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Buy now, pay later (BNPL) has quickly established itself as the go-to method of financing for a variety of purchases, particularly online.

This financing model has primarily been available to customers shopping online, but customers outside the U.S. have already dipped their toes into similar alternatives at brick-and-mortar stores. We’re likely to see BNPL offerings become more prevalent at points of sale for a manner of different purchases through 2022.

Investors in the space already see BNPL leaving the bounds of retail and entering sectors such as healthcare. “BNPL will become a more popular POS option in 2022, not only across brick-and-mortar stores, but also in sectors like healthcare, where installment payments already exist but have not yet crossed the chasm to digital,” said Frances Schwiep, partner at Two Sigma Ventures.

“Average ticket sizes for healthcare can range between $2,000 and $10,000, making it a perfect candidate for vertical-focused, larger-ticket BNPL solutions.”

Despite the popularity of the model, it appears there are a variety of applications for which BNPL is just being tapped, and smaller players are carving out a niche as the retail market grows crowded.

“Now that consumers have gotten comfortable with BNPL as a concept and are increasingly using it as an alternative to credit cards, we’re seeing opportunities for new BNPL products for recurring bills, such as rent, streaming service subscriptions, etc. We also see opportunities for new BNPL products for small businesses that are looking to reduce cash flow strains or avoid maxing out credit lines,” said Jason Brown, partner at Victory Park Capital.

It isn’t all smooth sailing, though. Smaller BNPL providers could struggle in markets where bigger players have already established a presence. In the U.S., Klarna, Afterpay and Affirm have managed to wrest the majority of the market share, leaving the rest with just a quarter of the market to compete over.

To get a better picture of where the BNPL market is at right now, we spoke with four active investors about their expectations for the space, upcoming regulation, scalability, default risk and more.

We spoke with:

Klarna, Afterpay, Affirm and PayPal generated more than $3.2 billion in revenue last year. Is BNPL still an open market, or is it already dominated by entrenched players?

Frances Schwiep: BNPL, though crowded in established markets, is still ripe for innovation in new geographies like Latin America. Notably, unique local characteristics challenge a one-size-fits-all approach.

There’s a host of difficulties to overcome: from managing market-specific database integrations with APIs that don’t talk to one another to understanding nuanced risk dynamics that inform underwriting models, and geo-specific consumer behaviors that impact product roadmap.

For example, BNPL companies based in LATAM must weigh an array of variables included in the risk model differently based on consumer behaviors natively bound to the characteristics of the local market. For example, telecom variables and contact graph referrals are more heavily weighted features in the underwriting model in Mexico versus the U.S. Repayment collection methods also vary drastically by geography, and require local knowledge and know-how to execute at scale.

We believe building fintech products (versus other classes of products) with geo-specific dynamics in mind is key to their success. As Kyle [Miller], founder of Nelo (a LATAM-based BNPL) and former product manager at Uber, puts it, “I’ve found that the product gap I saw with Uber in established versus developing markets is MUCH wider for financial products, specifically credit and BNPL. Major differences I’ve seen include available underwriting data, repayment methods and general consumer behavior. The winner of BNPL in LATAM will have been built in LATAM for LATAM.

Melissa Guzy: The market for BNPL is maturing, and unless a new player has a differentiated approach and can offer additional services to both consumer and merchants, it will be tough for new entrants.

Three key areas for differentiation include:

• Checkout distribution (e.g., association with a scaled platform).
• Cost of funds (capital available for lending).
• Consumer proposition (consumer experience and repayment model).

What is clear today is that a new entrant will need a significant amount of capital from the start for marketing and winning a position on the checkout page.

Jonathan Whittle: It depends on the market. In most emerging markets where Quona invests — including Latin America, the region I lead for the firm — BNPL remains relatively open, with a few market leaders beginning to emerge, such as ADDI in Brazil and Colombia, and Zest Money in India.

Jason Brown: It’s true that the large BNPL players that are focused on point-of-sale financing for consumers have dominated the market — they have strong brand recognition and customer bases. Because the market is crowded and it’s expensive to acquire customers, it is difficult for new BNPL entrants in the traditional consumer point-of-sale space.

However, now that consumers have grown comfortable with BNPL as a concept and are increasingly using it as an alternative to credit cards, we’re seeing opportunities for new BNPL products for recurring bills, such as rent or streaming service subscriptions.

We also see opportunities for new BNPL products for small businesses that are looking to reduce cash flow strains or avoid maxing out credit lines.

What kinds of opportunities are you looking for right now, and how do you like to be approached by founding teams?

Frances Schwiep: We’re on the lookout for companies both enabling and distributing next generation financial products. We continue to be bullish on platforms that are selling embeddable financial products, such as payments, insurance and lending.

We are seeing an exciting class of companies providing “OS systems” for specific verticals and professionals (from Glossgenius for stylists and Altruists for financial advisers, to Side for real estate agents), and believe financial offerings will be key pillars of these platforms.

We also see a compelling opportunity for fintechs to unlock more value within marketplaces — whether it’s retail, restaurants or B2B inventory — and attracting wallets by offering the financing and checkout experience consumers want. I believe the next Alibaba will start as a fintech play.

Beyond embeddable fintech products, we’re excited about companies that are disrupting traditional payment rails with more efficient models. As complexity and average processing fees at checkout have increased for merchants in recent years, there has been mounting pressure to innovate and regain control over costs.

We are also excited about companies building modern software for both financial institutions — who are under pressure to compete with digital native competitors — and for financial teams within enterprises who are trying to modernize their management of cash.

Last but not least, we think financial health and wellness is being redefined, with alternative asset classes, including crypto, becoming more mainstream. Consumers’ financial footprint is getting increasingly complex, and we’re eager to invest in tooling that helps with consumer on-ramps, consumer access and management of new financial investment opportunities.

Melissa Guzy: We like founding teams who think differently about opportunities and winning market share. They need to be realistic while being visionaries, which is hard to find. Also, founding teams need to demonstrate that they can build a team and attract talent.

We also believe there are opportunities to develop BNPL expertise in a segment (e.g., medical expenses) or a geographic region/country that has less competition and more growth potential.

Jonathan Whittle: We’ve already backed the company that we believe will dominate the B2C BNPL space, and perhaps B2C/M2C payments in general, in Latin America, and it’s ADDI. There are also opportunities in the B2B-focused BNPL arena on the back of growth in B2B e-commerce marketplaces and as M2B businesses come online. Many early-stage companies are attempting to tackle this opportunity, too: Slope, Dinie, R2 and Kontempo, to name a few.

Jason Brown: We are always looking for opportunities to partner with new entrants that have a differentiated and cost-effective customer acquisition channel, either through partnerships or product innovation.

As a lender, we work closely with VC firms that have significant expertise and vision in the space to identify innovative companies with strong management teams that need credit financing to unlock their next stage of growth.

Do BNPL offerings run the risk of appearing too similar? Which products or services are innovating? What can startups do to stand out?

Frances Schwiep: Yes, and to overcome this risk, we’ll see a bifurcation of companies — those who will pursue a B2B strategy with merchant integrations and merchant services at one end of the spectrum, and those who will prioritize a direct-to-consumer acquisition strategy and own the consumer relationship via their “super app” on the other.

The latter is a relatively new development and involves focusing on customer repeat engagement, loyalty and creating a marketplace of products with the financing solutions customers want. And that’s where Nelo fits in. They moved from a direct-to-merchant integration strategy to a direct-to-consumer approach, winning the hearts and minds of consumers with their slick, easy-to-use app.

Finally, we believe vertical-specific BNPL solutions will emerge with ancillary services tailored to address a particular sector’s need (e.g., healthcare, home construction, etc.)

Melissa Guzy: BNPL companies vary by geography to fit the local market. Tabby is a great example in MENA, Akulaku in Indonesia, and so is Paidy in Japan. They are all in the BNPL category, but they have developed an expertise in regional distribution channels, non-traditional customer segments and product variations.

Jonathan Whittle: Installment payments can quickly become a fairly standardized and easily commoditized offering. What will differentiate BNPL solutions is tech architecture, underwriting ability and UX, coupled with seamless integration of other synergistic products, such as one-click checkout and payment management solutions across payment methods.

Other forms of differentiation will stem from additional value-add merchant and/or consumer products, like a consumer app tied to a line of credit that can be used across multiple merchants. That strengthens stickiness and reduces churn while fueling client acquisition and conversion.

Jason Brown: Consumer point-of-sale BNPL products are very similar, though some are differentiating by offering longer payment options for products that are more expensive or more nuanced.

Another area where we’re seeing innovation is with white-label BNPL products that can be embedded into a merchant’s checkout process. With a crowded market, it’s important for startups to differentiate themselves by acquiring customers in a cost-effective way.

Will we start to see more consolidation this year? If so, which types of BNPL startups will be likely acquisition targets in 2022?

Frances Schwiep: Acquisition targets will be considered for their relevance in their users’ everyday lives as well as their granular (i.e., item level) longitudinal data ownership.