This headline in an AdAge opinion piece Monday kind of says it all. “Why Buy Now, Pay Later May Be One of the Biggest Retail Trends of 2021.” With all respect to the author, Mara Grenwald, we don’t think there is any “May Be” about it. Based on the valuations we are seeing from major players like Klarna, Afterpay, Affirm, and others, BNPL is clearly all the rage, and it will be for a while to come.
BNPL has a few different flavors. But the basic structure is to offer consumers the option to make a purchase then pay it off in four equal, scheduled installments. Some BNPL platforms charge interest and fees to the consumer. But the classic model is cost-free to the consumer (other than the cost of the actual goods), with the BNPL platform taking fees from the merchant. Just about any product can be sold via BNPL, but the model is associated most closely with apparel.
This list of companies offering this service is long and growing. And it’s a global phenomenon. Klarna is Swedish. Afterpay started in Australia and later moved to the U.S. There are more than a dozen BNPL operating in the Middle East alone. And one of the small handful of tech unicorns operating on the African continent is an Egyptian BNPL company called Fawry.
Klarna Valuation Up 3X in 6 Months
In recent weeks we’ve seen major moves from the big BNPL players. And we’ve seen Klarna, one of the OG players in the space along with Afterpay and Affirm, reach a $31 billion valuation, making it, according to Reuters, “Europe’s most valuable startup.” Klarna actually isn’t a brand new business. It launched in 2005. Every overnight success seems to take about 15 to 20 years. Probably a better description of Klarna is as Europe’s most valuable fintech, following only Stripe (which had a monster raise of its own recently).
So what’s under the hood in a business that is now supposedly worth $31 million?
The company, which is expected to go public either later this year or in 2022, offers its service through 250,000 retailers. And its app, according to Reuters, was consistently rated as one of the 10 most downloaded apps in the U.S. last year. The company reported that its loan volume grew 46% last year and its revenue climbed 40% to about $1 billion. Using some simple math that works out to revenues of $4,000 per merchant.
So roughly a 30X multiple on revenue seems pretty rich. But is it outlandish? Its rival Affirm went public via a direct listing in January. Today its market cap is 30X trailing twelve months revenue. So it seems that 30X is about what BNPL platforms are valued at these days. At least the ones that have proven they can scale. As a point of reference, we looked at another fintech that is not in the BNPL space. Point of sale pioneer Square is trading at roughly 11X revenue.
Will BNPL Play in Local?
While BNPL does seem to be more of a major merchant play, small businesses do participate. As long as they sell online. Afterpay features small businesses on their website.
The pandemic’s acceleration impact on eCommerce has been much discussed. And it has no doubt fueled BNPL’s recent popularity. However, even with massive acceleration, for BNPL to become a common feature for small retailers (and perhaps other local merchants), it needs to be incorporated in the physical point of sale. After all, it remains true that most local merchants do most of their selling in real life.
Also, local is as much about services as it is about retail. Imagine if BNPL were applied to things like interior paint jobs, new gutter installations, and other home services tasks? A company called Wisetack is doing just that. And it has raised $19 million to date, with Greylock as its lead investor over two rounds.
We learned a bit about what Wisetack is doing from a recent TechCrunch article. The company partners with vertical SaaS companies (for plumbers, etc.) to offer a flexible payments option to service provides using the SaaS platforms. According to TechCrunch, the company has “thousands” of customers and saw its loan volume rise 20X in 2020. The company makes its money from both sides of the equation. It changes loan processing fees and from consumers in the form of interest.
We expect, given how hot the BNPL sector is, to see more new companies to bring BNPL in more local verticals. We also wonder if as the pandemic eases and we settle into a new normal of in-person shopping (whatever that is) if we won’t see more of the major BNPL platforms extend their solutions to the physical point of sale.