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Buy now, pay later companies are facing more pressure as competition in the space intensifies and traditional payments companies offer their own models.

Companies in the space, commonly known as BNPL, are known for partnering with merchants to offer payment plans to customers. But news that is testing a new pricing model in which customers could essentially rent one of its internet-connected stationary bikes rather than finance the purchase through its BNPL partner聽, shows the competitive pressure these companies are increasingly under to evolve.

鈥淚f you really want to survive, you have to go beyond just buy now, pay later,鈥� said , managing director of equities research at . 鈥淎nd if you want to thrive, you have to be able to offer other products and services in your ecosystem. So that鈥檚 what you have to do.鈥�

Last week, Peloton in which customers pay a monthly fee for access to a bike and classes, rather than buying the device upfront. It鈥檚 significant because a sizable portion of Peloton鈥檚 customers use Affirm to finance the bikes. Affirm knows this too, acknowledging in its S-1 filing last year that nearly a third of its revenue came from Peloton.

鈥淭he significance of Peloton in our portfolio has increased as a result of consumer spending trends on home fitness equipment, and there can be no assurance that such trends will continue or that the levels of total revenue and merchant network revenue that we generate from Peloton will continue,鈥� the company wrote in its S-1 filing. 鈥淭he loss of Peloton as a merchant partner, or the loss of any other significant merchant relationships, would materially and adversely affect our business, results of operations, financial condition, and future prospects.鈥�

BNPL companies have increased in popularity over the past three or four years, with Affirm, and emerging as the largest players.聽

Venture-backed companies in the BNPL space raised more than $4 billion in 2021, according to Crunchbase data. That鈥檚 up from around $1.7 billion in 2020. And companies in the category have seen notable exits in the last year as well: Affirm went public last year, and (formerly known as Square) bought AfterPay for a whopping $29 billion.聽

The pure-play BNPL companies have positioned themselves to disrupt the payments ecosystem and become something of an alternative to companies like or , Katri said. The biggest issue for BNPL companies is credit losses and default rates, which could increase if there鈥檚 a financial downturn.聽

Another issue that has emerged over the past 12 months is that traditional payments companies have also developed their own BNPL offerings. Last month, Visa announced the development of Visa Installments, its own BNPL offering. MasterCard also entered the BNPL space last year with MasterCard Installments.

And with that increased competition comes pressure for BNPL companies to lower the fees they charge merchants. Pure-play BNPL companies usually charge between 4 and 6 percent of the average ticket price, Katri said.

鈥淚n general, as more and more third parties or payments companies offer that buy now, pay later option, there鈥檚 definitely more competition and potentially more pressure on these fees that buy now, pay later companies are charging,鈥� Katri said.

Now, pure-play BNPL companies have to choose between getting acquired or evolving the financial tools they offer. Affirm, for example, recently introduced a debit card, and Klarna is working on a product similar to a banking app.

While BNPL companies can be cash intensive and those in the public markets have had a tough run lately鈥擜ffirm鈥檚 stock is down nearly 61 percent since the start of the year鈥攊nvestors won鈥檛 necessarily be turned off by them completely.

鈥淭he one thing to remember about those companies is they have a lot of data,鈥� said , founder and managing partner at . 鈥淭hey know what consumers do. That鈥檚 valuable.鈥�

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