This is part of an on-going series exploring the “buy now, pay later” (BNPL) space.
Part 1 “Buy Now Pay Later” and What Might Be Coming Next discusses why BNPL adoption is likely to surprise to the upside…and why BNPL must ultimately merge with commerce to survive.
Part 2 “Buy Now, Pay Later” and the Coming “Closed Loop” discusses Square’s acquisition of Afterpay…and why BNPL is a credible threat to the current payment network landscape.
This is Part 3 where we will explore how shifting consumer preferences could lead to a showdown between BNPL and subscription services…and why subscriptions might win out.
Recently, interest in “buy now, pay later” (BNPL) has positively exploded.
While BNPL was already quickly gathering momentum with younger consumers, Square’s recent acquisition of Afterpay has been nothing less than gallons of gasoline poured into a growing fire.
Not only does the transaction promise to expand BNPL to more consumers and merchants, it has accelerated industry competition and partnership developments including recent announcements by Affirm, Paypal, Amazon, Walmart, Goldman Sachs, JP Morgan Chase, and others.
Capital Flywheels certainly shares the optimism around BNPL, but one thing I do wonder about is whether changes in consumer preferences could alter the long-term BNPL opportunity.
Although there is significant and spirited debates around BNPL, the debates are almost exclusively focused on BNPL as a payment method without taking into account the rapid changes that are already underway in terms of what consumers want to buy.
This is an incredibly important factor to monitor because what you are buying can play a huge role in how you pay for it.
BNPL is pretty straightforward if you assume consumer demand stays product-centric and physical.
In a product-centric and physical world, some things are cheap, and some things are expensive.
For expensive things (and especially for expensive things), you probably want to buy it on some form of credit so that you can spread the cost out over time. This helps make the purchase more affordable.
Historically this would mean credit cards.
But BNPL would likely be a better option because BNPL (at the moment) puts the burden and cost of financing on the merchant instead of the consumer.
This ultimately makes BNPL more attractive for the consumer compared to cards. And merchants are currently willing to bear the extra cost of BNPL (compared to cards) because BNPL also tends to lead to larger transactions, which means more revenues and profits for the merchant.
But consumer preferences are changing.
Consumers increasingly want less products and less physical goods.
Consumers increasingly want more experiences and services and digital goods.
And these types of things – experiences, services, digital goods – are increasingly being monetized through subscriptions.
For example, you probably have a Netflix subscription that costs you ~$14 / month (Standard plan).
You probably vastly prefer paying $14 / month rather than paying $168 for an annual pass upfront. You might be agnostic if you can use BNPL to turn that $168 back into 12 installments of $14 each, but having the service marketed as $14 / month probably has less “sticker shock” than $168 / year.
If you play games, you have likely also observed the shift from upfront game purchases towards advertising, in-app purchases, and, increasingly, battle passes and subscription monetization models.
For example, Fortnite now offers Fortnite Crew:
And Xbox has Xbox Game Pass:
If you squint, BNPL and subscriptions look almost the same.
But the nature of experiences, services, and digital goods often lend themselves very easily to subscriptions. And if this trend towards experiences, services, and digital goods continue, the ultimate long-term opportunity for BNPL could shrink.
I suppose you could further break down your monthly subscription payments into BNPL installments, but the smaller the ticket, the less important BNPL becomes.
For experiences, services, and digital goods, monetizing through subscriptions isn’t just about timing of payments or convenience. Subscription monetization models have real value for both consumers and merchants alike.
Subscriptions incentivize the merchant to continually improve the product or face potential subscription cancellations, otherwise. Merchants know that they have to prove themselves worthy of your money every month in order to keep you subscribed. This is a good outcome for consumers!
And for merchants, they get the benefit of more data. Merchants get periodic (e.g. monthly) data points that prove their service remains highly valued. You simply don’t get these data points under a BNPL payment plan because the purchasing decision is only made once even if the installments break up that single decision into multiple payments.
Of course, subscriptions are much more natural for digital and service type products because you can turn off the digital good or service once a consumer decides to cancel the subscription.
This is much harder to do with a physical product.
With a traditional physical product, there is no way to hand over a physical product upfront (which likely costs quite a bit of money to manufacture) without charging a significant sum at the same time upfront because the consumer could just run away with the product and never pay anything in the future.
But BNPL would work in these scenarios with physical products because BNPL is a legal obligation for payment even if it is spread out over time. I suppose you could require a consumer, contractually, to pay an equivalent “subscription” for a few months, but this likely would not be as smooth of a consumer experience as just using a pre-set BNPL installment option when it comes to physical products.
So one potential shift is that consumer demand increasingly shifts towards experiences, services, and digital goods that lends itself much more easily to subscriptions.
The other potential shift that could impact long-term BNPL demand is the increasing infusion of digital capabilities into physical products.
What’s interesting is that as more and more traditional physical products become (essentially) computers, it becomes much easier to transition to a subscription monetization model because you can digitally control access and function of the product long after you’ve handed the product over.
This means merchants can hand you a product without charging anything upfront and still limit the risk of non-payment because digital capabilities allow them to potentially brick your product if you don’t pay.
A great example is Peloton:
Note that the image indicates that the bike costs $1,495 that can be paid monthly at $39. And below that in (very light) gray font, it also says there is a separate $39 / month Peloton All-Access Membership (subscription).
While Peloton bikes do sort of function without a subscription, the majority of the value actually comes from the $39 / month “All Access Membership” plan.
Peloton is a fascinating case study to me because Peloton bikes also happen to be the single biggest portion of Affirm’s business.
Peloton currently requires consumers to pay $1,495 for a bike upfront + $39 / month subscription. The $1,495 can be further broken down into 39 payments of $39 / month for 0% APR, powered by Affirm (If you do the math, the total payment value comes out to $1,521…so there’s a $26 fee embedded in there but spread across a 3 year period).
Given how much of Affirm’s business is driven by Peloton, it suggests that quite a large portion of Peloton’s customers use BNPL to pay for the bike.
But if you squint, BNPL and subscriptions are almost the same.
If Peloton already asks consumers to pay $39 / month as a subscription + an additional $39 / month Affirm BNPL installment for the bike, why shouldn’t Peloton eventually just ask consumers to pay $78 / month as a subscription?
One potential reason likely holding Peloton back is that it does get paid by Affirm upfront when BNPL is used. Affirm is technically the one receiving the consumer payments over time, while it pays merchants like Peloton upfront.
But one thing that is increasingly common and consistently observed in tech is that mature tech companies have more cash than they know what to do with.
Young tech companies may have interesting investment ideas to deploy excess cash into, but most mature tech companies do not. If cash is not an issue, the delayed payments via subscription monetization models might not be as much of a non-starter compared to upfront BNPL payments since BNPL partners do technically take a pretty hefty cut (~5% of transaction value).
What I’m arguing won’t really matter for a very long time, though. BNPL has a very bright future for many years. It will likely struggle as a standalone payment feature, but once merged with commerce (or a robust consumer fintech wallet), it can become a pretty compelling product.
But somewhere really far off in the future, we’re going to be living in a world where we mostly consume experiences, services, and digital goods…and to the extent that we consume physical goods, these physical goods will likely be digital in nature. And all of these things suggest subscriptions will be an ever easier monetization model to pursue.
Somewhere in the future, the roads for BNPL and subscriptions will likely converge, and when that happens, these two monetization models will need to fight for the heart and soul of consumers everywhere.
But until then, the sun continues to rise for both.