The Real Economy

'Buy now, pay later' space gets big boost from Amazon

Oct 04, 2021
Economics The Real Economy

Amazon, which has been slowly adding financial services products to its portfolio, has entered the hot “buy now, pay later” space. The e-commerce giant recently announced its partnership with Affirm, a buy-now-pay-later platform that allows customers to pay for purchases in installments.

This partnership means customers shopping on Amazon will be able to use Affirm when they check out, for purchases over $50.Amazon’s partnering with Affirm is—along with Square’s early August announcement of a $29 billion acquisition of Afterpay—one of the latest signals that BNPL offerings are here to stay, on the heels of strong performance in this space last year.

It also signals that online and brick-and-mortar retailers that don’t have BNPL options should assess what that means for their competitiveness. The use of BNPL resulted in $1.1 trillion in U.S. e-commerce sales in 2020, according to FIS’s 2021 Global Payments Report, and that figure is expected to grow to $1.78 trillion by 2024.

Amazon’s customers that use Affirm will not be charged interest or late fees and will know the total cost of their purchases upfront, typical terms BNPL providers offer. The option to use Affirm for Amazon purchases is initially launching for select customers before rolling out more broadly.

The news comes at a good time for Affirm, which suffered a dip in its share price when Peloton announced it would decrease the price of its bikes during its fourth-quarter fiscal year 2021 call.

As Peloton purchases currently make up about 20% of Affirm’s revenue, investors didn’t relish the potential negative implications. As such, it is no surprise that Affirm’s shares soared in the immediate aftermath of the Amazon announcement as investors absorbed the potential implication of the partnership. If Affirm captures even 1% of Amazon’s North America sales, it could add $900 million to its revenue, according to Bloomberg.

Amazon’s interest in offering BNPL through Affirm also makes sense, as its mission is to offer low prices, a vast selection of goods and utmost convenience to customers. Splitting up a purchase into more manageable installments at the click of a button is the latest way Amazon is providing a frictionless experience for customers.

Amazon’s entry into the buy now, pay later market signals that online and brick-and-mortar retailers that don’t have BNPL options should assess what that means for their competitiveness.

Additionally, the ability to split purchases into monthly installments could further extend Amazon’s reach into larger consumer purchases such as appliances or furniture. This could give Amazon an advantage over traditional brick-and-mortar retailers that use promotional product discounts or interest-free financing on branded credit cards to help increase in-store foot traffic.

A more seamless buying option

Providing customers a more seamless buying option could help drive online sales for customers still hesitant about in-person shopping.

But the importance of the partnership goes beyond the implications it could have for Affirm—this partnership solidifies buy now, pay later as a ubiquitous business model. After all, a partnership with the top e-commerce retailer in the United States—especially when North America’s aggregate e-commerce volume is expected to grow at an 11% compound annual rate through 2024, according to FIS’s Global Payments Report—is no small feat.

Given the number of monthly active users among the top five BNPL providers—Klarna, Afterpay, Affirm, QuadPay and Sezzle—it is evident consumers are drawn to this option. When comparing the monthly active users of the top five BNPL providers from the second quarter in 2020 to the second quarter in 2021, the growth is staggering—on the low end, Klarna grew 68%, but Sezzle grew 292%, according to Bloomberg.

The potential of BNPL

The potential reach of BNPL is huge, especially now that Amazon offers it as an option. Fundamentally, BNPL could be used for any purchase, whether predictable—such as rent and utilities—or not, like an unexpected health care expense.

Flex, for example, is a BNPL provider that allows you to split up rent into smaller payments and pay your bills based on when it’s most convenient for you, not on your utility provider’s schedule.

Another company, Walnut, allows you to pay for health care expenses in installments. Sunbit works with merchants in retail, automotive parts and service, dental, and eyewear, and offers consumers the option to buy anything from those segments and pay over a three-to-24-month term based on the type of expense. This is all in addition to consumers already using BNPL to pay for travel, flights, and even brick-and-mortar store purchases.

The takeaway

Given the significant activity in the BNPL space over the last month, merchants of all sorts should examine whether BNPL could help them deliver a better customer experience.

The Real Economy

Monthly economic report

A monthly economic report for middle market business leaders.

Industry outlooks

Industry-specific quarterly insights for the middle market.