Is Buy Now Pay Later (BNPL) Sustainable? Who Is At Risk If The Bubble Bursts?

Retail has always come down to the core economics, requiring operational excellence to squeeze out margins in a complex business with a lot of areas of potential failure. For example, DTC eCommerce was sexy until caps to scale and profitability in the unit economics made it clear that for most, profitability is ultimately driven in-store. Now we see a shift to in-store investment in experience and operations as the future of retail (although social shopping and retail metaverse continues to vie for the spotlight).

In 2021, we predicted the rise of the retailer as financial services company, including shopper credit like BNPL. And rise it did.

BNPL financing accounted for $157 billion in eCommerce purchasing alone in 2021 or 2.9%. By 2025, it is expected to more than double to $438 billion, or 5.3%, of global e-commerce transaction value, according to a March report from payments processor Fidelity National Information Services. BNPL was even bigger in the US at 3.8% of eCommerce transactions. BNPL constituted a stunning 91% of California consumer loans in 2020!

Clothing is by far the most popular retail category in where shoppers have used BNPL, followed by technology, shoes and home decor. That said, BNPL platforms are rapidly expanding to new categories, including even fine art, where Klarna has a joint venture called Platform.

Gen Z in particular has adopted BNPL, spending 925% more now through point-of-sale services than in January 2020 with 43% of Gen Z users having missed at least one payment and 30% missing at least two payments. 58% of GenZ has used BNPL, the largest demographic, and one that already has large existing debt.

The Increasing Competition And Losses For Buy Now Pay Later Companies

Despite the increasing volume and consumer usage, none of the major pure-play BNPL competitors, including Klarna, Affirm, Afterpay and Zip, currently is profitable. Affirm’s revenues grew 70% through June 2021, but net losses grew 283% to $431 million! If that sounds worrisome, Klarna’s losses grew 303% to $688 million. Affirm’s stock is down 86.3% from its high and down 57% YoY.According to Yipit Data, in the US market, the market share leaders are:

  1. Affirm - 40%

  2. Klarna - 19.6%

  3. Afterpay - 16.4%,

  4. PayPal’s Pay in 4 - 11%

  5. Zip - 4.2%

And competition is heating up with both Mastercard and Visa launching competitive BNPL offerings, which put further drags on profitability. Credit cards do need to act to counter this existential threat. Nearly half of consumers prefer BNPL to credit card purchases (at least for now).

The Danger In Extending Credit For Growth At All Costs

Increasingly, hypergrowth targets fueled by excessive VC funding may be attracting the wrong type of consumer. 1 in 5 U.S. adults who took out a BNPL loan missed a payment in January, per a Jan. 28-30 Morning Consult survey. Even scarier are the correlations between BNPL users and shoppers who repeatedly overdraft and have credit issues. 1 in 3 users of BNPL in the US already over-drafted in January, a troubling predictor of future defaults. Over-drafters were twice as likely to use BNPL as consumers in good standing. In Australia, 15% of BNPL users had to take out a loan to pay off their purchases. Maybe that’s why so many of their stocks are off 50-90% from their highs. And with credit markets stiffening, we expect consolidation in the space as losses mount and VCs stop wanting to foot the bill in the hopes of future profitability.

Who’s Left Holding the BNPL Bag?

So what happens if consumers are buying beyond their ability to pay which 66-70% of consumers admit? Luckily for retailers, they have already been paid. BNPL platforms will get hurt the most, as their underwriting assumptions prove to be aggressive. More money will be spent on collections at a reduced recovery rate forcing less attractive lending rates that further stifle consumer demand. Many will go under forcing consolidation at garage sale prices. Shoppers will see their credit scores drop, and become more cautious with spending as they find themselves unnecessarily in debt, potentially owing penalty fees and interest payments they didn’t anticipate. And of course, that goes back to hurting retailers in the segments where BNPL most hurts consumers, the lower income working class still saddled with debt.

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