Jedi or Empire | Buy Now Pay Later competitive dynamics

We’ve been taking a journey through the BNPL space, we looked at the history, the product, and the go-to-market. I’d like to close the series with a view on the competition and where I think the industry is headed. Warning speculative discussions and opinions ahead.

This space has EXPLODED, to say the least. We’ve been taking our journey with the main players Klarna, Afterpay and Affirm, but there are so many more players in this space – to list a few – Sezzle, Quadpay, SplitIt, ZeBit, Four etc. All these players have the same product value proposition. For merchants it’s increase your sales and for consumers it’s the ability to split the purchase over time and get deals. I consider these players to be secondary players in the market.

The big kahunas in the room are the ones to watch out for. I’m talking about PayPal and Visa. Paypal is the 300lb gorilla in the room. It launched its pay in 4 product in the US. Paypal has enormous distribution and reach with both consumers and merchants (346M+ active consumers, 22M+ merchants). For global businesses its a no-brainer as adopting the PayPal product gives them instant global coverage.

If Paypal is a gorilla then VISA and MasterCard are a herd of thundering elephants. Their monopoly lets just call it for what it is, controls pretty much the entire electronic payment market in developed and most developing economies. Both of them have launched products that offer the ability for issuers to offer BNPL options at the network level. On an initial reading it seems that VISA’s product offers the ability to do this both on debit and credit card rails. A huge part of the growth of BNPL was driven by a version of folks to use credit cards i.e debit volume. It’s pretty smart of VISA to offer this on both rails.

So what does this mean for the industry?

The overarching trend in the last few years has been the consolidation of market power in the hands of a few. The same trend will play out in BNPL. The market will probably stay and split with the companies that have already achieved scale and brand recognition. Phase 1 will be consolidation or die out of the secondary players. Affirm, Klarna, AfterPay as the main players will split the market share.

The sub-trend in financial services has been the rise of the incumbents. Even though PayPal was built on the internet they are now an incumbent :). The incumbents still have massive distribution! With VISA adding BNPL as a feature to its network layer, the entire incumbent ecosystem of issuing banks and payment processing companies can offer what affirm does as a company, as a feature. I can see a future where the BNPL product is a commodity and the only differentiation is the price charged to the merchant and the underwriting risk appetite/skill of the bank.

If history serves as a guide, the incumbents will acquire the large players or use their monopoly network and distribution power to ruthlessly win. Prices for merchants will not come down and eventually fees for consumers will go up. In fintech, the incumbent always strikes back, and unfortunately, it’s game over for the Jedi.

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