BNPL – The ‘Goose is Cooked’

Globally regulation will challenge this totally unregulated space

Rising interest rates and credit issues will threaten viability 

Will this well used idiom apply to BNPL?

“There is no possibility of (long term) success; the period of good fortune is over. If he doesn't win the next round, then his goose is cooked”

Sentiment is turning on the BNPL sector in Australia – even the share market is changing its view, at this point it’s a trickle but that’s how it starts.

As with other global Fintech disasters it starts with a trickle, before a major flood and bust. In the last decade Fintech has seen many of these across different sectors – BNPL will be next as its spin and bluster simply doesn’t match reality.

Respected Macquarie analysts this week published a very sombre view of the Aussie BNPL sector, highlighting significant threats: increase in competition, regulatory threats, crucial business risks from increases in interest rates, retailer sentiment and scale is crucial for any BNPL platforms to survive.

“BNPL is a low interest rate play, giving providers access to cheap money. This won’t last forever”   Macquarie Analyst Report

A hefty list of risks – you can also add credit risk which Macquarie did not cover.

Competition is intensifying with CBA, PayPal and others yet to be announced all entering the Australian market – this directly threatens BNPL apps ability to achieve scale .

Scale is key in payments - RBA payments figures show BNPL has 0.64 percent of retail payments after 7 years – at this rate it will take over 70 years to achieve 10%, a necessary threshold to achieve longevity.

Increasing interest rates are a significant risk – paradoxically the faster the economic recovery, the higher the risk of interest rates rising and the higher the rates. BNPL must fund the gap between paying the merchant before being paid by consumers - any increase in rates simply adds cost.

Credit risks are enormous - BNPL total revenues in 2020 were $891 million with 16.2 million ‘customers’ in 11 markets. Bad Debts total $267.8 million, or 30% of revenues (they say they don’t lend?) Bad debts are BNPL apps largest expense – second largest expense ESOP shares!

The combination of increased interest rates and high bad debt levels will ensure these apps never make profits and securitized funding will increase at 3-5 times faster than bond rates. This risks creating a major confidence issue for all BNPL players, the investment markets and more regulatory scrutiny.

Already bad debts are at excessive levels as this chart shows, comparing Afterpay and Klarna with US credit card charge offs – note even the very high levels in credit card losses following the GFC in 2010 pale in comparison to Afterpay’s bad debts. Klarna's bad debts are double 2020 charge offs. These losses are higher than payday lenders!

Two regulatory risks are significant, firstly BNPL being rated by ASIC as lenders and secondly the RBA designating against the ‘no surcharge rule’.

Australia is the only OECD country allowing merchants to pass on the cost ( by surcharge) of payments - so debt, credit, charge card fees are added to cost of the purchase – BNPL apps since launching in 2014 applied a no-surcharge rule in its contracts and giving an artificial competitive advantage.

RBA research released last week is conclusive: 50% of BNPL consumers say a 4% surcharge will make them switch to other payments i.e. debit cards - 10% would cancel and not buy the item- while 40% will keep using BNPL.

A 60% potential reduction in sales/revenue is catastrophic - nothing short of life threatening for all these fintech start-ups! 

Afterpay, Zip, OpenPay, Humm are still dependent on Australia for 50% or more of revenues - this is funding their rapid global push - so a net reduction of 60% of revenues really will be big trouble.

One other development – BNPL start-up Beforepay is seeking more equity and an IPO – this is a totally unregulated salary lender or payday lender – how in would anyone countenance this?

Watch this space –

Negative sentiment to BNPL grows

 BANKING DAY  John Kavanagh 26th March 2021

The explosive growth in the buy now pay later market, which has seen customers numbers and transaction volumes doubling year on year, will give way to industry consolidation that will cause “pain for all players”, according to new research.

In a review of the sector, Macquarie Securities has focused on BNPL downside risks, including increased competition from new entrants, competition from banks and other financial institutions, regulatory pressure and likely merchant drop-off from BNPL platforms.

Macquarie said that to some extent BNPL is a low interest rate play, giving providers access to cheap money. This won’t last forever.

Macquarie said: “We think an excessive number of participants has entered the industry in the near term, resulting in industry overcapacity. We expect a few years of industry consolidation before normalisation at a healthier supply/demand equilibrium. 

“As interest rates rise, BNPL becomes more mature, investor appetite rotates out of tech and the low-base effect gets eroded away. We think that it will become increasingly difficult for BNPL companies to raise capital.”

The pain period could last one or two years, with another year or two of recovery before the sector returns to growth.

Macquarie expects to see downward pressure on merchant fees, which are currently averaging around 3.6 per cent, to be more in line with merchant fees charged by credit card issuers.

PayPal has recently entered the BNPL market and is charging a merchant fee of 2.5 per cent.

The Reserve Bank put the industry on notice that at some point it will require BNPL providers to remove their no-surcharge rules, and when it does merchant surcharging will put downward pressure on merchant fees.

Macquarie also expects to see merchants stop adding BNPL providers to their merchant platforms, as they get to know which providers are adding value at their checkout.

Macquarie says that to secure their future BNPL companies will need size. Currently Klarna, Afterpay and US company Affirm report the highest underlying transaction values, Afterpay Klarna and Zip the biggest customer numbers, and Klarna, Afterpay and Zip the largest number of active merchants.

Sezzle, Afterpay and Affirm have the best returns on their receivables book, largely because they recycle their receivables more than their competitors.

On the inevitable encroachment of regulation, Macquarie says: “On balance, we think Afterpay may be the most adversely affected by any potential regulatory changes for the BNPL sector. As its product design is purely BNPL, with none of the credit-like features offered by competitors, where credit checks are already conducted.

“There may be additional costs associated with increased regulation for Afterpay versus peers.”

AUSTRALIAN BNPL MARKET

 Over 20 BNPL start-ups are trying to achieve scale in Australia

 Nine BNPL platforms have floated on the ASX since 2013 all unregulated financial products.

 Afterpay, Flexi-Humm, OpenPay, Quickfee, Laybuy (NZ), Sezzle (USA) Splitit (US, UK) Zip and Zebit (US) -- only 4 actually operate in Aussie.

 There are another 9 start-ups : Brighte, CreditLine, Deferit, FuPay, Payright, Plenti, Roar, Inkpay, PayitLater - with more about to launched 

 Other established players include: CBA bank,PayPal with ‘Pay in 4’, global leader Klarna, the Swedish start-up and Latitude with ‘LatitudePay’.

 The 9 listed stocks make no profits - have combined 12 average market cap of $35.75 billion

 Total Revenues - $891 million with 16.2 million ‘customers’ in 11 markets.

 Bad Debts – $267.8 million – or 30% of revenues and they say they don’t lend? Bad debts are BNPL’s largest expense – second largest expense ESOP shares!!

 Accumulated losses $396 million and counting 

 Other possible entrants include - Citibank has US has partnership with Amazon and American Express launched ‘Plan It’ in US market in April 2020.

 BNPL’s using credit checks – Flexi-Humm, Klarna, Latitude Pay, LayBuy NZ, Brighte, Zip Money

 Two banks, NAB and CBA launched very poor ‘no interest cards’ – with substantial fees.

 There are 6 DIY platforms who claim to support white label BNPL - Limepay, EasyPay, PreCredits, Douugh  etc 

 Quickfee operates in SME and professional markets offering instalments to SMEs accountants and other professional groups.

 Of just a big concern are the copy cats in other sectors -  

Beforepay a payday lender who ‘only charges’ 54% - again claims to be unregulated.

Deferit - allows utility, telco, car registration or childcare bills into four instalment repayments.

 Flexibond - allows rental bonds to be paid in instalments charging 32% interest - again they say they are unregulated.

Bricklet – real estate start-up breathlessly described itself as “dynamic micro-investing platform Bricklet is providing buyers the opportunity to become an independent part owner of their chosen residential or commercial dwelling via BNPL as of this weekend”