Buy Now, Pay Later Market Update

VISUAL ANALYSIS SUMMARY
‘Buy Now, Pay Later’ Market Update
In short In October 2023, the revised Consumer Credit Directive was adopted. As a result, the BNPL sector will come under the supervision of the AFM by November 2026 at the latest. The sector has grown further in size since the 2022 exploration. It has also taken steps to improve its services. For example, a code of conduct has been in force since October 2023. BNPL providers will need to improve further in the lead-up to the new regulations. In the short term, we explicitly request attention for the handling of BNPL use by minors. 3 Of every €100 in purchases, approximately €40 is returned. 40 BNPL providers that process more fashion purchases see articles returned more often. 100 This is also the largest sector:
about two-thirds of all
BNPL transactions come from here.
Other Fashion sectors
% BNPL transactions
2022 2023 2024 2025 2026
November 2022
AFM publishes exploration
October 2023
Code of Conduct
November 2026
Regulation and supervision
Now
The BNPL market is fully developing: Some notable results:
2 Extra caution for users under 35 years old.
18-24 years 25-34 years
In this group, the number of transactions has increased by 32%. In this group, the average number of transactions is the largest. These two age groups most often deal with dunning costs. Ultimately, more than 4% of them are handed over to the collection agency. This has a huge impact. €€ €50 1 Unauthorized BNPL use by minors. 6 0 Almost 600,000 possible transactions by minor account holders in 2023. Average approximately €50 per transaction. 18 Younger than

ANALYSIS REPORT
Table of Contents

1. Introduction 3
2. Evolution of the market landscape 4
   2.1 Transaction characteristics 4
   2.2 User characteristics 5
   2.3 Transactions per sector 7
   2.4 Return behavior in BNPL transactions 10
3. Quality of service provision 12
   3.1 Self-regulation 12
   3.2 Information provision 12
   3.3 Provision of BNPL to consumers 13
   3.4 Costs and consequences of late payment 15
4. New regulations coming 18
   4.1 Regulated and exempt BNPL schemes 18
   4.2 Information provision 19
   4.3 Creditworthiness assessment, costs and
   delinquency management 20
5. Conclusion 22
   5.1 Growth and development of BNPL will continue 22
   5.2 BNPL providers must improve further in the
   lead-up to new regulations 23
   Appendix 1: Justification 25
   Appendix 2: Results of AFM Consumer Monitor 26

‘Buy Now, Pay Later’ Market Update 3
ANALYSIS REPORT

1. Introduction
   1 By debt habituation, we mean here a shift in the norm from saving first for purchases or paying directly for them to buying on installment. 2 We note that the most recent figures we have received and used from BNPL providers in this market update relate to 2022. Any improvements that providers have implemented since the publication of our exploration in November 2022, however, can only be reflected in the 2023 figures at the earliest. We do not have data on those figures. This report is an update of the 2022 exploration. The content of that exploration is assumed to be known. We do not intend to produce a standalone readable report. Reason and objective With Buy Now, Pay Later (BNPL), consumers can delay payment for their online purchase fully or partially until after delivery. It is often offered for free and sometimes for a small fee. BNPL offers consumers advantages, such as flexibility, and helps shops increase their sales. On the other hand, the ease with which a consumer completes an order with BNPL is so great that debt habituation1 and debt stacking can easily arise. In November 2022, the AFM published its exploration of the BNPL market. Following this report, there has been much social attention for this phenomenon. The purpose of this market update is to provide insight into the development of BNPL services in the Netherlands since then. This market update therefore does not address the different products that fall under the overarching term ‘BNPL’ and the possible impact of these differences on the quality of BNPL service provision. This is part of the 2022 exploration. Guide In chapter 2, we describe the evolution of the market landscape and in chapter 3 some developments in the quality of the service provision. We do this, among other things, based on written information that BNPL providers (voluntarily) shared with us and the additional clarification obtained in interviews. It concerns the same 5 providers as in the 2022 exploration, namely Billink, In3, Klarna, Riverty and Tinka.2 Additionally, we had consumer research conducted again to get a better picture of the use of BNPL in the Netherlands.
   Chapter 4 follows with an explanation of new regulations that
   are coming. In October 2023, the revised European Consumer Credit Directive was adopted. As a result, BNPL providers will have to comply with new consumer protection rules in a few years. They will then come under the supervision of the AFM. Finally, we have listed the main conclusions in chapter 5. This report contains 2 appendices. In Appendix 1, we explain the justification for the creation of this document. Appendix 2 contains the results of the consumer research on BNPL use in the Netherlands.

‘Buy Now, Pay Later’ Market Update 4
ANALYSIS REPORT
2. Evolution of the market landscape
3 See Annual mutation consumer price index; from 1963 | CBS. 4 The calculation of the number of users was made by adding up the number of users of 5 BNPL providers. So it is not about unique users. A consumer who uses multiple BNPL providers is also counted multiple times. It is not possible to correct for this. 5 The AFM has research institute Centerdata conduct online research among consumers twice a year. This gives us more insight into the intentions and behavior of consumers on the financial markets. We asked more than 1,000 people about their use of BNPL. The results are in Appendix 2. 6 See Dutch person buys more digital products but fewer goods online | CBS.
2.1 Transaction characteristics
Number and value of transactions increase; quantity of users decreases slightly In 2022, BNPL providers processed some 45 million transactions with a total amount of €4.8 billion. As can be seen in Figure 1, the number of transactions increased by 8%. The total value increased by 13% . This is just above the 10% increase in the consumer price index in 2022.3
Figure 1. Number and value of transactions
2022 2021 Change
Total value transactions
€4.8 billion €4.2 billion + 13%
Number transactions
45 million 41.6 million + 8%
Average value transactions
€106 €101 + 5%
Source: AFM data
The number of BNPL users decreased by 8% in 2022 compared to 2021.4 Where the 5 BNPL providers saw approximately
7.1 million users in total in 2021, it was some 6.5 million in 2022. The AFM
Consumer Monitor5 shows a similar trend. It shows that 29% of respondents in the spring of 2023 stated that they had used BNPL in the past 12 months. This percentage was still 38% in 2022. We thus see that on the one hand the number of users has decreased slightly, and on the other hand that the transactions have an upward trend. It seems that existing users are paying with BNPL more often and also spending more. More people shopped online in the corona period To put the somewhat declining user numbers in perspective, we look at the annual research on ICT use by the Central Bureau of Statistics (CBS).6 They look here among other things at the percentage of people (from 12 years) that made an online purchase in the 3 months preceding the research. This percentage decreased between 2021 and 2022 from 77% to 74%. A decrease in the number of consumers making online purchases can have consequences for the BNPL market. The payment method is primarily used online. The results of the CBS seem to translate into the figures we have received from the BNPL providers. We note that as a result of the coronavirus there was a hard lockdown in 2021 and many physical stores were closed. As a result, many people were dependent on online purchases. In 2022, society was opened up again and people could choose more between online and offline (in physical stores) purchases.

‘Buy Now, Pay Later’ Market Update 5
ANALYSIS REPORT
BNPL in physical stores is growing
We see an increase in the number of physical stores where the customer can pay with BNPL. In 2021 there were still 74 stores where that was possible, in 2022 there were already 256. The transaction in the store takes place via a specific payment card or the online environment of the provider or store. 3 of the 5 providers who participated in this market update facilitate this payment option. The information provision to the customer takes place mainly online. For the issuance of payment cards that are used in physical stores, the provider in question verifies the identity of the customer via iDIN.7 We are positive about this, because it enables the provider, for example, to check whether the customer is at least 18 years old. The impact of the possibility to pay with BNPL in physical stores is still small. For every €100 that is settled with BNPL, it is for approximately 10 cents in physical stores (in 2022). The approx. €4.9 million BNPL turnover in physical stores is already 126% more than in
2021. In the 2022 exploration, we signaled that due to the ease of BNPL, buying on installment normalizes, leading to debt
habituation. A further increase of BNPL in physical stores could increase this debt habituation.
2.2 User characteristics
Usage by age group
We see a decrease in the number of users in every age group, as shown in Figure 2. The largest decrease is seen in the group 65+ (-14%). Despite the decrease in the total number of users, it can be observed in every age group that the average number of transactions has increased compared to 2021. The number of transactions per age group is in Figure 3. 7 iDIN is a service of the banks through which consumers can identify themselves to other organizations with the login credentials of their own bank. 8 See Number of young people with payment problems growing | Dutch Youth Institute (nji.nl). The average number of transactions among young users grows 32% The increase among users between 18 and 24 years is striking. This group made an average of 5.5 transactions per user in 2021, in 2022 the average is 7.3. This is an increase of some 32%. The users between 18 and 24 years are now approaching the average number of transactions of consumers between 25 and 34 years. They did namely the most transactions, on average 7.6 per user in 2022. Young people are financially more vulnerable, as they often do not yet have financial buffers built up.8 It is worrying that the number of transactions is growing hardest among young customers.
Figure 2. Number of BNPL users in millions per age group

• 2022 ● 2021
  Age group
  0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
  65+
  35-64
  25-34
  18-24
  Source: AFM data

‘Buy Now, Pay Later’ Market Update 6
ANALYSIS REPORT
Figure 3. Average number of transactions per age group9

• 2022 ● 2021
  Age group
  0 1 2 3 4 5 6 7 8
  65+
  35-64
  25-34
  18-24
  Source: AFM data
  Number of very frequent users increases by 31% From the previous paragraphs, it appears that the number of transactions and the value of these transactions are increasing while the number of users is decreasing. A possible cause is that there is a growing group that uses BNPL products frequently. The group of very frequent users (20+ transactions in 1 year) has indeed increased significantly, namely by 31% to almost 1 million users. The risk of this development is that there is an increased risk of debt habituation in this group. Users between 25 and 34 years old say they more often miss a payment term In the AFM Consumer Monitor of 2023, 12% of BNPL users say they have missed at least 1 payment term in the past 12 months.10 The people for whom this happens most are between 25 and 34 years old. 25% of this user group states that they have missed at least 1 payment term. In Figure 4, it can be seen how the compliance with payment terms differs per age group. 9 We have placed extra emphasis on certain information in some figures, for example by framing or shading this information. 10 This is the sum of the 10% who stated they had once missed a term and 2% who said they often missed a term (2%). 11 88% of respondents stated they had never missed a payment term. The complete graph can be found in Appendix 2, figure 14b.
  Figure 4. Payment behavior within the set terms per age group11
• Mostly yes, but I have once missed a payment term
• No, I often miss payment terms
  Percentages
  0%
  5%
  10%
  15%
  20%
  25%
  18-24 25-34 35-44 45-54 55-64 65+
  Source: AFM Consumer Monitor spring 2023 Consumers under 35 years old more often have to deal with the consequences of missed payment terms In Figure 5 below, it is broken down what percentage of users in a certain age group has had to deal with dunning costs. Figure 6 gives the same breakdown for the handover to a collection agency. What stands out is that the 2 youngest age groups relatively appear most often. The BNPL providers brought in 2021 at 12.9% of users under 25 years dunning costs charged. They handed over 3.7% of this user group to a collection agency. These percentages increased in 2022 to 13.2% and respectively 3.9%. We see a similar increase among consumers between 25 and 34 years. Where in 2021 still 13.4% of users had to deal with dunning costs, it was 14% in 2022. The per-

‘Buy Now, Pay Later’ Market Update 7
ANALYSIS REPORT centage of users in this age group that has been handed over to a collection agency has increased from 4.5% to 4.7%. The increases compared to 2021 seem small, but the impact is often large. The costs associated with late payment can add up significantly. We discuss this further in chapter 3.4.
Figure 5. Percentage of users for whom providers charged dunning costs
per age group

• 2022 ● 2021
  Age group
  0% 2% 4% 6% 8% 10% 12% 14% 16%
  65+
  35-64
  25-34
  18-24
  Source: AFM data
  12 We asked the BNPL providers to categorize the retailers affiliated with them into the mentioned categories. If an affiliated retailer is active in multiple sectors, a choice can be made to place the transactions under the main sector of the respective retailer.
  Figure 6. Percentage of users handed over to a collection agency
  per age group
• 2022 ● 2021
  Age group
  0% 2% 4% 6% 8% 10% 12% 14%
  65+
  35-64
  25-34
  18-24
  Source: AFM data
  2.3 Transactions per sector
  We have calculated what the most important sectors are based on information we received from the BNPL providers.12 The results in euros and in number of transactions are in Figure 7 and 8 and generally correspond reasonably well with each other. There are significant differences between providers. This is for example due to the fact that providers focus on certain sectors. Fashion sector by far the largest in BNPL The fashion sector holds by far the largest share of the BNPL market. About 2 out of 3 transactions (67%) concern fashion. Of every euro spent, about two-thirds (68%) is also spent in the fashion sector. After that, the home and garden sector follows at a large distance. The category other is also quite large. This includes, for example, the mobility sector (scooters and bicycles), printing and online services.

‘Buy Now, Pay Later’ Market Update 8
ANALYSIS REPORT
Decrease in liquor and alcoholic beverage sales; use in travel sector grows significantly In most sectors, more was spent with BNPL in 2022 than in 2021, with the exception of the electronics and white goods sectors (-3%) and liquor and alcoholic beverage sales (-15%). The travel sector plays a modest role in terms of size (1.4%) on the BNPL market. The growth the sector is undergoing is nevertheless striking. This concerns in particular flight tickets, accommodations and package holidays.
Figure 7. Share of sectors in total amount of BNPL transactions
Sector
Weighted average result
Change in total amount transactions vs. 2021 Fashion 67.96% +13% Home and garden 11.79% +5% Electronics and white goods 4.39% -3% Personal care 2.92% +14% Travel 1.40% +289% Supermarket/groceries 0.98% +36% Liquor and alcoholic beverage sales 0.29% -15% Other 10.28% +33% Source: AFM data 13 See Figure 16 in Appendix 2.
Figure 8. Share of sectors in total number of BNPL transactions
Sector
Weighted average result
Change in number of transactions vs. 2021 Fashion 67.21% +7% Home and garden 8.05% -4% Electronics and white goods 2.33% -19% Personal care 4.57% +10% Travel 0.60% +243% Supermarket/groceries 1.85% +26% Liquor and alcoholic beverage sales 0.25% -21% Other 15.14% +29% Source: AFM data Suitability of BNPL for non-returnable or addictive products From the AFM Consumer Monitor13 it appears that the most mentioned reasons for using BNPL have to do with the uncertainty of online purchases, such as the reliability of the webshop. Consumers want to know that their purchase is in order and pleases them before they pay. People do not want to pay in advance for things they do not keep. Products that the customer basically cannot return, such as daily groceries with limited shelf life and travel, seem from that perspective less suitable for BNPL. The chance seems small that the customer will return the groceries because they did not please them. Also, a holiday cannot be canceled after returning home. For such products, the risk seems greater that BNPL is chosen out of financial necessity, which can lead to irresponsible credit provision and debt stacking. We note that often the option exists to purchase the mentioned products, for example, with a credit card. Even

‘Buy Now, Pay Later’ Market Update 9
ANALYSIS REPORT without the possibility of BNPL, the customer can then buy these products with borrowed money. For alcoholic beverages, for example, it applies that the customer usually may not test them first upon delivery of the order and then return them, so from that motive BNPL use is not meaningful. Then the concerns remain about the reliability of the webshop and whether the purchase is in order upon receipt. Against this stand the concerns of experts from, among others, Jellinek and the Trimbos Institute that BNPL is so low-threshold in its use that it encourages excessive drinking and increases alcohol-related damage.14 Weighing this against each other makes it clear that also addictive products such as alcohol are less suitable for BNPL. Use of BNPL for non-returnable or addictive products From the figures in Figure 7 and 8 above, it can be seen that the use of BNPL in the travel sector has increased strongly. Furthermore, it appears that BNPL use in the category of liquor and alcoholic beverages has actually decreased. The available figures do not yet give a complete picture, for example because it is not clear to what extent it goes about travel where the actual payment only takes place after returning home. For a more complete picture, we therefore asked BNPL providers if it is possible to pay for certain non-returnable or addictive products with BNPL at retailers affiliated with them. The results are in Figure 9. 14 See Installment alcohol at webshops is advancing, experts want the cabinet to intervene | RTL Nieuws.
Figure 9. Number of BNPL providers where non-returnable or addictive
products can be settled
Type of product
With how many
BNPL providers possible?
(Inquiry among
5 providers)
Groceries/perishable food 2
Vacation trips/flight tickets where the trip can take place before the trip is fully repaid 1 Alcoholic beverages 5 Soft drugs for recreational use 0 Gambling services 0 Source: AFM data Although it is possible with all 5 BNPL providers to pay for alcoholic beverages with BNPL, the providers mostly state that it is possible sporadically or only under specific circumstances, or that the possibility is being phased out. That creates confidence that the BNPL providers mostly want to give responsible shape to their role as a provider of a payment method. We still have our concerns. With 2 providers, it is possible to pay for groceries or perishable food with BNPL. With 1 provider, it is moreover possible to pay for vacation trips or flight tickets where the trip can take place before the trip is fully paid off. We call on retailers and the BNPL sector to continue evaluating for all possible purchases whether BNPL as a payment method is suitable from a societal perspective.

‘Buy Now, Pay Later’ Market Update 10
ANALYSIS REPORT
2.4 Return behavior in BNPL transactions
With BNPL, the purchase amount is only debited when the customer chooses to keep certain purchases and not return them.15 Additionally, delivery and return are often free. These facto rs can contribute to customers ordering more than necessary and subsequently returning excessively without regard for the ecological footprint thereof. The transition to a sustainable society is one of the most important challenges of our time.16 For the AFM, this is reason to conduct research into the return behavior of customers who use pay-after-delivery. We have calculated what the return ratio is based on information we received from the BNPL providers. We set the returned orders against the total orders. We calculate the return ratio both in euros and in number of transactions. For every €100, approximately €40 is returned On average, 41.0% of the order value is returned. That is, for every €100 that the customer settles with BNPL, €41 is returned. The result for the number of transactions is almost identical, namely 40.7%. That means that for every 100 transactions, the customer returns part of their order or the whole in about 41 of them. The return behavior looks stable; the changes compared to 2021 are minimal. We note that this is a weighted average. The results per provider differ strongly among themselves. With one provider, approximately €56 is returned for every €100. The highest return ratio based on the number of transactions is 60.7%. 15 This applies to a lesser extent for paying i