The Rise of Buy Now, Pay Later and Startup Competition

The expansion of the e-commerce sector is fueling a surge in startups focused on providing “buy-now-pay-later” (BNPL) solutions for online retailers. BNPL enables consumers to convert a single, upfront cost into a series of manageable, scheduled payments.

While specific conditions differ between providers, the BNPL landscape is characterized by significant activity. Recent funding rounds demonstrate this trend, including Scalapay’s $48 million raise in January, which the Italian company categorized as a seed round.

Furthermore, this year has witnessed France’s Alma securing $59.4 million in Series B funding to advance its BNPL offerings. Wisetack’s $19 million in aggregate funding was also recently reported, as the company aims to increase awareness of its services geared towards offline transactions, such as home renovations.

Analyzing Established BNPL Players

Unlike some emerging startup areas where assessing market viability is challenging due to a lack of public data from leading companies, the BNPL space offers concrete figures for analysis. To gain insight into the performance of newer companies vying to facilitate consumer financing, we will examine the earnings reports of Klarna, Afterpay, and Affirm.

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Klarna, headquartered in Sweden, is reportedly evaluating a direct listing, with its 2020 results publicly available. Afterpay, an Australian company, completed its initial public offering several years ago, and its H1 fiscal 2021 results have been published.

Affirm, a U.S.-based BNPL provider that recently went public through a direct listing, also offers publicly accessible financial data, specifically its fiscal Q2 2021 results (corresponding to calendar Q4).

A comparative analysis of these three companies’ performance will be conducted. Key insights will be extracted, and an assessment will be made regarding the implications of their results for BNPL startups globally.

BNPL Market Trends

Startups in the Buy Now, Pay Later (BNPL) sector are increasingly focusing on specialization to identify untapped market opportunities that larger companies haven't addressed. While companies like Affirm aim for widespread online integration, offering repayment options across numerous digital platforms, Wisetack adopts a different approach by partnering with a specific group of merchants.

This focused strategy could empower startups targeting niche markets to gain a deeper understanding of their financial performance and potentially increase their overall loan margins. It’s important to note that our analysis is based on current data and represents a directional assessment.

Let's begin with an examination of Klarna’s performance.

Klarna Performance Analysis

We will analyze Klarna’s Q3 2020 report and its subsequent Q4 report from the same year.

Klarna experienced substantial growth throughout 2020. The Q3 update revealed a 43 percent increase in gross merchandise volume (GMV) during the first nine months. The Q4 report indicated a full-year GMV growth of 46 percent, suggesting a strong final quarter.

In the U.S. market, Klarna reported reaching 10 million consumers by the end of Q3 and 11 million by the end of October. By January 2021, the company had facilitated transactions for 15 million U.S. consumers.

Klarna achieved record revenue in the full year, with operating income reaching nearly $1.1 billion from $46 billion in GMV. This represents the total value of goods sold through the Klarna financing system.

Klarna’s performance report highlights its expectations for the continued expansion of the BNPL model, including growth in real-world retail environments and increased partnerships. Continued expansion could drive further growth for the company.

Affirm’s Financial Results

Our focus today is on Affirm’s latest earnings report, which can be found here. The company’s fiscal Q2 2021 aligns with our calendar Q4 2020, so we will use calendar-based references moving forward.

Affirm reported results that exceeded expectations, but its stock price declined after its first public earnings release. This was due to investors anticipating even more significant positive results. Despite this, Affirm demonstrated solid growth, achieving a GMV of $2.1 billion in Q4 2020, a 55 percent increase compared to Q4 2019.

This GMV translated to revenues of $204.0 million, up 57 percent, an operating loss of $31.7 million (a 3% improvement), and a near-breakeven adjusted loss. Looking ahead, Affirm projects a GMV between $1.80 billion and $1.85 billion for the next quarter, revenues between $185 million and $190 million, and an adjusted operating loss of approximately $50 million.

It’s evident that Klarna is currently more profitable and significantly larger in terms of GMV than Affirm. One could potentially equate GMV to BNPL market share, representing the proportion of total volume handled by each company in a given period.

As MarketWatch observed, Affirm’s guidance was better than market expectations.

While Affirm doesn’t match Klarna’s size or profitability, it exhibits positive momentum and contributes to the overall growth of the BNPL market.

Afterpay’s Performance Overview

Afterpay recently released its H1 fiscal 2021 results, covering the six-month period ending in calendar 2020.

The results were notably strong. “Underlying sales,” or GMV, increased by 106 percent to AU$9.8 billion compared to the same period in the previous year (calendar Q3 and Q4 2019). Active customers grew by 80 percent to 13.1 million, active merchants increased by 73 percent, and the company improved its take rate to 2.2% from 2.1%.

These gains resulted in revenue (“income”) rising to AU$374.2 million, up 108 percent, and adjusted EBITDA reaching AU$47.9 million, a significant increase from the prior year. While traditional losses increased, the company is seeking additional capital. Overall, Afterpay continues to expand its reach and achieve growth through its strategic efforts.

Understanding the Implications

A substantial amount of analysis has likely been dedicated to dissecting recent earnings reports. However, the crucial question remains: what do these figures actually signify for startups operating within the current market landscape?

Key Takeaways for Startups

• The BNPL (Buy Now, Pay Later) model demonstrates strong appeal among global consumers. This suggests that regional companies in currently underserved areas have the potential to establish a significant presence. They might even secure funding from larger, internationally recognized BNPL providers. This also highlights the potential for substantial growth in BNPL transactions worldwide.
• Major BNPL companies are successfully broadening their market coverage. Startups can potentially counter this trend by concentrating on specialized niches. The emphasis on international expansion by companies like Klarna (Europe) and Afterpay (Australia) is noteworthy.
• The continued investment from private investors indicates confidence in the BNPL sector. Despite a favorable e-commerce climate, the performance of established BNPL companies is remarkable. Investors are clearly anticipating sufficient room for additional competitors to succeed.
• The relative size of Affirm compared to its competitors was particularly surprising.

The substantial consumer demand for the BNPL model is supported by considerable evidence, making it difficult to dismiss the recent investment activity.

I welcome any relevant news or updates regarding BNPL; a future summary may be compiled based on received information. Moving forward!