2021 was a breakout year for BNPL in the U.S. BNPL gross merchandise value accelerated to $49 billion, with projections to grow another 65% this year. But despite rapid growth, questions remain about profitability. According to the Financial Times, none of the three largest standalone BNPL firms are currently earning a profit. In fact, all three firms lost more money in 2021 than in previous years. Because many BNPL firms have been backed by venture capital, profit has been a secondary concern to market share thus far. But, as investors seek positive returns on their investments, profitability will matter more in the years ahead. 

How can BNPL providers sustain their remarkable growth and build profitability? One answer may seem intuitive to the tech savvy entrepreneurs that launched the BNPL wave - it’s the data. Here are five examples from Equifax, that can help pump up margins and reduce the drag on profits.

Pre-Tax Losses

Millions, USD

Source: Financial Times, (2021). “Is BNPL a Viable Business Model?”

Merchant Data

In just three years, BNPL went from an uncommon payment method to an option on most online check-out pages. BNPLs fueled early growth by adding merchant partnerships at breakneck speed. Yet growing a network of merchants at this point has new challenges now that most major retailers are already affiliated with one or more BNPL providers. As BNPLs look to smaller retailers and a variety of service providers, comprehensive business firmographics and business credit data can provide advantages to help propel profitable growth. Numbers released by the U.S. Census Bureau found that a whopping 5.4 million new business applications filed in 2021, surpassing the record set in 2020 of 4.4 million. Identifying good BNPL prospects, reducing the risk of business default or fraud, and onboarding new merchants efficiently can help BNPL providers continue to grow their merchant networks in an increasingly saturated market.

Identity Data

Fraudulent transactions erode profit margins. Fraud is a growing problem across the electronic payments industry. As transaction volumes continue to grow and brand recognition increases, BNPLs can expect to be more frequent targets. In Australia, where BNPL is already popular, fraud reports doubled in 2020. The U.S. could follow a similar pattern. According to Equifax research, more than one-third of consumers with good credit are being manipulated by synthetic identity fraud. A robust combination of physical and digital identity data can help reduce synthetic fraud risk at account setup, transaction fraud risk at point of sale, and account takeover fraud risk at login. Verification of physical identifiers, like name and address, in combination with digital identifiers, like device ID and electronic velocity metrics, can help BNPLs reduce risk while maintaining a low-friction consumer experience.

Economic Capacity Data

Leading BNPLs are expanding merchant services and nurturing consumer loyalty to differentiate themselves. Merchants attracted to the higher cart values and reduced abandonment rates associated with Pay-in-4 point-of-sale financing are looking to their BNPL partners for other financing terms as well as sales and marketing support to draw more consumers. At the same time, some BNPLs are promoting their own brands to consumers through more direct advertising and the development of online shopping hubs. In both cases, economic capacity data can help segment consumers based on household metrics. These metrics like disposable income, ability to pay, and financial durability can support personalized experiences, targeted offers, and higher margins.

Credit Data

High rates of second-pay default present a challenge to BNPL profitability. A 2021 survey found that nearly four in ten BNPL users report they have fallen behind on their BNPL payments at least once. Also, a recent Morning Consult survey found that one in five U.S. adults who took out a BNPL loan in January 2022 missed a payment. 

While some market professionals have hypothesized that typical BNPL users are either new to credit or credit averse, a recent Equifax study of BNPL applicants revealed a different profile. Data showed that BNPL users are almost 4x more likely to have subprime credit scores, and significantly higher credit utilization rates, compared to the general credit population. Subprime credit scores and high utilization rates indicate that consumers could be at higher risk of late or non-payment.

Traditional credit files and alternative data assets, like telecom and utility payments, remain highly predictive measures of repayment risk. Equifax allows BNPLs who report to the bureau to check consumer credit by using a soft pull that does not impact scores.

Risk Scores Among BNPL and General Credit Populations

Source: Equifax, (2021).

Employment Data

Employment status is an important leading indicator of a consumer’s future repayment risk. The U.S. Bureau of Labor Statistics reports that unemployment rates are trending toward pre-pandemic lows. This is even as forecasts of recession add uncertainty to the future outlook. In a changing market when employment metrics are more volatile, instant access to employment verification can help BNPLs extend credit more often and more responsibly. Through The Work Number® from Equifax, credentialed verifiers can get secure income and employment data from 2.5 million employers nationwide delivered 24/7 for instant decisioning.

Equifax maintains an extensive suite of configurable, cloud-native data, including more than 32B interactions, 600M consumers, 81M businesses, 4.5B trade accounts, and 500M employee files. For more information about Equifax solutions for BNPL providers, visit us here. 

 

 

1 Kelly, J. (2022). "Is BNPL a Viable Business Model?" Financial Times. 

2 (NPR.org)

3 Kaye, B. (2021). “Australia’s BNPL boom pushes identity theft to record.” Reuters.

4 Equifax research.

5 Lapera, G. (2021). "BNPL Missed Payments." Credit Karma.

6 Williams, C. (2022). "BNPL Users Significantly More Likely to Overdraft than Nonusers." Morning Consult.