BNPL Bubble – Totally Unregulated and Unprofitable

Australia’s BNPL is TOTALLY unregulated!

BNPL has never made profits in 7 years.

Credit Losses run 30% of revenues.

Buy Now Pay Later (BNPL) has been hailed as one of Australian greatest innovations, yet the ‘industry' is totally unregulated and protected by fawning politicians – just as Wirecard Germany was – will this massive bubble end up the same?

INVESTMENT RISKS

Australia’s BNPL sector has 8 ASX listed stocks making no profits – yet have combined market cap of US$35.75 billion (A$45.8 billion) making one of the biggest tech bubbles globally. Total Revenues are a modest $891 million with 16.2 million ‘customers’ in 11 markets.

Bad Debts – $267.8 million – or 30% of revenues and they say they do not lend?

Bad debts are BNPL’s largest expense – second largest expense is ESOP shares!

Accumulated losses total $396 million and counting.

Goldman Sacs has an unprofitable tech rating graph clearly showing the massive tech ‘bubble’ – BNPL is one of the biggest risks as Affirms IPO just demonstrated.

BNPL EXPLOITING A LEGAL LOOP HOLE

BNPLs exploit a current loophole in the Credit Acts in Australia and New Zealand.

The Australian National Consumer Credit Protection Act 2009 (NCC) - The NCC does not apply to certain loans, including: low-cost short-term credit (less than 62 days), insurance premiums paid by instalments, bill facilities and staff loans. When does up to 61 days allow a loan to be unregulated? No other OECD country has any legislation like this – it’s totally crazy yet regulators don’t care.

The two regulators reasonable are Reserve Bank of Australia (RBA) and Australian Securities & Investment Commission (ASIC).

REGULATORS TAKE NO ACTION

ASIC has failed to close this loophole – despite its own research since 2018 showing considerable damage done to young mostly female consumers. ASIC research shows 60% BNPL users are 18 -34, a majority are young women. 44% of users earn less $40,000 - of this group 40% students are part time workers, this sounds more like pay day lenders than ‘innovative’ Fintech.

The RBA has not moved on the key issue of allowing retailers to surcharging – stating BNPL is currently too small to ‘designate’

In one of the most astonishing statements ever made by a payment regulator RBAs Governor said:

 “Dr Lowe said the stance was in recognition of the innovation the instalment products brings to customers and the relatively small overall volume transacted compared to existing payment methods”  AFR Dec 7th Afterpay Benefits Outweigh Harm :RBA.

So…. BNPL is too small to regulate – really!! 

So why is the sector worth US$35.5 billion on the Australian stock market? 

BNPL OVERVIEW

How BNPL operate – $100 purchase earn $4 in merchant revenue, late fees the another key revenue source.

Many BNPL apps also offer lines of credit and fixed instalment loans – yet all of the players are unregulated. Since when is offering up to $20,000 credit line not lending?

When the consumer makes $100 purchase – in most cases prepayment of $25 is required others it is a loan for the full $100 – then 3 instalments of $25 over 6 weeks. 

BNPL BUSINESS MODEL

The BNPL profit model is highly questionable – a $100 sales earns $4 in merchant revenue with 56 cents in late fees = $4.56.

Expenses are $4.75 – of which $1.00 are credit losses, 16 cents funding, 34 cents share purchases and $3.25 in marketing, operations and salaries.

It is clear from these numbers that BNPL companies will never make huge profits – they are very high volume, very low margin businesses and extremely sensitive to funding costs.

Globally regulators need to consider the business risks and operational model used by BNPL.

• Consumers used as "off balance sheet" securitized borrowings.
• Very high bad debts - averaging 30% of revenue.
• Very high ‘late fees’ which, when converted to APRs, are up to 68%.
• Small 'loan' amounts over a short period.
• BNPL typically do not assess a consumer’s ability to repay.
• Majority do not use credit bureau for new applications or update performance.
• Majority do not report payment obligations or default to credit bureaus.

BNPL BAD DEBTS – THE REAL RISK

Australian BNPL apps have excessively high bad debts and this is the key risk, along with longer term funding risks. The Australian sector has average bad debts of 30% of revenue which is four times higher than European BNPL’s.

BNPL Fintechs do not use retail bank measures for bad debts - which use receivables as the key measure - as applied to personal loans, credit cards or auto loans. BNPLs instead use bad debts as a percent of sales, as this measure lowers bad debts substantially – yet bad debts are the biggest single expense.

BNPLs ‘bill’ customers every two weeks, with 26/27 ‘statements’ a year - similar to debit cards, ATM cards, P2P transfers. All these business models have short-term usage and industry measures are in days and months - not years as stated by BNPL.

Afterpay has bad debts/collection costs for F20 of $111.6 million representing 25.7% of core revenue. This is its best performance ever - accumulated bad debts since 2014 total $213.8 million.

Australian bank CBA by comparison has revenues of $23.9 billion while actual bad debt write-offs total $1.01 billion or 4% of revenues. Even including all loan provisions, most of which are business banking at $1.5 billion, total bad debts are $2.51 billion - only 10.5% of revenues.

If a bank had 25% bad debts to revenue regulators would close them down and establish a ‘bad bank’ to wind down loans.

A comparison of BNPL with US credit card charge-off rates clearly demonstrates the excessive risks currently being taken. The excesses of the 2010 GFC charge-offs are well below current levels of bad debts by Afterpay – surely a major concern. Yet these apps remain unregulated!  

BNPL RISKS

BNPL apps process payments far quicker than traditional banks while also offering client loans and services to manage their risk and use customer’s data.

Technology giants like Amazon and Google (parent Alphabet) are also increasingly offering financial services yet operate largely outside regulation.

Australian BNPL apps have revenues of $891 million, receivables of $1.76 billion, bad debts of $262.5 million (30% of revenues) and accumulated losses of $396 million and counting. This sector is far from assured and needs to be closely monitored and regulated as a financial services provider.

The risk for Australian and global investors is if BNPL's US$35 billion bubble bursts it will be 3 times higher than Wirecard which cost investors US$12.5 billion - watch this space.