How the Buy Now Pay Later landscape is shifting
Unless you’ve been living under a rock for the last week or so, you might’ve heard that Buy Now Pay Later (BNPL) is going through a rough patch. Swedish giant Klarna was forced to lay off 10% of its workforce, whilst Affirm has seen a 75% drop in shares since hitting a high of $168 in November.
The rumours are true: Public interest in ‘pay later’ products is on the wane in the face of a cost-of-living crisis. On top of this, efforts to regulate the space are ramping up, particularly in the US where BNPL solutions are under intense regulatory scrutiny. Fintechs are getting nervous and beginning to reevaluate their future earnings potential on a global scale.
The end result? BNPL is changing before our eyes. Let’s take a look at some of the big shifts and what they might mean for an industry under stress.
Taking on a large number of users with a thin credit file is a dangerous game.
UK credit reference agencies are getting involved
Taking on a large number of users with a thin credit file is a dangerous game. BNPL providers risk customers being unable to afford repayments and having to default on their borrowing.
To counter this growing trend, a few firms have started to work closely with UK credit reference agencies to include BNPL borrowing on consumer credit reports. Klarna will report the use of its 'Pay in 30' and 'Pay in 3' products to Experian and TransUnion from June, including purchases paid on time as well as late and outstanding payments. This will help customers with thin credit files build credit history, as well as giving providers a more accurate picture of individuals’ creditworthiness, helping them to mitigate against customers’ default risk.
What kind of threat do rate rises and inflation pose?
A big one. The longevity of BNPL hangs on low interest rates, as companies’ margins come from the difference between what they spend lending money to consumers and what they earn from providing their services to retailers. As central bank rates rise and inflation soars in many markets, providers face a clear and present danger — their margins will feel the pinch owing to an increase in the cost of borrowing.
But that’s not all. Rising costs of living around the world, driven by surging energy and fuel prices, higher food prices and rising interest rates, will reduce disposable income for many consumers and make some more cautious about buying discretionary goods, slowing the growth of BNPL and potentially throwing the sector into reverse.
What are some of the key variations within the sector?
Well, the biggest identifier is probably how BNPL providers actually make money through fees. Some charge customers with late fees. Laybuy charges $10 by default if a user fails to pay within 24 hours of the payment due date, for example. Others, like Zilch, are fee-free for customers but make their money through a retailer fee, where retailers pay a transaction fee each and every time users shop online or in-store.
I know what you’re thinking. Klarna?! It’ll be fine.
Surely the big players will survive?
I know what you’re thinking. Klarna?! It’ll be fine. It’s got (literally) millions of users, partnerships with every major retailer you can think of, and Snoop Dogg on their adverts. But will that be enough to guarantee survival? Particularly now that Apple has entered the market.
BNPL providers are reporting much higher bad debts than credit cards. Largely, this is down to having a high thin credit user base. For every $1bn of processing volume, BNPLs write down $19.2m of bad debt - compare that to the $270k recorded by credit cards, according to Fraugster.
All eyes will be on the BNPL industry over the next six months as businesses are forced to adapt to the changes that have rocked them in recent times. How they contend with the cost of living crisis, rising inflation rates and an increasingly competitive market that now includes the likes of Apple, will separate the BNPL mainstays from the rest of the pack.