The Covid-19-fueled boost in e-commerce also boosted the “by now, pay later” (BNPL) industry, which synergistically benefitted from making high-value purchases more immediately affordable amidst the increase in online purchases. By spreading payments over time, BNPL provides payment options, without relying on credit, for millions of consumers who have faced economic uncertainty over the past year. Merchants that accept some sort of BNPL integration benefit from increased sales conversions and higher cart values. The major players in the space, Affirm, Klarna, Afterpay and PayPal, offer BNPL options to tens of thousands of merchants covering categories ranging from makeup to high-end exercise equipment. All together, BNPL accounted for $24B in spending in 2020 in the U.S. alone. Global BNPL expenditure is expected to reach $347B by 2025. 

For retailers, BNPL is integrated into the checkout flow by customized API or directed through channels such as Shopify and Woo Commerce. Consumers discover BNPL options either at checkout or through one of the providers’ apps. If a merchant doesn’t offer a BNPL option, some providers will provide a one-time-use virtual card to use at checkout. Many of the leading BNPL solutions charge zero or minimal interest, as the retailer takes on the processing fee rather than the consumer, similar to a credit card. 

Affirm (Nasdaq: AFRM), which postponed its Q4 2020 IPO to avoid the kind of market pop that happened in IPO debuts from DoorDash (Nasdaq: DASH) and Airbnb (Nasdaq: ABNB), surged in first-day trading by more than 90%. Affirm’s stock opened at $90.90 and climbed as high as $96.07 in late trades after pricing at $49 a share—nearly doubling its valuation to around $24B. Over the past weeks, the stock has crept up as high as $137.98. At the time of publishing this article, it was trading around 115, up more than 5% for the day. 

Some question the company’s vulnerability given its success has been tied to consumer shopping behavior during the pandemic (revenue was up 93% in the fiscal year ending June 30, 2020, and 98% for the quarter ending in September 2020). While its customer base is rooted heavily in e-commerce, and a whopping 30% of sales came from Peleton, it provides service to many companies in travel—an industry that will surely see a boom when the pandemic is over. 

The valuations of two of Affirm’s top rivals, Klarna and Afterpay, also soared during the pandemic and amidst the news of Affirm’s IPO. Some consider BNPL to be a three-horse race between these companies. Sweden-based Klarna, which is still private, reported gross merchandise volume of $35 billion for the first nine months of 2020, up 43% YOY. The company counted 11 million U.S. customers and 2 million monthly active app users as of November 2020. Australia-born Afterpay’s ASX-listed shares rallied on the news of Affirm’s market debut, taking the company’s valuation to $24.7B (USD).

All of this comes with mounting concerns over people buying things they can’t afford and falling into a debt trap. Some critics liken BNPL to the predatory lending practices of Payday Loans. I disagree. In fact, I see BNPL as a viable alternative to payday loans, which charge up to $15 per $100 borrowed, totaling a 400% APR for a two-week loan. 

Some also worry about BNPL’s effects on the future creditworthiness of the millennial user base, which was particularly economically affected by the pandemic. Getting BNPL approval does not affect users’ credit score, as it is a “soft check” to determine creditworthiness. Still, in some cases, repayment will be reported to agencies and can potentially boost credit scores. Late fees vary by company and can be levied either as a fixed fee or a percentage of the purchase price. Late payments and defaults are reported to credit agencies. Currently, there are no regulations controlling BNPL companies, unlike credit cards. With this in mind, users should do their research before deciding if the instant gratification is indeed worth it. 

There is mounting skepticism about the future of BNPL due to the uncertainty of whether e-commerce will continue to rise at the current pace. Home gym equipment accounts for a large portion of BNPL purchases—it remains to be seen if people will return to gyms or continue to work out at home. However, if a user can responsibly manage all their payments on one app, pay little to no interest or credit card fees and have instant gratification, I see BNPL capable of disrupting traditional card networks and succeeding.