The COVID-19 pandemic was the catalyst that buy now, pay later (BNPL) needed to really take off. Exploding e-commerce usage and a need to manage cash flow drove triple-digit growth in installment payments during 2020, with 2021 on track to see even greater growth in the space. As usage grows, so does the number of players in the space, and consolidation is inevitable. I keep a running list of BNPL providers as they pop up in the news or in client discussions, and even excluding bank providers and the largest players like Affirm and Klarna, the current list runs to 35 and is far from comprehensive. Thus, the Square acquisition of Afterpay was not so much a surprise as a step in the direction of starting to rationalize this exploding space.
In light of the growth in BNPL, the trend to use installment options more frequently and for lower-cost transactions, and the move toward in-store availability of BNPL, the Square acquisition brings a lot of benefits to the ecosystem.
Key beneficiaries include the following:
- Merchants: This acquisition brings BNPL payment options to the millions of small and midsize merchants that use Square’s platform to manage their payments. Increasingly, consumers are expecting to be provided an installment payment option for purchases both large and small. Most of the growth in BNPL has been in e-commerce, with installments only really starting to make inroads at the physical point of sale in 2021. It is likely that the long tail of smaller brick-and-mortar merchants would not have had the opportunity to add BNPL for at least a few more years. Square’s acquisition of Afterpay solves that problem for those small merchants by pre-integrating BNPL into the Square platform, promising a potentially huge jump in acceptance points for Afterpay’s solution and the potential for much-needed revenue growth for small merchants hit hard by the pandemic.
- Cash App users: The announcement indicated that Square’s Cash App would play a key role in the integration, with users able to manage their spending and find retailers accepting Afterpay. This potentially gives 70 million Cash App users integrated access to a BNPL solution. Suddenly, installment payments become an option for person-to-person transactions, for paying your lawn guy, or for paying your rent.
- IPhone users: The Square/Afterpay announcement—reportedly over a year in the making—heats up the point-of-sale installment space even more in light of Apple’s recent announcement that it plans to add a BNPL option to Apple Pay, called Apple Pay Later. Apple Pay is accepted at 85% of U.S. retailers, many of which use Square. IPhone users will soon have not one but two installment payment options available to them at many merchants.
This is a fascinating time to be working in payments. We all know that predicting the future is a dangerous game, but I feel confident that the Square announcement is far from the last BNPL acquisition play we will hear about this year.
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