The Bowery Capital team sat down with Jillian Williams, Principal at Cowboy Ventures, to discuss the future of Buy Now Pay Later (BNPL). At Cowboy, Jillian focuses on the intersection of financial technologies and all other sectors. Prior to Cowboy, Jillian was at Anthemis, a fintech focused firm, and Barclays in the financial institutions group.
What are your thoughts on existing players in the BNPL market?
We have seen amazing growth with the name brand BNPL players. And this was further accelerated throughout COVID given consumers having more time and cash due to government intervention and stay-at-home orders. As consumers paid off other types of debt, such as credit cards, at unprecedented rates, the usage of BNPL ballooned. This highlights the view, especially from the younger generations, of BNPL as an alternative to debt, especially credit cards. Not acknowledging the BNPL is a form of debt is a concern that I’ve had for some time, and believe that the risks associated are becoming more visible. I do not think that this will lower the demand from the consumer side, but the structure and consumer protections may need to change. Especially pending a potential recession that could have an impact on consumers and their behavior, the underwriting process may have to adjust. This will be interesting for the overall debt market, but particularly in BNPL.
Despite having some highly funded businesses in the space, it is still early days. Who do you think is in the lead and why?
Based on anecdotal evidence, it seems like Klarna and Affirm are winning right now. The measurement of success is how many checkout pages a BNPL company can land on as that drives the volume. Right now, the brand is not necessarily the driving factor to success as these businesses are not direct to consumers. As they make that shift, which a number of them are, the brand awareness will be increasingly important. Klarna is probably the biggest overall, but in the states, the leader in checkouts is probably Affirm.
As we leave COVID, we have seen a drop in savings rates and an increase in credit card applications, etc. What do you think BNPL is showing us about consumer behavior?
One of the theses when BNPL was first introduced is that consumers do not want credit cards because they are shunning debt. I don’t really agree with that. Gen Z really is still rather young, with the oldest being 25. Credit cards used to be a lot easier to access but due to the CARD Act, in which credit companies were not allowed to advertising on campus and issuing cards to anybody under the age of 21. This means that while Gen Z may not want to accumulate tons of debt like older generations, they also have not had to chance to even access it. Thinking about BNPL as something different from debt is also short-sighted. Up until recently when BNPL was not showing up on your credit score, using BNPL payment plans could only hurt scores. If you paid on time, nothing would happen towards your credit score, but if a payment was missed, BNPL companies could report it. There has been recent change here and three credit bureaus have finally said that they are going to report BNPL payments, on-time or late, which is good from an overall risk perspective. The lack of reporting also does not just impact BNPL companies but also other lenders, having a ripple effect through the market by under reporting risk.
BNPL underwriting models were extremely effective during the pandemic because more people had access to disposable income and were able to pay off their BNPL debt, but now we are already starting to see default rates go up. Collections from BNPL companies are starting to go up. I think the way we think about underwriting must change.
Do we expect default rates to rise?
One of my biggest questions is, for consumers, where does BNPL debt fall in the priority stack with other debt. Will they pay off their credit card first?
What learnings from consumer buying behavior may translate to B2B?
I think it very much depends on two things. BNPL for consumers are essentially a rebranding of layaway and BNPL for B2Bs are a rebrand of invoice financing and factoring. For B2B, payments in general have not been digitized right now (a shocking amount still handle payments through checks) across the board. Typically only large companies like Walmart get access to factoring or net payment. Larger players can currently take 90 days to pay off debt while mom & pop stores have at most 30 days. Access to BNPL at the point of sale is becoming more relevant, and there are several BNPL companies starting to look at being on B2B checkout pages. Being able to digitize the payment process, let alone adding payments, is massive. This is where there is a huge opportunity on the data side. Underwriting SMBs can be extremely tough, which is why I think most companies have avoided it to date. Once someone figures out how to underwrite SMBs, this could be even bigger than the consumer side. I really like enterprise SaaS companies that wedge in being a workflow tool and then become the finance piece. Once you are integrated into the workflow, the booking and payments go through you. After you do all that, why not offer financing?
Is BNPL here to stay? If so, does regulation around business lending tighten?
I think BNPL is here to stay, and I think that there will be more regulation coming down. We are already seeing regulation in Europe, where BNPL has been around a little longer. US regulation is in the early days, but for more serious regulation in the states, historically we have seen that there needs to be an extreme event.
Fraud has become a hot topic in BNPL as of late. Why is this in your opinion? Will the Affirms of the world be the best to solve it or do you anticipate a wave of BNPL fraud specific businesses coming?
There are many different types of fraud in BNPL. The types of fraud that I was most surprised to see were consumers creating their own stores, ‘buying products’ from themselves, using BNPL to get paid and then saying that they never received the product they ordered. This is the biggest fraud BNPL companies are trying to focus on. Fraud across fintech has become more complex and concerning. We are going to see a big wave and increase in fraud protection companies to address these security issues. I think the BNPL companies will outsource their security to independent companies.
At the simplest level, BNPL fraud is not very different from marketplace lending fraud mixed with payment card fraud. Why have BNPL companies not adopted methods successful in other areas for their security? Or have they tried, and these solutions are ineffective in this space?
Know Your Business is a lot harder than Know Your Customer. There are a lot of startups that can verify if someone is real. Doing the same for KYB is a lot harder because it is far more manual – going through documents of incorporation for different states that are not standardized, etc. Shopify has enabled all these businesses to enter the market and grow extremely quickly. Trying to keep up and verify these has been really difficult and I think that BNPL companies are dealing with a beast that hasn’t been solved yet.
How do BNPL companies stay a step ahead of fraud and security threats? Is this a problem where they must be reactionary?
Companies need to make sure that all compliance is dynamic and not static, which is hard. The point of cyber criminals is that they are two steps ahead and companies are trying to catch up. It is important to make sure that security platforms are always learning, iterating, and flagging anomalies. Having ongoing security will be crucial. Many startups, generally and not just in BNPL, have tried to balance compliance with consumer experience and often focus more on the latter. As cyber security compliance increases, it might become more cumbersome for onboarding and consumers must accept this in order to protect themselves.
What is the next iteration of BNPL? Does this model have staying power? What is next in the payments space?
There are two things that I think about. I am really interested in bringing this to life and not just online, and that will have to do with the launch of cards by some of these BNPL companies. On paper, they will look like credit cards, but these will be more of an installment card. The success of these cards will be driven by tying to company rewards. Secondly, I think BNPL is going to lead to some alternatives as well. There are companies that are anti BNPL – Save Now Buy Later, etc. We are going to see more alternatives for financial wellness.
If you liked “Buy Now Pay Later with Jillian Williams” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on trends across fintech in the coming weeks.