Buy now, pay later BNPL services see strong growth

BofA analysts identified Affirm as a standout in a new digital note on Buy now, pay later BNPL services.

The note, issued on October 12, raised Affirm's price target from $119 to $160 from BofA. AFRM closed $146.13 on Wednesday. AFRM is the clear bright spot, analysts said. While all the other BNPL vendors saw app downloads in September and monthly active users growth compared to September and 1 H, AFRM was the only vendor that saw growth accelerate in both metrics. BofA was the only company to increase its share of monthly active users relative to the first half of the year, according to Affirm. And like many other players, Affirm also saw app downloads accelerate in September.

BofA noted strength in Affirm due to its recent partnerships, its product roadmap, and its super app strategy. The bank expects Affirm to deliver 30% new revenue growth for at least the next several years, driven by growing BNPL market and top-line product introductions. Despite their bullishness toward the foreign players, the BofA analysts still noted strength among the American players.

As of September 2021, Klarna and Afterpay remain popular BNPL companies, analysts noted. The two apps were the most downloaded BNPL apps in September. Affirm was third, but is slowly gaining market share.

The Swedish firm has been making efforts to push out to the US. Newly partnered with mall operator Simon Properties to provide its BNPL service in stories via the Klarna app.

The move is timely, as Klarna's users indicated in a December 2020 survey that last-minute shopping has been key for physical owners.

There's been a lot of digital players trying to get into physical stores, Klarna's CEO told Yahoo Finance Live video above PayPal has tried so many times, other players have as well, but we are actually seeing real success with it. We are already living in 60,000 stores in the U.S. with Macy's, FootLocker, Sephora. Several of them reported up to 65% increase in average order value when providing our services in the stores, so we're seeing a lot of traction. Established companies like Mastercard MA and Visa V have also jumped into the BNPL space.

In August, Square SQ announced a huge $29 billion deal to buy Afterpay. Affirm also entered the space by partnering with Amazon AMZN.

Traditional banks are also looking closely at the industry: In an earnings call on October 13, JPMorgan Chase JPM CEO Jamie Dimon said the nation's largest bank would spend whatever it has to spend to compete with all these folks in our space given that Affirm announced its intention of offering debit cards and cash banking accounts.

Voraina stressed, given this backdrop, that the mission of Klarna is to shift away from debit and towards credit.

We believe that people should have credit cards, but not debit cards, but occasionally they need access to credit, Siemiatkowski said. But pay later when they do, buy now, we're in interest free. According to Siemiatkowski, apps like Klarna are not trying to encourage you to borrow more than you have to. Our credit losses are 30%, 40% below industry standards for credit cards. And I think it's more likely that this model is actually more responsible than the traditional credit cards. More people are starting to use BNPL, according to BofA's survey of 1,124 BNPL users, which found that 47% of respondents had used BNPL eight or more times in the last 12 months, while 54% of respondents plan to use it eight or more times in the next 12 months.

About 56% of respondents said the average BNPL transaction size was less than $200.

24% of BofA's respondents said they turned to BNPL because they had maxed out their credit card loads.

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