Amazon (AMZN -0.77%) is partnering with Affirm (AFRM -1.73%) to offer its buy now, pay later (BNPL) service at checkout. BNPL is exploding in popularity, particularly among young consumers, as an alternative form of credit. Big-name fintech companies like PayPal Holdings (PYPL -0.83%) and Square (SQ -0.84%) have entered the space as well.
But Amazon's partnership with Affirm is an indication that it's not interested in the space. At least, not at this time. And while the partnership's great news for Affirm, it's good news for PayPal, Square, and all the other players in BNPL, too.
Why isn't Amazon interested?
Amazon has been in the payments space since 2007. It now boasts "tens of thousands" of websites using its Amazon Pay service. It also launched a mobile card reader for in-store shopping in 2014 but discontinued the product about a year later.
Amazon has to overcome the challenge of being both a competitor and partner to some retailers that use its various services (Amazon shipping, for instance). For example, if an e-commerce website has similar options to what Amazon has to offer, that website is more likely to go with another shipping service to avoid sharing too much proprietary information with Amazon. Competitors are wary of sharing data, even if they only pull back the curtain a tiny bit. Nonetheless, Amazon has partnered with competitors in other spaces, particularly its Amazon Web Services business.
Regardless of its struggles, payments remain an area of interest for Amazon. So it's curious that it hasn't developed its own BNPL service, and it's partnering with another company to offer it on its own website. That's particularly notable because Amazon has offered customers the opportunity to pay in installments for Amazon devices like its Kindle e-readers for years.
Amazon has a big advantage in the space. It already knows a lot about its customers' shopping habits. That knowledge can help it make better credit decisions.
PayPal CEO Dan Schulman noted its user data is an advantage over smaller companies as it grows its BNPL business. PayPal gets a good view of its users' shopping habits, and as it expands its business into new services, it could get a more complete picture of their financials. That could result in better lending terms with lower risk for PayPal. That's why Square -- which is arguably ahead of PayPal in building out the financial services businesses -- has such a good opportunity to grow the BNPL business it's acquiring in Afterpay (AFTP.F).
Still a crowded space
Even if Amazon isn't going after the buy now, pay later opportunity, it's still a very crowded space. And for good reason; BNPL volume is growing quickly, with estimates of the global market reaching as much as $1 trillion by 2025.
While Affirm is the big winner of the Amazon partnership, it's still competing with PayPal, Square, most of the major credit card companies, and other payment processing incumbents. Additionally, Apple is working on an installment payment service as part of Apple Pay.
Investors should expect the market to remain fiercely competitive as companies look to capture share of the fast-growing market. That could benefit the bigger companies willing and able to take more risk with the backstop of other operations to offset any losses in BNPL.
Affirm has seen its operating loss grow in 2021, as it invests in technology and data analytics to stay ahead of the competition. Meanwhile, PayPal and Square have seen strong operating income growth even as they invest in new areas like BNPL.
And with plenty of growth left in the BNPL space, Amazon could still decide it's worth pursuing at some point.