On Monday 2 August 2021, American digital payments provider Square announced its upcoming acquisition of Australian ‘Buy Now Pay Later’ (BNPL) company Afterpay, creating a new giant in the BNPL sector.

Valued at approximately $29bn, the transaction will see Afterpay’s BNPL platform integrated into Square’s Cash App. This will expand the global presence of the former and strengthen the online payment capabilities of the latter in a burgeoning BNPL market.

Square’s acquisition of Afterpay creates a major player in the BNPL sector

Given that the fintech industry overall is still relatively fragmented, consolidation is often a lucrative strategy to generate new revenue streams and continue to grow in a highly competitive market. By combining the financial capital, expertise, and resources of both companies, Square’s acquisition of Afterpay has the potential to disrupt the traditional banking landscape and maintain profitability amid an economic downturn caused by the Covid-19 pandemic.

BNPL is a short-term financing service in which customers can defer or spread the cost of purchased goods, without incurring any interest or fees. Instead, retailers are charged to offer the platform; an opportunity which many are eager to undertake as BNPL options claim to increase sales by around 35%.

There are a range of BNPL platforms currently available, including sector leaders Klarna and Afterpay. Renowned online payment servers such as PayPal also offer a ‘Buy in Three’ option, whilst multinational technology company Apple is currently developing its own service in collaboration with Goldman Sachs. This is heating up competition in the sector.

Buy now pay later has been boosted by evolving shopping habits

The BNPL sector has experienced exponential growth in recent years as the ease of availability of this type of credit has proved to be particularly attractive amongst millennial and Gen Z consumers. It is estimated that the BNPL sector quadrupled in size in 2020 and will reach a value of $166bn by 2023. In the UK alone, Klarna has approximately 10 million customers and is seeing 95,000 new accounts being opened weekly.

The rise of e-commerce has been a key driver for growth in the BNPL sector. Consumers are increasingly turning to online retailers to shop for both essential and non-essential items, a trend which has been bolstered by the pandemic and the closure of brick-and-mortar stores.

According to GlobalData, BNPL platforms have been used by 77% of consumers globally for online shopping, compared to 49% in-store. By partnering predominantly with clothing brands such as ASOS, Boohoo, and PrettyLittleThing, and targeting consumers through Instagram advertising, BNPL platforms have been able to capitalize on the desire for continuous self-improvement through the newest fashions and cosmetic products.

Moreover, BNPL platforms have been boosted by the demand for more flexible payment options as consumers suffer the financial effects of the pandemic. As many are inclined to pull back on non-essential spending at a time of greater job insecurity and general economic uncertainty, the option to pay at a later date provides an incentive for consumers to shop. According to a survey by Comparethemarket.com, 35% of consumers have said that they are using BNPL platforms more frequently than before the pandemic.