How crypto and buy now, pay later services may fit together

Ask any venture capitalist what the two hottest trends in fintech are today and the answer is likely to be "buy now, pay later" (BNPL) and crypto. 

But what happens when you mix the two? A number of firms are trying it. 

As payment giant and BNPL late adopter PayPal deepens its ties to crypto by exploring a stablecoin, key BNPL players Affirm, Afterpay and Zip are readying cryptocurrency offerings for 2022. The planned services range from crypto investments to bitcoin payments and cashback and even stablecoins. 

For the uninitiated, BNPL is a checkout credit option where the user is able to delay payment or split payments interest-free. Unlike other credit options, the merchant does not have to handle repayments. Instead, the lender takes on the customer’s risk, paying the merchant in full in exchange for a fee. BNPL’s biggest success story thus far, Klarna, claims to be able to boost average order value by 41%. 

But slicing up the payment pie into digestible chunks has come at a price: profitability. None of the aforementioned BNPL firms is profitable, which helps explain why these companies are now looking to crypto. 

“The BNPL business model is still figuring out its path to profitability,” says Charlie Boles, senior associate at Speedinvest, a venture capital firm. “And crypto trading has proven to be very profitable.” 

The BNPL to super-app pipeline 

During the past few years, BNPL has become a competitive market. Take the US market for example. In 2018, Affirm dominated the sector, accounting for 78% of BNPL app downloads. 

Now, Affirm makes up a measly 16% of the American market, with Klarna and Afterpay taking up most of the share. Affirm’s user base pales in comparison to its competitors — only 7 million compared to Klarna’s 90 million and Afterpay’s 60 million. 

To stay competitive, BNPL fintechs like Affirm need to be prepared for a crypto future in much the same way that banks have started providing customers with crypto custody options," argues Martha Bennett, VP and principal analyst at Forrester. “(Affirm) may well end up partnering with a [crypto infrastructure platform] like Paxos,” says Bennett.

An Affirm spokesperson told The Block that the company plans to create its own super-app, with its crypto services currently in pilot mode. “Consumers will be able to buy and sell crypto directly from their Affirm savings account, driving the value of their dollars even further with what has been a long-term appreciating asset class,” they said.  

The crypto generation 

For public companies like Affirm, while a source of fresh revenue would be especially welcome, it’s a revenue stream that is especially vulnerable to fluctuations in the market — as Jack Dorsey’s Block (formerly Square) found out late last year. 

In 2021, the bitcoin gross profit margins of CashApp, the mobile payments service developed by Block, decreased from $55 million in Q2 to $42 million in Q3. The app currently allows its users to buy, sell and send BTC. 

But crypto expansion in the BNPL space isn’t simply about making money: some see it as a customer acquisition play.

“This definitely isn't about profit,” says Forrester’s Bennett. “Cashapp has only made about 2% profit on Bitcoin so it’s likely the reason these companies got into crypto is actually because they think it will get them new customers by reaching a younger demographic.”

There is considerable demographic convergence among users of both BNPL and crypto. In a poll conducted by The Ascent in March 2021, on average over 60% of American 18 to 34 year-olds have used a BNPL service. Similarly, a Statista poll showed that in 2020 over 50% of this age group said they were likely to purchase bitcoin in the next five years. 

Australian BNPL Zip has been upfront about targeting Gen Z and millennial consumers. In its September investor day presentation, the company said that its upcoming product roadmap will cater to the “millenial financial diet”. 

“I think it's less about people who are already interested in crypto using BNPL firms — there are great solutions for them that already exist. It's more about convincing,” says Speedinvest’s Boles.“So if you’re interested in crypto and a BNPL is already a trusted partner in your life, [a BNPL] introducing you to crypto may make you more likely to actually take your first steps.” 

Of all BNPL firms, Zip has offered the most clarity about its crypto ambitions. Not only will it enable its customers to buy, sell and hold crypto, it also floated the idea of its own digital native wallet during an investor presentation in September. Zip’s US merchants will be able to accept bitcoin as payment for goods and services this year. 

The company will also offer a streamlined crypto onboarding service by allowing users to convert cash rewards into bitcoin on their purchases through its forthcoming “BitcoinBack” feature. 

Blockchain payment rails

There are also signs that at least one BNPL firm is also exploring using crypto as a payment rail.

Along with confirming that crypto will play a pivotal role in its merger with Block, Afterpay has lobbied the Australian Senate for a privately-backed AUD stablecoin. It cited the removal of card network fees as beneficial for merchants.

In Australia, merchants are charged on average 0.9% for transactions occurring over Visa and Mastercard credit card networks. 

“It is not hard to imagine a world [with] a privately issued stablecoin that is pegged to the Australian dollar,” said Afterpay VP for public policy and communications Damian Kassabgi. “One that passes from consumer-to-consumer or consumer-to-merchant with very little friction, where the traditional payment rails are not used, where interchange fees are close to non-existent, and where there is no commercial bank as an intermediary.”

Forrester’s Bennett agrees that stablecoins transactions could settle far quicker than those done in fiat and reduce dependency on legacy payments networks offered by Mastercard and Visa. “As long as you can do it within the regulatory framework, having that kind of parallel payment network makes sense,” she says. 

Boles highlights the potential cost savings. “BNPL as a payment method can be relatively expensive and can run merchants anywhere from 3 to 7% compared to 3% for cards,” he says. “Using a stablecoin to take payments off the Visa and Mastercard network will cut costs for BNPL firms.”

Boles also suggests that blockchain-based BNPL platforms may be on the horizon.

Loans on today’s decentralized platforms like Aave currently require borrowers to hold more than the requested amount in collateral — called "overcollateralization" — offering lenders protection against sudden swings in the prices of the tokens they’re lending out. BPNL services, on the other hand, provide undercollateralized loans. 

“There are a number of protocols out there that are trying to figure out undercollateralized loans in DeFi,” says Boles. “We'll definitely see a BNPL crypto firm but it may take some time.”