Green Sheet interviews Drake Star's Julian Ostertag on BNPL

Apple's June 2023 launch of Apple Pay Later is the latest example of BNPL's continuing diversification and growth. Julian Ostertag, managing partner and board member of global tech investment bank Drake Star and co-chair of the company's German operations, shared insights with The Green Sheet on the developing BNPL phenomenon. Following are interview highlights.

What key contributing factors are driving U.S. BNPL growth?

BNPL growth was especially driven by the lockdown in 2020 and 2021 as consumers were forced to shop from home and turned to online shopping. Getting a short and interest-free loan is very, very tempting. Estimates are that 50 percent or more Americans have now used BNPL.

How did some high-profile BNPL providers misread the market and what can we learn from their failures?

Fintechs like Klarna, Affirm, and Afterpay strongly benefitted from this development by offering an alternative to traditional credit cards. BNPL solutions have now been integrated into thousands of online shops, reaching a global transaction value of $120 billion in 2021, which has spurred investor interest and investment into these fintech.

However, the key question remains: is BNPL helping consumers to bridge short-term financial gaps, or does it just boost retail sales while pushing consumers into purchases they can't afford? Initial research reveals that 50 percent of borrowers have already maxed out their existing credit solutions before using BNPL, or their credit scoring was so bad, they couldn't get a credit card.

This has a strong impact on loan repayments. The key reason for the massive downturn we saw last year was the overall negative economic outlook driven by high energy costs, high inflation, the war in Ukraine, etc. BNPL providers now need to be more careful in selecting their customers.

How will Apple and other big techs entering BNPL impact other players in the space?

Big tech has been very successful in entering different financials services markets without actually becoming a bank or insurance company. They use their vast number of customers and offer personalized financial products based on the huge amount of data they already have. They might just be able to offer better products and assess the risk better due to the number of consumers and data they already have.

What advice would you give companies entering the BNPL market?

It's probably too late to enter the BNPL market, except if you are Apple, Google or Amazon.

What problems does BNPL solve in today's economic climate?

That's the key question. Does BNPL offer consumer an alternative lending instrument, or does it just boost retail sales while pushing consumers into purchases they can't afford? It was designed as an alternative to credit cards, and if spending is unavoidable, BNPL can be a great option. That's why other players like tech companies and banks have entered the market as well.

How would you advise CFPB and other policymakers to regulate BNPL?

I believe regulators will have to review BNPL to make sure it's being used as an alternative lending product and does not push subprime consumers into financial disaster.

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