It also doesn’t charge customers late fees for missed payments but instead simply freezes their account. Zilch also could potentially be added to a digital wallet for touchless payments in brick-and-mortar stores. Simply by taking a different approach Zilch has made installment payments more accessible to customers in many markets. Likewise, it is also one of the first buy now, pay later companies to become authorized as a consumer credit provider. All of these features have fueled the company with major funding, resulting in a current valuation of $500 million.

“In five years, our vision is to be carrier agnostic. So, no matter where you are in the healthcare system, you can use Walnut to break up your medical bill into a monthly plan.” – Roshan Patel, Cofounder of Walnut

Expanding Installment Payments Beyond Retail

For the most part, buy now, pay later companies have primarily been attracted to retail sectors. But this too is quickly changing. Lately, several such companies are exploring opportunities in service sectors as well. By offering installment payments for a variety of services, customer access also increases in addition to use. For example, Affirm is one of the buy now, pay later companies offering options within the travel industry. Sunbit is another one that gives customers options for installment payments for car dealership services. These types of services are ideal for buy now, pay later companies because they tend to involve higher consumer costs.

Perhaps, one of the last industries to consider buy now, pay later companies is healthcare. But that too is evolving. Walnut is one such company that hopes to provide these services throughout the healthcare sector to patients. Currently, it offers patients to option for installment payments on a variety of elective procedures. These include things like cosmetic surgery, dentistry, and dermatology. But in time, Walnut hopes to provide similar options for emergency room patients and service providers in the community. Such offerings could go a long way in reducing financial stress among those with rising healthcare costs.

Favorable Projections for the Future

Given the rise in e-commerce, most analysts expect buy now, pay later companies to thrive in the coming years. While regulatory changes could affect this growth, they’re more likely to simply impose consumer protections. As a result, many project that these types of installment payments will account for 10 percent of purchases by 2024. Just as subscription services have recently boomed, it’s therefore likely buy now, pay later offerings will as well. (Read how subscription-based services are the future in this Bold story.)


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