Do We Need Web 3 BNPL Protocols?

Background

During the pandemic, people start to consider various methods for payments. According to the research, the credit card usage rates in USA, SEA, and EU are 70%, ~30%, and 55%-71% respectively. That is, many people in Web 2 still have barricades to approach credit cards. It represents there is a niche market for service providers to occupy those potential clients. Interestingly, Web 3 world doesn’t have a credit card system and mostly we adopt over-collateralized lending which causes customers able to access the buy now pay later (BNPL) services. Doubtlessly, BNPL is a chance in both the Web 2 and Web 3 markets.

Web 2 BNPL Companies

Web 2 BNPL companies struggle to survive between commercial banks and financial service providers. Most people can purchase almost all the merchandise, such as cars, properties, and even handphones, with credit cards or loans from commercial banks. However, the processes may cost higher fees than we expected. Moreover, not all countries have well-structured financial systems for the public to hold credit cards. It somehow occurs a difficult for certain groups of people to apply for installments from banks. Given that banks, as a risk-averse party, rarely take risky decisions, BNPL companies discover an opportunity to step into the market. BNPL companies can be divided into to C (customer) focused and to B (Business) focused businesses.

To B business targets those companies which want to expand their business and require to acquire essential hardware in advance. The winning tip depends on risk management; that is, evaluating the business potential instead of the past records. To C business targets those individuals who are thirsty for commodities. Those items usually range from 100 to several thousand USD. Thus, the winning tips rely on how the BNPL companies aggregate the credit systems across various e-commerce platforms and simplify the application processes. BNPL companies should not be afraid of risks; however, BNPL companies should think of the net benefits from each case. (Net benefits = Total Profits — Cost of Risks)

Web 3 BPNL Protocols

Compared to the Web 2 BNPL companies, Web 3 BNPL protocols can only serve to C business and are limited to NFTs only. As far as I am concerned, the main reasons are 1) the infrastructures in Web 3 are mostly software, and 2) the only commodity-liked asset in Web 3 is NFT. Given that lacking hardware infrastructures, there are fewer demands from companies to utilize BNPL services. Under the natural restrictions, Web 3 BNPL protocols interestingly change to “Buy NFT, Pay Later” services.

Unlike Web 2 BNPL companies, Web 3 BNPL companies hardly investigate their users and know their personal information since we normally use wallet addresses represent ourselves without KYC (know your customers). As a result, Web 3 BNPL companies encounter higher risks from the client side which render them to implement a change on the product: 1) the ownership of NFT will be transferred only when the full payment is completed, and 2) higher downpayment. Needless to say, it doesn’t make sense when we talk about physical goods; however, Web 3 BNPL companies now focus on digital assets which means we can separate the ownership and the rights of usage by adopting MPC wallets or multisign wallets with whitelist smart contract.

Since the protocols don’t require KYC, Web 3 BNPL protocols usually make the underlying assets collaterals. Different from Web 2 BNPL companies, Web 3 BNPL protocols will liquidate the underlying assets when the users fail to repay the full payments. That is to say, the winning tips for Web 3 protocols are 1) how to accurately manage the risks and 2) how to instantly liquidate the assets.

Conclusion

Based on the above discussion, an interesting question is do we really need the Web 3 BNPL protocols? Although Web 3 BNPL protocols not only require higher downpayment but encroach on the ownership of the users compared to the Web 2 BNPL companies, Web 3 BNPL protocols still serve a niche market. Though digitalization might optimize Web 2 BNPL companies’ efficiencies, it is still hard for those companies to serve the DeFi users due to the fact that they hold different risk parameters and product designs.

Web 3 BNPL protocols are equipped with risk management models concerning liquidity risks, credit risks (after DID infrastructures are well-constructed), and so on as well as instant liquidation systems which set them apart from traditional BNPL companies. Doubtfully, will digital assets become the potential market? My short answer is YES.

Not Financial Advice and only for Research