BNPL – Much More Pain In 2022

Australia has 35 BNPL apps fighting over 1.7% of card spend – not many will survive

Australia has 12 ASX listed BNPL stocks – the largest Afterpay will probably move to Square in early 2022 – maybe not?

The 12 listed stocks represent 75% of global BNPL listings, that should say something - why is Australia the global leader in this Fintech space?

BNPL shares have been hammered, down 82% on average from their 2021 peaks – these companies require more cash as the losses mount up – over $1.3 billion in losses in 2021.

Major player Zips shares are down 65% from its peak.

This chart shows the last 3 months for all BNPL stocks –

BNPL companies need to access more cash to fund their losses - if the share market won't support them, then its good night - or maybe they can fund their equity by splitting the payments?

BNPL HAS NO SCALE

Total Australian annual retail consumer payments $1.65 trillion.

Australia 71.1 million cards spending $741 billion

BNPL 5.2 million accounts with $11.4 billion

BNPL share of all retail payments is 68 basis points down from 73 basis points in January – BNPL has peaked and is simply not keeping up.

The RBA calculates the share of 1.7% of card spend based on consumer card only – excludes Corp/Commercial but that still tiny.

CREDIT QUALITY IS A DISGRACE ?

BNPL apps in 2021 has bad debts of 32% of revenue – Afterpay $220 million, Zip $123.8 million, Humm BNPL only $33.2 million

The closest product types to BNPL are charge cards American Express (Amex) and Diners Club, debit cards, P2P transfers, payday lenders, salary advance lenders and ATMs cards - all short term products which are measured over days and months - not yearly as BNPL does.

Charge cards and BNPL both have bad debts - unlike debit or P2P which have fraud only.

Amex Australia 2020 accounts ex ASIC – with 70% charge cards 30% revolving credit cards:

Amex sales 2020 $44.5 billion and bad debts/provisions of $14.5 million.

Afterpay global sales $21.1 billion bad debts/collections $220 million

Amex Australia with twice the sales than Afterpay does globally - BUT 15 times less bad debts!

Just think about that for a moment – what it’s really shows is the massive credit risks Afterpay take and it’s not getting any better – in fact it’s worse.

BNPL BAD DEBT TRICK

In addition BNPL apps play a trick with bad debts – they compare bad debts against total sales which reduces bad debt significantly.

The example is a BNPL $100 sale requires $25 dollars to be paid upfront – so the loan is $75 – not $100.

BNPL by comparing credit write offs to total sales and reducing bad debt by 25% - this is a massive red flag in what are already massive bad debts.

It’s like a retail bank including the deposit figure with mortgage defaults – great for reducing losses but doesn’t measure the true health of the portfolio.

MASSIVE CROSS OWNERSHIP

BNPL apps have very high cross ownership and that’s concentrating the market, consumers are changing providers when their credit is extended - a really bad sign but in an unregulated lending market anything goes.

This USA chart says it all –

MONTHLY SPEND PER CUSTOMER

Charge Cards - $3,425

Credit cards - $1230

Debit cards?- $806

BNPL apps?- $96 to $218

PrePaid Debit - $31

It’s fascinating that Fintech have used BNPL (Afterpay) and Prepaid cards (Revolut) to try to access consumers – both these categories have very low spend yet similar costs.

It will take a BNPL customer 32 years to spend as much as a charge card customer does in one year – a major driver for profitability.

NO PROFITS – ONLY DEEPER LOSSES

BNPL companies increased losses in 2021 – across all twelve stocks losses totalled $1.34 billion a huge increase from 2020 – yet no profits in sight.

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Payments veteran warns buy now, pay later faces more pain in 2022

?AFR Tom Richardson?Markets reporter and commentator Dec 9, 2021

Companies in Australia’s under-pressure buy now, pay later sector will have to raise more money from investors in 2022, as bad debts and losses balloon, according to one of Australia’s leading payments industry experts.

Grant Halverson, the founder and chief executive of payments consultancy Mclean Roche, also warned the likelihood of rising interest rates next year threatens to hurt the industry’s margins, as operators fund their interest-free loan books by borrowing at fixed margins above variable benchmark interbank lending rates like LIBOR.

On Thursday, shares in Laybuy collapsed to 14.5￠, down 89.7 per cent from a $1.41 IPO price in September 2020. Other loss-making juniors in the sector, such as Zip Co, Sezzle, Openpay, Splitit, Humm and Ioupay, are down 50 per cent or more from their share price highs.

Mr Halverson predicted 2022 could bring more poor performance as balance sheets and cashflows weaken. “They’re going to have to try to raise a lot of money,” he warned. “It partly depends on how quickly interest rates go up, because if they go up quickly there could be carnage. If there’s a slower uptick then obviously the carnage will be slower in my view.”

Federal Treasurer Josh Frydenberg on Wednesday flagged the potential?for new regulation of the sector that could close loopholes and bring it in line with obligations imposed on traditional credit card providers.

?Bad debt problem

Mr Halverson also attacked the sector’s cavalier approach to bad debts and pointed to the fact that the charge card sector, including Amex and Diners Club, wore $15.4 million of bad debts on $56.8 billion of sales over the last 12 months, versus BNPL at $220 million of bad debts on $11.4 billion of sales.

The bad debt problem could translate into lower credit ratings and higher funding costs for the interest-free lenders, according to the payments veteran.

“The moment their bad debts go up their cost of funding will go up three or four times faster than the actual rate rises and the rating agencies will downgrade them, and then they’ll get to junk status,” he said.

The junior players listed on the ASX don’t have the scale to successfully compete with large, deep-pocketed entrants boasting giant customer bases such as Commonwealth Bank, PayPal and American Express, according to Mr Halverson.

“To be successful in payments you have to have scale, and you must have what the industry calls ubiquity, which is wide acceptance – and buy now, pay later has neither,” he said.

The lack of a moat also means the marketing costs to acquire a customer may not equal their lifetime value as the product’s functionality has little to lock in a customer, unlike some software-as-a-service businesses, for example.

“Because they’re all frantically going at the US they’re racing to the bottom,” Mr Halverson said. “And that means probably more bad debts because they’ve gone after customers who haven’t got credit ratings.”

However, many analysts disagree with Mr Halverson’s gloomy views.

On Tuesday broker UBS upgraded Zip Co to a “neutral” rating with a $5.20 share price target. It tips Zip to make a $79 million profit on revenue of $1.1 billion in financial 2021. Prior to its proposed merger with Square, analysts at Macquarie rated Afterpay a “buy” with a $160 price target some 60 per cent above Thursday’s share price.

Zip closed at $5.08, down 4 per cent, and Afterpay was flat at $100.23.

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