Our position on BNPL, since it hit the U.S. market, is that the model is unsustainable. Simply put, you can not lend credit without responsible lending standards. It puts consumers in a bad position and infuriates regulators. Investors may tolerate credit losses to gain scale, but the long-term horizon suggests that the investments will soon sour. And bank-grade, safe and sound lending? Fuhgeddaboudit, as Donnie Brasco said.
Two recent events beyond the crumbling Australian BNPL stock market indicate the Buy Now Pay Later (BNPL) is crumbling. First, the Wall Street Journal noted that Klarna, the grand-daddy of BNPL, is devaluing their business by a whopping amount.
Klarna Bank AB is seeking to raise new funds that could value the fintech giant at almost a third less than the roughly $46 billion valuation it achieved just under a year ago, according to people familiar with the matter, an example of the struggles facing the tech investing world.
Klarna specializes in buy-now-pay-later services, a popular type of cash advance that competes with credit cards and lets customers pay for goods and services in installments without paying interest. Instead, Klarna makes money by charging merchants who offer Klarna’s services a fee.
Klarna became Europe’s most valuable financial-technology startup in June when SoftBank Group Corp.’s Vision Fund 2 led an investment in the company that valued it at $45.6 billion.
Last year, Klarna’s net loss widened to 7.1 billion Swedish krona, equivalent to $705.7 million, while credit losses jumped as the company grew its consumer base and expanded geographically.
Klarna’s devaluation comes as they try to raise another $1 billion.
The second issue du jour comes from Affirm, a U.S. firm that shares the market with a floundering market valuation.
The share price of Nasdaq-listed Affirm Holdings Inc., a Klarna competitor, is down 75% this year, giving it a market value of $7.2 billion. That decline comes even as the payment network earlier this month boosted its 2022 revenue guidance to $1.33 billion to $1.34 billion, from earlier guidance of $1.29 billion to $1.31 billion.
The concept of BNPL did awaken many credit card issuers. However, some consumers want something more than revolving credit cards. As we illustrated in a recent report, lenders must consider the implications of installment lending, particularly as interest rates rise.
But for now, the threat of fintechs taking over credit cards with an interest-free model that cannot sustain funding requirements, or an “interchange free model” which often fails to mention merchant discounting, is a castle built upon sand.
Don’t throw away your credit cards.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group