Investment

The booming “Buy Now, Pay Later” market catches the attention of family offices

Family offices/holding groups are out to disrupt the credit card industry by backing companies like ScalaPay, the newest provider of Buy Now, Pay Later consumer loans.

ScalaPay’s $155 million funding deal, confirmed on 9 September, follows PayPal’s $2.7 billion purchase of Paidy, a Japanese Buy Now, Pay Later (BNPL) business and Square’s plan to acquire AfterPay for $29 billion.  Zilch raised $110 million from Goldman Sachs and Lord Rothermere’s DMGT in July. 

Research has consistently found that consumers see item-by-item BNPL loans as easier, cheaper and trustworthy compared to monthly credit card bills

Fund raisings have quadrupled the value of Sweden’s Klarna to $46 billion in a year, following its pursuit of young shoppers, who are keen BNPL participants. Affirm Holdings, valued at $29 billion, has signed trade deals with Shopify, Amazon and Walmart. 

Apple wants to develop its own offering. McKinsey has forecast growth for BNPL from $15 billion in 2020 to $90 billion by 2023.

Buying goods “on tick” is a pursuit dating back to 17thCentury England, when customers postponed paying for goods by persuading shopkeepers to put the debt on a ticket.

BNPL lenders offer individuals “tick” by using an online account of delayed payments. ScalaPay says individuals can sign up for its service in two minutes. It expects the repayment of loans, interest free, in three monthly instalments. It collects its return via an average 4.2% fee from retailers who have claimed a 40% increase in turnover from the arrangement. 

BNPL, as well as the pandemic, led to a 9% fall in US credit card business to $756 billion in the year to September, according to Elite Personal Finance. Research has consistently found that consumers see item-by-item BNPL loans as easier, cheaper and trustworthy compared to monthly credit card bills.

ScalaPay’s fundraising means its notional value has risen from practically zero to $1 billion this year. It was led by top VC backer Tiger Global led by Chris Coleman who led tech deals for Julian Robertson’s Tiger Management hedge fund.

Tiger Global brought in Woodson Capital, owned by Jim Davis, another former Robertson analyst. His hedge fund doubled in 2020 from long positions in e-commerce and shorts in bricks-and-mortar retail.

Another investor, family office Ithaca Investments, is owned by Giorgio Valaguzza, who used to be married to Barbara Berlusconi, daughter to the former Italian politician. 

Fasanara Capital, owned by Francesco Filia, has invested twice. He likes Scalapay’s focus on forging partnerships with merchants as opposed to moves into banking. 

Another investor, Baleen Capital, is a partnership started in 2012 by Fang Lui, a former executive vice-president at AfterPay. He recently became a ScalaPay director.

ScalaPay is launching its assault on European BNPL from Italy, although its founders Simone Mancini and Johnny Mitrevski are Australians with a tech team based in Wollongong.

Australia also leads big BNPL offerings AfterPay, Openpay and Zip. Gary Rohloff waves the flag for New Zealand by starting LayBuy in 2017 with his wife Robyn and sons James and Alex. It is listed, with a market value of $122 million.

Several BMPL providers now offer global scale through acquisitions. Deals are facilitated by VC investors hugely encouraged by recent progress.

Two early fintech businesses, Monzo and Revolut, have unveiled BNPL offerings. Stripe has done a deal with AfterPay. Splitit has teamed up with Visa and Mastercard by letting clients pay by credit card.

Hard-pressed retailers also see potential in using BNPL balance sheets to drum up new business. UK-based Fly Now Pay Later is now offering BNPL deals to the travel industry.

The big question for BNPL operators is how they plan to deal with any future rise in interest rates, particularly when a drive for growth takes priority over credit scores. 

Former payday lenders, such as Wonga, have courted unpopularity by charging excessive interest rates. Capital One has banned BNPL users from using its credit card, telling Reuters: “These kinds of transactions can be risky for customers and the banks that serve them.”

Providers do not generally employ hard credit checks, although some operate checks similar to credit cards. Late payers defaulting on BNPL debt run the risk of harming their credit record.

Regulators are watching the sector carefully but, for now, the banks look unlikely to benefit from their intervention. 

 

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