At the end of last week, Amazon announced that it was partnering with fintech company Affirm to offer US customers to pay for purchases over $50 in installments in selected categories. Amazon itself already offers a plan to certain customers to split payments, but this is the first time the queen of online retail is teaming up in the US to a fintech company that specializes in providing credit at the point of sale, which will gradually become available to all customers. This was huge news for the fintech sector and Affirm's share price soared by more than 40% on the news.
Affirm belongs to the 'buy now pay later (BNPL) sector. In contrast to Israel, in most of the world credit cards do not provide convenient options of splitting payments into installments and this vacuum has been filled by fintech companies like Sweden's Klarna, which is worth $45 billion, making it the fourth most valuable privately-held startup in the world; Australian company Afterpay, which is expected to be acquired by payments company Square, which belongs to Twitter founder Jack Dorsey, for $29 billion; and Affirm, traded on Nasdaq at a market cap of more than $26 billion.
60% of US consumers will use the service
Credit for small purchases will for the most part be granted through a minimal check of the companies to which pervious loans have been repaid, while for larger purchases credit ratings and banking history will be checked out.
The model for these companies is diverse: Afterpay and Klarna specialize in splitting small purchases into four payments, with the first quarter paid immediately and the rest within six weeks. The payments in this instance do not bear interest and the stores pay fees to the fintech companies. Affirm, on the other hand, takes interest from larger purchases but unlike its rivals does not impose fines for payment in arrears. What all the companies have in common in the industry is that they offer credit at the point of sale - either physical or virtual - per specific purchase instead of a set credit line on a credit card.
The BNPL industry has gained enormous traction during the Covid pandemic as consumers make purchases mainly online and forecasts are that it will continue to grow at a rapid rate. Bank of America research found that the BNPL industry is set to grow 10-15 times by 2025 to $1 trillion annually. A survey by consultancy company McKinsey estimated that 60% of American consumers will use point of sale credit over the next year. McKinsey also estimates that point of sale credit will represent 13%-15% of unguaranteed loans in the US by 2023, compared with 7% in 2019. Amazon is not the only giant joining the trend. According to reports Apple is collaborating with Goldman Sachs on a plan to divide up every payment on Apple Pay into four installments without interest. Apple is already cooperating with Affirm to allow customers in Canada to pay for products in installments.
Sunbit is a unicorn, Splitit is worth $150 million
The swift rise of the point of sale credit industry is good news for the Israeli startups operating in this space. Sunbit, which is headquartered in Los Angeles and has its development center in Binyamina, provides payment installments for US customers purchasing routine needs like car servicing and buying spectacles. In May, Sunbit became a unicorn after raising capital at a company valuation of $1.1 billion.
Another Israeli company in the field is Splitit (ASX: SPT), which already has a market cap of $150 million. Splitit allows customers paying by credit card to split payments. Another company is Behalf from Ra'anana, which offers BNPL options to small businesses.
The Zap of the credit industry - ChargeAfter
"The acquisition of Afterpay by Square and Affirm's agreement with Amazon are very big news," remarked Meidad Sharon, founder and CEO of ChargeAfter, another Israeli company in the industry. "These pieces of news prove that the BNPL industry is becoming mainstream and I have no doubt that it will eventually replace credit cards."
ChargeAfter, which has 50 employees and has raised $20 million so far, offers a marketplace for BNPL suppliers. Customer who buy a computer on Lenovo's website, for example, will receive the three most worthwhile options for them for credit from the range of BNPL providers.
"I took out a credit card in Israel many years ago, and since then I haven't changed the terms so that the credit I receive is based on my past data. In contrast, with BNPL, you are signed up anew for credit and offered optimal loans for you according to the latest data," Sharon explained. "The only reason that until today you needed to work with the credit card method was that the signing up process was manual and it has taken time for the bank to understand on what terms to give you credit. Today, when everything is done digitally, I can give credit to a customer within two seconds."
Jifiti brings the banks into competition with the fintech companies
Israeli startup Jifiti provides a technological solution enabling the banks to enter the BNPL sector and compete with fintech rivals. Jifiti was founded in 2012 to provide solutions in the gift card sector. But in 2019, the company understood that it had the ability to interface with the cash tills of relevant stores and the credit world and it changed direction. Jifiti's solution is based on creating a virtual credit card through which customers can receive an immediate credit card from the bank and make specific payments in physical or online stores.
Jifiti's solution allows customers to receive credit from banks for purchases at IKEA stores in a range of European countries and in Walmart branches in South Africa and Mexico. Jifit, which has 50 employees, announced on Tuesday that it had received an investment of $22.5 million from IKEA's parent company Ingka Investments - the Swedish company's first-ever investment in an Israeli startup.
Jifiti cofounder and CEO Yaacov Martin said, "Our approach is that banks know how to lend money in the best way and what they need is a way to connect up easily to stores in order to offer credit at the point of sale. Instead of the banks needing to undergo an integration process with the stores that takes 12 to 18 months, we offer them immediate interfaces."
An industry that's creating a credit bubble?
Alongside the success, the BNPL industry has received much criticism that it is causing customers, mainly young customers, to buy more and run up debts. ChargeAfter CEO Meidad Sharon dismisses the criticism. "The concept of credit has existed for many years. The only thing that the BNPL industry does is to give better credit to customers and so there is a positive element here. It's like saying that Booking.com, which allows comparison of prices between hotels, causes people to take more vacations."
Martin believes that the right solution is for the banks to take a leading position in the BNPL industry. "Today it is very difficult for the regulators to monitor the loans provided by the fintech companies and that creates an unofficial and unsupervised credit bubble. We are empowering the supervised and regulated banks so that they can offer responsible solutions."
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2021
Copyright of Globes Publisher Itonut (1983) Ltd. 2021