Will BNPL as we know it, make it to the winter holiday season? Maybe not if you read the WSJ.
“Buy now, pay later” companies promised a credit revolution that would change the way people pay for things. Rising delinquencies and a slowing economy are clouding that outlook.
Payment plans that allow shoppers to split up the cost of things such as clothing, makeup and home appliances were all the rage last year. The companies behind the plans saw their valuations surge. Scores of retailers rushed to add them at checkout.
This does not mean the pay-in-four model is dead. In fact, there are plenty of options from payment brands, issuers, and even platform service providers. However, responsible lending is important if you want to stay in the credit extension business. And do not forget interest rate risk. The “free financing” model did not work when the prime rate was 3.25%, and it surely does not work in the escalating interest environment. 75 basis points on the funds rate translates into costlier lending. With inflation looming, more interest rate rises are certain.
That is one reason that credit quality is key to successful lending. Back to the WSJ.
But late payments or related losses are piling up for the industry’s biggest players— Affirm Holdings Inc., Afterpay and Zip Co. ZIP -4.79% Their borrowing costs, meanwhile, are rising. Buy-now-pay-later companies sometimes rely on credit lines whose rates rise and fall along with the Federal Reserve’s benchmark rate, which has risen 0.75 percentage point so far this year and is poised to go up even more.
The young industry finds itself in a tricky spot at a time when the economy is slowing and, some fear, headed for a recession.
As retailers prepare for Black Friday and fill their inventories with goodies for winter holiday purchasing, we recommend thinking about plan B, which might not mean BNPL.
Cash will not make the cut, particularly if you are hoping for online sales. Keep your payment acceptance devices in tune and look for options by established players in the space such as PayPal. Issuer models for broader lending, such as American Express’ Plan It, My Chase Plan, and Citi’s Flex Pay work fine, as do other issuer options. And know that you can count on cards from American Express, Discover, Mastercard, and Visa. Or, perhaps this is time for consumers to try a secured card, such as Amazon’s private-label Synchrony card.
Wake up and smell the coffee, we say. Consider the finer points of BNPL: inclusive lending, changes in the structure of credit, keeping the merchant involved in the financing model, and ensure your credit business is agile.
Fourth-quarter 2022 will be different than the past few years. Gasoline, and soon heating oil, will bring more budget stress than years before. Dollar stores will not be an option. Credit managers will need to exercise scrutiny, and unbridled lending, well, that is a ghost of Christmas past.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
