FTT+: Is BNPL A Feature? Standalone? Both?

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What’s up everyone—happy Tuesday! No playlist today as I’ve just been listening to random Drake songs over the past week.

I was trying to have a relatively chill Sunday when some huge news lit up Twitter—Square announced plans to acquire Buy Now Pay Later company AfterPay for $29B in an all stock deal.

PS: Julie is covering this in the podcast on Thursday with Matt Harris of Bloom so be sure to check that out!​

There’s already been a lot of hot takes around the acquisition—Square and CFO Amrita Ahuja did a great job of explaining the additive value AfterPay could bring to Square for both its Sellers business and its consumer-facing Cash App subsidiary too.

It brought me back to a question I’ve had for a few years now: Is BNPL a feature that makes sense as part of a larger financial services firm?

There’s a story about Steve Jobs meeting with Dropbox founder Drew Houston and suggesting Apple buy Dropbox because Dropbox is a feature and not a product. Clearly, to some degree, Jobs was wrong—Dropbox has a $12B dollar market cap. Individuals and businesses have a need for simple cloud services, and Dropbox has expanded into other areas by snapping up companies like DocSend earlier this year.

I’ve always wondered if BNPL is more of a feature than a product for card networks, and it seems like that’s the case. A network like Visa or Square already has merchant relationships and consumer brand trust developed, making it easier to layer on a business like AfterPay that add value to both sides of the network. For merchants, it leads to larger purchases and sticky customers that shop with you regularly. For users, BNPL is a value add service that helps you defer payments for large purchases for later.

While I do think more BNPL companies will get bought up over the next year or so, there are obvious counterarguments to my hypothesis as well: namely Affirm and Klarna. Max Levchin’s company is now trading at a market cap of $17B and Klarna was valued at $46B in the private markets.

However, it’s probably fair to argue that Affirm and Klarna are burgeoning networks themselves. That’s certainly been Affirm’s goal—to initially build out a massive merchant base and attract users by powering programs like Shop Pay Installments and other consumer-facing partnerships. Klarna has a similar strategy in Europe and is quickly becoming a major player in the US as well. But, similar to Dropbox, these are companies that have expanded beyond just installment loans. Affirm has a fascinating B2B strategy to help businesses add their own installment programs, powered by Affirm. Klarna has expanded in a different direction, getting banking licenses in the EU and developing more financial services for users.

But while these valuations and market cap’s are massive already, bigger players think they’d be more valuable as a part of their ecosystem. According to The Information, MoffettNathanson analyst Lisa Ellis said that companies like Shopify, Stripe, and American Express are interested in Affirm or Klarna. And I’ve heard about some other small players that are on the market.

All the potential acquirers have a network that BNPL companies could leverage. Shopify powers millions of merchants and has a rapidly growing consumer payments product. Stripe offering installment lending to its millions of e-commerce customers makes a lot of sense. American Express created a network from scratch, and both millions of merchants and millions of cardholders.

If BNPL is more of a feature than a full product, it can still result in several multi billion dollar exits. Definitely expect more consolidation and more networks like Visa and others to buy up BNPL companies for big sticker prices, but it will also be interesting to see if companies like Affirm and Klarna can continue to expand and become large merchant and customer networks themselves.

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