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Special Edition: The Changing BNPL Landscape

By Cole Gottlieb

July 28, 2022

Happy Thursday everyone! We come to you today with a special edition of the newsletter.

Due to the changing times and BNPL space, we wanted to provide an update to our Q3 BNPL Distribution Models framework, summarize the latest BNPL models, cover new entrants to the space, and examine emerging risks.

As we face a potential recession, BNPL has continued to remain highly relevant, despite markets punishing company valuations. Notably, we have seen Klarna raise funds at a valuation 85% lower than its previous round. Additionally, Affirm’s market cap remains over 85% below its 2021 peak, and PayPal is sitting more than 75% lower than its 2021 peak. However, the installment loan product continues to draw interest, with major players entering or revamping their offerings. Just in the past couple months, tech giant Apple announced plans to enter the space, and Klarna launched its hotly anticipated Klarna Card. Large players continue to gain traction, with Citi reporting 21% growth in its installment business from the first quarter of the year.

Source: PeerIQ

Merchant Agnostic

Recently, we have seen a greater emergence of Merchant Agnostic BNPL products that allow consumers to “BNPL anywhere”, potentially threatening incumbents that have grown and achieved success through merchant partnerships.

Merchant Agnostic lenders differ from Merchant Integrated lenders as they do not charge a merchant fee, which often is charged to the merchant as a percentage of the transaction. Instead, they rely on interchange, interest charged to consumers, monthly fees, and/or use the product as a customer experience and retention tool.

Merchant Agnostic - POS

Apple’s announced Apple Pay Later and Klarna’s newly released Klarna Card provide tools for consumers who wish to turn purchases into BNPL at the POS.

Many view Apple’s move into the space as a major threat to incumbent players, like Affirm and Afterpay, as Apple Pay Later will not require merchant partnerships and will be immediately available to the millions of Americans who own iPhones. Instead of partnering with merchants, there is speculation that Apple will profit through an expected growth in Apple Pay (where it collects 0.15% of every payment), and from its potential issuance of a virtual card for the Apple Pay Later transactions (where it would collect a larger interchange fee).

While Apple Pay leads the U.S. mobile wallet market, mobile wallets only represented 11% of POS payments in 2021. In comparison, consumers used credit cards for 40% of payments and debit cards for 30% of payments. Further, a 2021 PYMNTS survey found that only 6.1% of consumers with Apple Pay activated on their iPhones use it in-store to pay for purchases. For in-store purchases, tap to pay cards can be even more seamless than Apple Pay, which requires thumbprint authentication or Face ID. However, this added layer of security could decrease fraud, potentially reducing costs for Apple.

With Apple’s place as the leading mobile device option for upper-income consumers (defined as $150k+), it may be unclear why this demographic would be particularly drawn to the Apple Pay Later option. If, like many upper income consumers, they are credit card transactors and do not carry a balance, there may not be the incentive to finance a purchase. Apple Pay Later, as announced, would only be able to be linked to a debit or bank account, making users forego credit card rewards points for a short-term installment plan. This may provide a headwind to adoption of Apple Pay Later, and a potential adverse selection of less creditworthy users. On the other hand, Apple Pay Later could serve as an “on ramp” to the Apple Card for younger or consumers with thin credit files. Consumers could start to use BNPL and be cross-sold to the Apple Card once they build a history of on-time payments. At the same time, Apple’s desire to vertically integrate and reduce dependence on external partners could provide a disincentive to channel users towards the Apple Card.

Image: Flurry

Klarna’s newly released Klarna Card appeals to habitual BNPL users, automatically converting charges into pay-in-4 plans. U.S. consumers can currently join a waitlist to be invited for the card. The card has over 1Mn waitlisted customers, giving Klarna at least a few months lead over Apple to gain traction. Similar to Apple Pay Later, the card can be used at any store or online purchase without interest. However, the Klarna Card’s economic model differs. Klarna plans to charge (after a free first year) $3.99 a month to cardholders, in return for the automatic conversion of purchases to pay-in-4 plans. Consumers who use the Klarna Card will likely be more frequent users, as they have to justify paying the monthly fee to gain the utility of the short-term installment product.

Merchant Agnostic - Post-Sale

Post-Sale options are card-based options that let consumers translate purchases into pay-in-4 or installment loans. This is a multi-step process where consumers do not select a BNPL option at the POS, but must elect to turn charges into installment loans.

Post-Sale BNPL providers fall broadly into two categories: incumbent card franchises and new fintech entrants. Incumbent card franchises such as Citi, Chase and Amex allow users to pay for purchases over time, generally in monthly installments. These models charge consumers interest or fees to consumers that are variable based on the amount of purchase, billing cycles and other factors. Card issuers may offer monthly installment options in order to increase user spend, as credit card users could be inclined to spend more at a lower APR than what would be charged for their revolver. Adding the product can enhance the user experience and act as a retention tool preempting credit card consolidations.

Fintech players are also launching new cards that give consumers the option to translate purchases into loan products. Affirm’s Debit+ card is a decoupled debit card, meaning that it is linked to consumers’ bank accounts, rather than tied to any particular financial institution. The card will allow users to break purchases into four installments without fees or interest. Unlike the Klarna Card, the Debit+ does not automatically convert charges into four interest-free payments, and requires consumers to go into a linked app (within 24 hours) to split a charge.

Upgrade offers a card that is a hybrid of a credit card and an installment loan product. It offers the ability for purchases on credit to be converted to installment loans at a fixed interest rate. In addition, users can tap into their credit limit as a personal loan and pay this back in equal monthly installments. One of the differences is this product is reported to credit bureaus as a line of credit (though it does not report the total credit limit) which can impact a user’s credit score, for better or worse.

Merchant Integrated BNPL

Merchant Integrated solutions currently dominate the American BNPL market. Merchant Integrated BNPL providers partner with merchants, charging a % fee, to enable merchants to offer BNPL at checkout. Merchants choose to partner because adding BNPL increases the likelihood of consumer conversion and the average ticket size.

While “BNPL anywhere” type products may encroach on Merchant Integrated BNPL providers’ consumer base, the overlap in type of consumer may not be as strong as anticipated. Users of Merchant Integrated BNPL solutions may use the financing for bigger ticket items, rather than habitually on everyday purchases. Additionally, users may be using these BNPL provider websites and apps as ecommerce venues, with Affirm reporting that 23% of its transactions initiated through its mobile app and website channels last quarter. Merchant Integrated BNPL providers can lean into the fact that they directly drive traffic to merchants not just from their offerings, but due to their presence as an ecommerce venue.


Our Infrastructure category covers BNPL providers that generally serve the merchant and lender side of the loans.

Companies like Mastercard and Visa enable bank card issuers to issue installment loans against existing credit lines at the POS.

For example, Apple Pay Later has partnered with Mastercard and will use their white label BNPL product called Installments. Mastercard has partnered issuers like Deserve, i2c, Lithic, Sutton Bank, and more on their BNPL program.

Visa has partnered with CIBC, Commerce Bank, Desjardins Group (Desjardins), i2c, ScotiaBank, Versapay and more on its Installments Solutions product.

Similarly, Synchrony just teamed up with Fiserv on its SetPay pay-in-4 product, which will allow merchants, including small businesses, to offer BNPL to consumers.

Another category of BNPL infrastructure companies provide white label BNPL solutions for merchants and/or lenders to customize and utilize. Jifiti and Certegy allow both lenders/banks and/or merchants to offer their own bespoke branded BNPL products. This service enables companies to center the product and marketing around their own brand, not a third-party BNPL provider.

Emerging Risks - Credit Quality

With inflation squeezing consumer pocketbooks, we may see an increase in credit losses among consumers. BNPL users are thought to have thinner or lower credit scores on average. An Equifax study showed a high concentration of BNPL borrowers with subprime credit scores. 91% of BNPL consumers in their study had a credit score under 670 and 48% had a credit score below 579.

A former Klarna executive is rumored to have estimated that the average BNPL user likely had a credit score around the 500 mark. While credit has not yet turned over, cracks could emerge as BNPL companies chase growth. Klarna saw its credit losses outpace commission income growth in the back half of 2021. Credit losses grew 109% from the prior year period, while commission income only grew 43%. Tighter consumer budgets could cause losses to rise, as inflation outpaces wage growth.


BNPL has begun to attract increased regulatory scrutiny. Financial regulators in other countries, notably Australia and the U.K., have already begun to take steps to strengthen oversight of the products. In the U.S., the CFPB began a market monitoring inquiry into the sector late last year. The results of the exercise could form the foundation for additional oversight of the sector or BNPL-specific rulemaking from the consumer agency. BNPL has also attracted attention in Congress, with the topic coming up in various hearings. Areas of concern included how BNPL is underwritten and whether or not BNPL providers furnish data to credit bureaus. All three major bureaus have announced plans to support the furnish of BNPL tradelines, though their approaches differ. While a move towards more traditional credit checks could introduce additional friction into the UX or reduce approval rates, it should also help BNPL providers better underwrite credit risk.