So, I admit that I did another 6 BNPL loans in preparation for the winter holidays. With 14 paid loans under my belt and half a dozen more in play, I am probably the borrower that BNPL lenders hope for but seldom find.
BNPL loans are easy to arrange, and when set up correctly, they can generate credit card reward points on the back-end when payments settle, and what the heck, they are interest-free.
But things are not so rosy down in Australia, as News.Com.AU reports. There are signs that the fintech model is starting to crumble, in an article entitled Buy Now, Pay Later Providers Reveal Millions in Losses. Of course, this does not mean the end of Mastercard or Visa Installments, or PayPal’s Pay-In-Four, but the darlings of the Australian Stock Exchange now feel the heat of a credit model that lacks credit quality.
Let’s start with the last sentence in the article, which suggests that BNPL peaked in Australia.
…RBA figures showed BNPL spend is flat, with $11.5 billion sales in a year, suggesting the sector could have reached its peak already in Australia.
And, investors are starting to wonder if BNPL is really the “next big thing.”
Australian buy now, pay later providers have taken a beating on the stock market with shares plunging on average 80 percent, with the sector losing millions and a reported dive in consumer interest in the product.
Afterpay reported a $156.3 million loss for the last financial year, which was up by almost 700 percent compared to the last year.
Meanwhile, Zip shares have plummeted by 63 percent from their high, while another provider Openpay has racked up a raft of bad debts as it pushed into the US and UK markets with warnings it could falter if more money wasn’t raised or new shares issued, according to accounting firm PricewaterhouseCoopers.
Rival BNPL service Zip also reported a $652 million loss, a whooping 3000 percent increase on last year, where it had announced a $20 million deficit.
Lesser known players such as IOUpay experienced a dramatic drop of 96 percent from its peak, according to Mr. Halverson, and another called Fatfish dropped by 84 percent.
There are learnings for credit card issuers. The fintech fallout justifies the rigors of bank-grade lending. Income comes from risk-based interest, operating on a margin based on creditworthiness. Noninterest income and expenses come into play, and you need to live or die by your loan loss reserve.
Fintech BNPL lending is not over, but if it is to survive, it needs to understand that “safe and sound” will help grow a lending business better than “fast and furious.” Lacking prudential guardrails creates an environment where losses grow faster than revenue.
And, smart investors know unbridled lending will not last in the long run. Things may look good in the short term, but accelerated growth fails when delinquency spikes and lending slows.
So, enjoy your credit card. Expect to see options for installment lending on the card, but if you want to try a BNPL loan, do it now. Things will look differently in 2022.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
