Square, the digital payments giant co-founded by Twitter CEO Jack Dorsey, has this week acquired Australian fintech company Afterpay. The announcement has already made the rounds; plenty of outlets have proffered their own predictions of the effects this acquisition will have on the market. We at 3Sixty Insights see this going far beyond the market moment: we believe that buy-now-pay-later (BNPL) will continue to increase in relevance at the point of sale. By connecting AfterPay directly to purchase transactions, this acquisition has the potential to have a profound and lasting generational effect.
Pay and Payments in the Present
On-demand pay (ODP) has taken the HR world by storm since DailyPay was founded in 2015. There’s Dayforce Wallet (from Ceridian). Last month, global payroll provider CloudPay launched CloudPay Now, “as the first earned wage access solution that can be deployed globally,” according to the related press release. Even when ODP was new, many saw it as the future of pay, and thanks to the pandemic, both the value and estimation of ODP have skyrocketed. As Jeanniey Walden, Chief Innovation and Marketing Officer of DailyPay, remarked in a recent 3Sixty Insights HR Tech Chat, ODP’s popularity even pre-pandemic is due in large part to younger workers who have grown up in a digital world, accustomed to ordering anything they need with the click of a button. She adds, “Everything in life is an instant experience: when they need it, when they want it, it’s available to them, so why not pay? . . . And to access it, it should be very simple, like the click of a button. Just like getting a ride share.”
As these younger generations make up a larger and larger percentage of the work force, on-demand pay becomes more and more de rigueur. From an employer perspective, ODP is a benefit that has substantial value to the employee and yet can be offered at little cost to the company. Particularly for large organizations with a high number of lower-paid employees, ODP is great for retention—workers are not likely to leave for a company that can’t offer the same pay flexibility. And people are getting used to having access to their money as they earn it. For many employees now entering the work force, on-demand pay will be native, simply the baseline expectation, and not a novelty at all. It will be ingrained in their mindset.
The BNPL retail model is the flip side of the same coin. Together, ODP and BNPL represent an ethos that is taking root in current generations and will soon be entrenched in our society.
Why BNPL for This Day and Age?
BNPL itself is not new. Anyone who does any online shopping has seen this option offered at checkout, whether by Affirm, Klarna, PayPal, or one of the other roughly 18,000 fintech players.
Generationally speaking, the time is right for BNPL. The same demographics who expect access to the pay they’ve earned up to the minute also expect access to the things they need when they need them. Millennials and their successors, growing up in a time when credit cards were firmly established, are a far cry from the generations who meticulously balanced their checkbooks after each purchase. True, millennials tend to be debt-shy, scarred by having graduated into a recession, but Gen Z and its even younger siblings are a generally optimistic bunch. They’re living in an economy that rewards moon shots, and they can easily imagine that the value of their future employment will be significant enough to pay for their current needs. And the thing is, they’re probably right.
Imagine if your future earnings could be matched up with your present needs, whether for food or a new pair of skis, and a faceless, abstract institution would shoulder the cost of that convenience. That’s the BNPL proposition. As younger generations see it, banks and finance companies have essentially been stealing from them. Gone are the days of 5% interest on checking; meanwhile, punitive interest rates mean that living with credit card debt approximates indentured servitude. To top it all off, these credit card companies are also charging retailers for the privilege of accepting payment through their platforms! Onto this grim scene bursts BNPL, here to offer consumers installment payment plans without the burden of interest. And they’ve got perks for retailers, too. Credit cards have had a good run, but the model is ultimately unsustainable, and there’s about to be a reckoning.
The revolution that’s coming will be driven by the same BNPL companies that are enabling this shift. That’s for certain. The only question, at least up until now, has been, “Who will be the one to do it?”
The FinTech Fight
Some 18,000 fintech companies are currently vying for the coveted pioneer-savior role. There are only so many seats in this game of musical chairs, and as soon as somebody takes one, they will leave 17,999 others duking it out for an even more limited number of spots. With its recent acquisition by Square, already a major player at the point of sale, Afterpay has just successfully secured a seat.
Thanks to Square, Afterpay just overtook Klarna, Affirm, Paypal, and many, many others by leaps and bounds. Square was already widely acknowledged, accepted, and available. With this purchase, Jack Dorsey has simultaneously endorsed BNPL and made Afterpay the poster child of his determination that the model is worthy. Afterpay will soon be at every retailer that already offers Square, while its competitors are left in the dust, still fighting it out retailer by retailer. Eventually, one of these companies will establish a relationship with a Walmart or an Amazon and will win one of the few remaining seats. But until then, it’s looking like Afterpay will be the one to change the world.
Just How Different Is This, Anyway?
Consider this: how many sales depend on completing a transaction before the shopper loses interest? At a concert, for example, you either sell a t-shirt in the moment, or you lose the sale. Run out of sizes, let the line grow too long, mis-calculate the price your audience will be willing to pay, and you sacrifice a moment that will never return. Enabling transactions to happen quickly and painlessly will encourage impulse purchasing like nothing has before—not even credit cards, and that was the whole premise that convinced retailers to adopt them in the first place. With BNPL services, consumers don’t even have to sign a credit agreement. They get to pay in installments, retailers get to pocket all the money from the sale after a short wait, and everybody wins—except the credit card companies. Their 5% transaction fees go into the BNPL service’s pockets instead, and their hefty interest fees become a relic of the past, a horror story millennials will tell their kids about the bad old days when Grandpa drove all the way in to an office every day, rain or shine, just to be sure he had enough money to pay 125% of the cost of everything he needed.
That may be an exaggeration, but not by much. The world has tolerated credit cards only in the absence of any alternative. Retailers put up with the fees because the credit card option was so convenient for the customer and they risked losing sales if they refused to accept cards. But if someone comes along who can make shopping even more convenient for their customers, and if in fact this new model will win them more sales, there is simply no incentive to continue accepting credit cards. The reality is that a company that can step in and save a consumer from ultimately paying $100 in interest on a $100 sale has just doubled that consumer’s spending power. What retailer wouldn’t want that?
At the point of sale, there is a moment in which commerce either will happen or it won’t. If we’re talking about necessities like groceries or gasoline, we can pretty safely bet that sales not happening today will have to happen tomorrow. Needs cannot be put off forever. But what about wants? If we’re talking about souvenir t-shirts at a concert, giving someone who doesn’t have the extra cash right this second the power to buy that shirt now and pay for it later means that something can happen that wouldn’t have been possible otherwise. BNPL delivers the magic that credit cards failed to. This model is going to change the way that people think about what they should and shouldn’t buy.
The absence of a credit check with BNPL is also a game-changer. First of all, it makes the transaction faster, so you’re not losing sales just because the customer doesn’t want to hold up the line filling out an application. It also brings in new customers, those who may not have been able to afford your product or qualify for a credit card. With a freely accessible BNPL model like Afterpay, consumers’ buying power is no longer limited by their credit scores. Credit card companies can’t afford to take a chance on customers with low credit: by the time an individual’s spending and repayment habits establish a pattern of risk, they’ve likely already racked up substantial debt they can’t afford to pay back. In BNPL models, however, a separate installment arrangement is made for each purchase, meaning the provider has the opportunity to cut the user off before much damage is done. Furthermore, the transactions BNPL typically facilitates are more likely to be paid in full simply because they’re of lower value. BNPL is essentially a specific (and interest-free) loan for a specific purpose, which sets it far, far apart from revolving credit.
How We See BNPL Meeting the Moment
Study after study has shown that millennials and members of Gen Z tend to pay more for experiences than for material goods. Offering BNPL gives retailers the opportunity to meet the YOLO generations where their hearts are—in the moment.
Let’s say Serafina has just blown all her cash to attend her friend’s destination bachelorette party. At 29, she’s still paying off student loans—she’s not eager to incur more debt. But maybe all the other girls have taken a turn paying for the group’s drinks and she wants to get the next round, or maybe they all want to buy matching souvenir hoodies for a slumber party photo op back at the hotel. If Serafina knows she can pay just a quarter of the price to get the goods now and she’ll have her next paycheck by the time the next charge goes through, she’s not going to think twice. And the restaurateur or shop owner, who pays for his inventory ahead of time anyway, is happy to accept installments knowing that at least he’ll end up with the full amount at the end of the day.
That’s what BNPL comes down to: a service that lets the notoriously debt-shy YOLO generations live in the moment, guilt-free. There are plenty of restaurants, hotels, and travel agents eager to help these day-seizers make memories, and plenty of retailers ready to sell them souvenirs. If those offerings can be made available in a way that’s less expensive, takes less time, and doesn’t ding the buyer’s credit score, everyone benefits. That’s why we believe that Square’s acquisition of Afterpay has potential that far exceeds the hype.
Note: I’d like to extend many thanks to Natalie Harrington, Research Associate, for her very sizable contributions to the development and writing of this article.