FATP (03/02) - Will BNPL eat merchant's lunch?
Try and name the sellers/merchants of the last five items you bought on Amazon.
My guess is that you could name maybe one or two but not all of them. This is the world Amazon has created.
Amazon has become the first place many people go when they need to buy anything. The “Everything Store” is the front page of e-commerce for many people, with the different brands and suppliers, as well as Amazon operated brands themselves, slipping into the void in consumer’s minds. Amazon has minimised the role of brands and suppliers in order to give the consumer an easier shopping experience with easy and free returns and a quick checkout experience. Consumers come before merchants on Amazon and the merchant is disintermediated from the traditional customer relationship, which Amazon owns.
In his excellent blog Stratechery and seminal work on Platforms vs Aggregators, Ben Thompson talks about Amazon as an Aggregator who commoditise their suppliers for their own benefit. Amazon benefits from more third party sellers because it increases the allure of Amazon to customers and these third party sellers have to compete on price.
Is the same thing inevitable in the BNPL space?
BNPL companies such as Klarna, Affirm and AfterPay are growing fast and changing their business model. From starting out focusing on merchant integrations post-purchase at the checkout (see my previous post The Battle for the Checkout for more), they are now increasingly focused on the start of the consumer journey, the discovery phase. This makes sense for their business model because as the checkout page becomes more commoditised, consumers will have little BNPL brand loyalty in the post-purchase space. This would result in a race to the bottom in terms of price which is not a place any business wants to be in.
To combat this, BNPL providers have switched their focus, not entirely I must say as signing merchant partnerships is still key, to the consumer and the start of their buying journey. They have all come out with shopping apps, where consumers can start their shopping search on a BNPL app which also has integrated discounts and rewards. By starting their shopping journey through the respective app (not limited to the above), consumers are mostly presented with merchants that have commercial relationships with the respective BNPL provider.
Not only this but most of the BNPL platforms have also come out with physical and virtual cards as well as browser extensions which will let consumers pay with your chosen BNPL solution at ANY merchant. This is designed to build customer loyalty. It is unlikely that the BNPL provider will get the same economics from merchants they do not have an existing commercial relationship with but it all helps deepen the customer relationship and moves consumers to use this payment option more frequently.
The main cause for concern for merchants will be the increasing use of these integrated shopping apps. As more consumers start their buying journey through one of these apps, they may soon care less about the brand they are buying from and only pick from those in the app. BNPL providers also monetise the consumer on the app through affiliate marketing and cross selling.
It would be interesting to find out how many consumers are actively purchasing through these shopping apps vs not, as well as the degree to which they are switching between brands for similar products. If anyone has seen any data, please let me know.
Will the disintermediation of merchants happen?
I think for some merchants it will. Merchants offering a low value or commodity product will see consumers looking to the BNPL shopping app in a similar way that they go to Amazon. For higher valued items which form part of a more considered purchase, consumers are still likely to go direct to a merchant with enough brand recognition. Interestingly, Amazon has not made many in-roads into high fashion or other such categories.
Consumers are driving this shift because of the convenience of BNPL solutions. They are becoming more loyal to BNPL companies which offer them value in a number of ways, not limited to
Splitting payments over a longer period
A one stop shop to manage their payments
Transparency over budgeting with visibility on upcoming payments
Simplicity and transparency over repayments
As BNPL companies increasingly switch focus to consumers and bundle more services into their integrated shopping apps, consumers will increasingly start their shopping journey’s through them due to convenience. Afterpay reported that 17% of consumers initiated one or more transactions from within their shopping app in February 2021 alone (more up to date data is hard to find). This combination of an app with rewards/offers as well as a transparent payment hub is proving to be attractive for consumers.
Merchants have been lured in by cart conversion, increased AOV as well as introducing younger consumers to their brands but this joy might not be sustained if they are disintermediated. It also suggests that merchants are not against higher payment fees (BNPL typically charge 3%-6% compared to ~1.5% for cards) but are seeing more incremental spend and higher basket sizes.
Given the industry is so nascent, nothing is by any means a foregone conclusion, but it is something to think about. Yes the increased average order value (AOV) and more frequent purchase is a good sell for merchants. But what happens when their largest rival develops a closer (i.e. higher paying) relationship with the BNPL provider, will customers be nudged towards that merchant instead?
The comeback
Merchants could begin to stage a fightback. Railsbank recently released a white label BNPL solution for merchants to help them compete. However this offering is likely to only be a strategy for larger, established and recognised merchants, with many smaller merchants with commoditised products relinquishing the valuable consumer relationship to a BNPL provider, much as Third Party Sellers have on Amazon.
Another way is for merchants to focus on platforms that allow them to maintain their brand, such as Spotify, the anti-Amazon.
Fintech News Highlights
🇪🇺 German neobank N26 has begun to hold real estate as part of its treasury alongside stocks and other fixed income securities.
🇪🇺 Klarna has launched its physical card in the UK with a “Pay in 30” offering, mimicking credit card functionality. It also launched new savings accounts in Germany.
🇬🇧 Amazon and Visa announced that the planned ban of the latter’s credit cards on Amazon in the UK will not go ahead and they are working on a solution to the issues Amazon raised, namely high interchange.
🇬🇧 Fintech infrastructure platform Bud released Financial Product Finder, a tool that creates a summary of a customer’s financial products using their transaction history to allow customers to cross-sell and identify new product needs.
🌍 Apple is set to enable any iPhone to become a POS with its acquisition in 2020 of Mobeewave in the coming months according to Bloomberg.
🌍 Affirm announced the Affirm SuperApp alongside a new browser extension, providing consumers a one-stop shop into spending, cashback, savings and payments.
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