Hi friends, Ohad Samet here.

I’m the co-founder and CEO of TrueAccord, a leader in offering consumer-focused debt repayment products. Prior to this, I served as the Chief Risk Officer of Klarna after the company acquired my previous company, Analyzd. Before Fintech was Fintech, I was the head of risk analytics for FraudSciences, a company that developed ML products for fraud prevention in eCommerce, which was acquired by PayPal in 2008.

As you might have noticed, BNPL is blowing up, both as a market segment and in the public consciousness. You’re subscribed to this newsletter so I won’t bore you with the numbers, but in a ZIRP economy that’s both reopening and re-levering after paying down debt last year, anything that’s even remotely related to consumer credit is having a field day, and BNPL still attracts such good sentiment that media has started to use the term synonymously with lending in general (for example, with Goldman’s acquisition of GreenSky). In the past few months, though, BNPL has hit the part of the hype cycle when doubters start being vocal.

The Doubters

Let's talk about the incumbents, for instance. Traditional lenders and credit card issuers are invested in explaining why BNPL isn’t innovative, and then once it appears to be innovative, why they could just replicate it. Much like the iPad was supposed to be Just Another Form Factor, bankers are now launching a way for consumers to break up certain credit card charges into four payments, while calling BNPL Just A Feature. While I have a dog in this fight (major BNPL players are on the record about using my company, TrueAccord, to help consumers who fall behind on their payments), I find this shows a misunderstanding of what BNPL is.

BNPL is predominantly a convenience product, reducing friction and increasing basket size in the commerce experience because it offers an easy way to try before you buy. It uses credit rails (with zero interest, funded mostly by merchant fees) because those offer the lowest friction possible - no need to enter any payment details upfront. It then builds on consumer loyalty to the BNPL brand to improve approval rates and increase purchase frequency. It usually has low Average Order Value, though Affirm’s partnership with Peloton has shown that convenience can apply to higher balances as well. These three elements (no interest, high frequency, low AOV) are in sharp contrast with card and POS financing, highly segmented interest bearing products that, on their lower end, can allow consumers with worse credit scores to purchase products they can’t currently afford as a lump-sum payment.

Commerce Vs Lending

Product features aside, BNPL players’ structure and strategy highlight their focus on commerce rather than lending, and the expertise required to make it work. Internal teams are focused on optimizing the checkout experience for conversion. Their product offering is expanding -- not to more credit products, but to more ways to manage the full consumer lifecycle, from discovery and co-marketing (in the companies’ own apps) to return management (highlighted by Affirm’s acquisition of Returnly). On the consumer side, their brand and product investments are focused on increasing consumer loyalty, frequency, and ease of use. They are targeting a very different use case than consumers borrowing to bridge the gap between their income and expenses, and who turn to low-frequency usage loan products that mostly make interest revenue. Issuers that plan to offer both should respect this difference in incentives, product focus, and Go To Market if they want their BNPL offering to scale.

Looking Forward

BNPL is an incredible opportunity to rebuild a new payments network alongside the existing ones. One that features low balance first time purchases that can build thin credit files, real alternative rails (check out this thread by Alex Rampell), an intense focus on user experience and retention through the full life cycle (including collections and recoveries), and support for an emerging change in behavior of younger consumers from credit-heavy to debit-heavy card usage. It is not without its challenges, especially at scale, but it is not a feature. Ignore it at your peril.

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