As buy-now-pay-later grows, will the likes of Afterpay, Zip and Humm displace credit cards?

When corporate regulator ASIC published its review of buy-now-pay-later (BNPL) last November it found one-in-six customers in the $903 million industry had either become overdrawn, experienced delayed bill payments or had borrowed money to meet their obligations.

The findings cast a cloud over the fast-growing sector, fuelling concern that regulatory scrutiny might slow the roll of BNPL market darlings like Afterpay or Zip by forcing costly adjustments to their core business models.

Seven months and a Senate inquiry later, the horizons for BNPL look relatively clear. Regulators opted for an industry-supported extension of ASIC product intervention powers over implementing tougher consumer credit laws, opening the door for an all-out assault on the legacy credit-card market.

On the back of this newfound certainty, the BNPL market is taking its next steps, maturing from the cradle of savvy millennials with big fashion bills to a much broader, more affluent demographic: homeowners.

ASX-listed Flexi Group yesterday announced the addition of a sleuth of prominent brands to its own BNPL offer, including homewares and electronics brands such as Temple & Webster, Bing Lee, Betta Electrical, Williams Sonoma and Pottery Barn.

Credit cards in decline

It’s a significant moment for the provider, which recently relaunched its BNPL offer, renaming from Oxipay to Humm in a bid to reposition itself against the likes of Afterpay and Zip as the entire market broadens.

But what does it say about where BNPL as an industry is headed? FlexiGroup chief executive Rebecca James predicts a future where the service becomes the “payment vehicle of choice” for Australians.

“Buy-now-pay-later is a form of finance Australians are gravitating towards,” James tells SmartCompany.

“Credit cards are in decline.”

Those in the banking industry probably have a less pessimistic outlook for traditional credit, but the numbers are interesting.

Last November, the number of Australians with credit-card accounts suffered its biggest annual year-on-year decline in 13 years, while separate research by Illion has found younger consumers are gravitating towards BNPL — although 57% of under-30s still have credit cards.

In contrast, ASIC’s landmark report into BNPL found the sector has grown in excess of 250% in just a few years, with transactions increasing from about 50,000 in 2016 to 1.9 million by June last year.

Afterpay remains the clear market leader among BNPL providers, with more than 4.2 million users compared to more than 1.3 million at Zip and Humm.

New segments emerge

However, while most of Afterpay’s Australian customers are younger than 34 and its average order value is about $150,  James says 70% of Humm’s customers are in the 35-55 age bracket, with an average transaction value of $3,760 for “big things” and $400 for “little things”.

There are clearly distinct customer segments here — something which has never been lost on Afterpay rival Zip, which like Humm has offered a BNPL option which caps out at $30,000 through its Zip Money business.

Corporate advisor and SBO Financial founder Jason Andrew, who has researched the emerging BNPL market in detail, expects providers to increasingly compete on brand and marketing now that regulators have cleared the field.

“What might have been seen as a risky venture has now been de-risked,” he tells SmartCompany.

“Ultimately, in terms of winning the customer, it comes down to the typical differentiator … branding and marketing.”

Andrew says the next big challenge for BNPL will be whether it can deliver on its brand promise and displace credit cards.

“If the narrative holds true, and if consumers believe its better than traditional forms of credit, I could certainly see it replacing credit cards,” he says.

Where to next?

James is already thinking about where the market will go next, arguing BNPL has become a payment option like any other and will eventually transition to our phones.

“It will be just like today, but the way those transactions will be facilitated will be primarily by a digital wallet on your mobile phone,” she says.

For retailers, particularly those in categories which cater to higher purchase values, the growing adoption of BNPL among customers is also being increasingly viewed through the lens of challenging traditional credit.

The Party People chief executive Dean Salakas says 15-17% of his sales are coming through Zip these days.

“Customers are asking for it, about it — there’s a lot of conversations,” Salakas tells SmartCompany.

Salakas says offering customers as much choice in payment options as possible is good for business. However, recognising the expense of using platforms such as Afterpay, which makes most of its money from retailers, he’s about to launch a white-labelled BNPL service with Lime Pay.

A newer entrant to the market, Lime Pay has been quietly scouring around the industry in recent months pitching retailers a lower-fee white-labelled BNPL option that integrates into their own websites, without any third-party branding.

“If we’re putting our brand to it, customers will trust it,” Salakas says.

Costs a concern for retailers

Similarly to James, Salakas predicts a future where BNPL is understood as a service in its own right, separate from the brand recognition of Afterpay and Zip.

But he worries about the sustainability of the growing reliance on third-party platforms in the retail industry, particularly those which make their money charging retailers.

“You can have the Rolls-Royce of everything on your website, but it’s not sustainable,” he says.

Andrew agrees fees present a challenge for retailers, noting the rates Afterpay offers are typically more expensive than traditional merchant fees for credit card transactions.

However, he says retailers are already passing on the increased costs.

“It certainly does erode margin, but that assumes retailers won’t bump up prices.”