So you think CBA has trumped BNPL darlings Zip, AfterPay and PayPal? Think again. Today, CommBank announced that it will be rolling out a "Buy Now Pay Later" (BNPL) feature to its customers by mid-2021. But the truth is that BNPL is in such an early stage of its overall trajectory that CommBank joining the fray is just lending (get it?) it's authenticity and authority to the relatively new payment concept. 

When PayPal recently entered the BNPL market, our analysts were unfazed, and in a more recent conversation Randal Jenneke head of Australian equities from T. Rowe Price, said that while they spend a lot of time analysing competitors, they don't think any copycats are cause for concern ... yet. 

CommBank is the first of the major banks to move into the highly controversial space. The feature has the edge of undercutting BNPL competitors on the retail side of a transaction, that is, CommBank will not be charging any additional merchant fees if someone uses CommBank's BNPL. With 10 million personal banking customers, CommBank has a large retail customer base to tap into, but unlike AfterPay and others, CommBank will require users to pass eligibility assessments.

“As the leading digital bank in Australia, we believe we are best placed to offer our customers a prudent and responsible BNPL option based on the trends and insights sourced from real-time transaction data over many years,” said CBA’s Group Executive, Retail Banking Services, Angus Sullivan.

“When making a payment, customers will have additional flexibility to use it for their everyday spending for smaller purchases as well as split over four instalments to help smooth payments for bigger purchases," he said. 

It's a smart move from CommBank, with credit card usage declining intergenerationally as Gen Z and millennials are more inclined to use debit cards. This younger demographic has also had the largest uptake in BNPL space so far. 

Source: Deloitte credit card report, 'Getting ahead of the curve' (2020).

Just one piece of a bigger pie

Like negotiation theory, the pie gets bigger the more you can collaborate with your competitors. 

CommBank's play is just enhancing awareness of the service overall. As it stands, the total addressable market for BNPL is huge and the growth potential is strong. Globally, the BNPL market is expected to hit US$680 billion in transaction volume worldwide in 2025. In Australia, that market was only at about $700 million at the end of FY20, with projections for it to double by 2023. 

“Our new BNPL service complements and underscores our investment in Klarna and our joint venture business here in Australia which offers both CBA and non-CBA customers huge opportunities to connect with domestic and international retailers.... Our latest investment in the company is an expression of our confidence in its future both worldwide and in Australia and New Zealand,” Mr Sullivan said.

Clearly, CommBank sees the long play in the BNPL space, both in owning their own transactions and through a third party like Klarna. 

When Paypal entered the BNPL scene in August last year, Tribeca analyst Jun Bei Liu told Livewire Markets to look at the big picture when a competitor enters the space. 

"If you take a step back, Buy Now, Pay Later is a very new industry. Afterpay only moved in 18 months or two years ago. The penetration of this service is very, very low. If anything, PayPal's offering is going to drive more awareness and adoption of this service.

Similarly, Dushko Bajic from First Sentier Investors told us, "for a payments juggernaut like PayPal to enter, we think it brings great validation to the BNPL industry." 

BNPL has only reached 1% of its potential  

It's important to emphasise that the BNPL isn't the only revenue stream for Afterpay. It is also a marketplace for retailers. Just last week, we asked Randal Jenneke from T. Rowe Price about his thoughts on competitor threats like Klarna and Affirm in US and EU markets. 

"Why the retailers like AfterPay is because when they think about their sales and marketing efforts, they can grow their business. So the choice becomes, do I want to advertise on mainstream media, social media, or do I want to actually form a relationship with the buy now pay later company like in Afterpay, because they can help drive sales growth to my business?" he said in the recent Livewire Expert Insights. 

For Jenneke, the risk of copycat market entrants is a non-issue at this stage of the BNPL market journey. 

"I would say right now in the buy now pay later space, the competitive dynamic matters a little bit less today because we're still in the early stages of the category continuing to grow. On most estimates buy now pay later, in a market like the US for instance, is probably a little over 1% of the opportunity," he said. 

Conclusion

So do the BNPL bulls need fear CommBank's latest play yet?

It seems as though most investors and analysts see sound fundamentals in the Afterpay marketing play and a lot of room for competitors in this market. Meanwhile, the CommBank play looks likely to give a boost to the BNPL market as a whole, offering increased validity in the concept as a verified payment scheme. While a large proportion of millennials and Gen Z are already on the bandwagon, the CommBank play could open up the minds, and wallets, of more reluctant BNPL users.