Thesis 1/6: The rise in interest rates is slowing down the BNPL-Boom

3 Min
Christian C. Waldheim


Not so long ago “Buy now, pay later” fintechs were celebrated for revolutionizing the way people paid for goods. The flexibility and simplicity of BNPL has made it possible for consumers to manage their expenses in a much more efficient way. Recently, the excitement appears to have plunged. An unstable economic environment and rising interest rates seem to be staining the rose colored glasses. Big BNPL players such as Affirm and Afterpay have recently struggled with late payments and associated losses. Klarna had to let go 10% of their employees and investors are slowly withdrawing, taking a defensive stance. The BNPL trend gives the impression of being caught in a downward spiral. Where once consumers were enthusiastically spending large amounts of money on goods, contributing to the BNPL boom, it remains to be seen how BNPL players deal with a noticeable economic slowdown, decreased spending and an overall feeling of uncertainty.

But is the situation just as hopeless as it seems? One thing is certain: inflation is high, the price of commodities and services is rising and life is getting more expensive. Consumers’ need for more control over their spending will increase. Let’s take a closer look:

The current Harmonized Index of Consumer Prices (HICP), used by the ECB to measure consumer prices inflation, is currently at the highest level since its inception in 1997. In fact, it is currently 2 times higher than the previous maximum achieved in July 2008. 

With wages being indexed slower and at a lower rate than inflation, the adjusted gross disposable income of European households, which has steadily increased by 60% since 2000, will soon have peaked and possibly even start decreasing. In order to continue the current purchasing trend and maintain the standard of living, consumers will have to rely more on borrowing money than before. Unless the trend of rapidly growing HICP slows down, even higher interest rates will make it more attractive to buy now and pay back later than save now and buy later, losing some money on inflation in the process. Trapped between high inflation, low deposit rates and diving stocks, many consumers will find it increasingly difficult to postpone the purchases they have been planning.

Therefore, the BNPL industry will generally not be affected by the current situation as BNPL products enable consumers to manage their liquidity in a smart way. The numbers speak volumes: According to a recent study by Juniper Research, spending via buy now pay later services will reach $995 billion in 2026, from $266 billion in 2021. This 274% growth will be due to the consumers’ wish to spread costs, especially in the wake of the economic instability and the pandemic which has put significant pressure on consumer finances.

The latest industry entrant, Apple Pay Later, proves just how relevant the product is: Apple, the most valuable company in the world, will enter the “Buy now, pay later” market this fall. The integration of the Apple Pay payment service into numerous apps and online shops will enable consumers to spread the cost of an Apple Pay purchase in four equal installments over six weeks. And it is not the only giant player who choses to benefit from the market, as Amazon proves.

We expect the BNPL check-out shares to continue to grow amidst the current development. This is being confirmed by numerous retailers which can corroborate e-commerce check-out shares of 30% to 50%, and in individual cases even up to 80%. It is now important for banks to exploit their many advantages over fintechs and enter the BNPL market, as they have the necessary liquidity, the trust and the relationship with retailers, being their principal bank. Irrespective of the interest rate level, there is a trend towards making payments more flexible, away from one-offs and towards splitting them up. Consumers will be willing to pay interest for it in the future and it doesn’t always have to be zero percent financing.