Fintech ?? Food - BNPL is Good; I will die on this hill

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Hey Fintech Nerds ??

Welcome to 2024.

We're?so back.

The year Fintech rose from the ashes of an awful early 2023.?

Stocks like Affirm have rebounded, and I expect Klarna will IPO this year. As people discover BNPL is eating market share for breakfast and is more good than bad, I felt a bit Ranty. This week, your ???Rant is "BNPL is mostly good; I will die on this?hill."

The UK will launch a refund scheme for scams, but won’t solve the scams problem. They might make it worse and kill small Fintech companies. (in ???Things to Know)

Neobank Revolut is still struggling for profit and its banking license. (below in ???Things to Know)

Crypto is back. The SEC might let Bitcoin into 401ks soon by approving an ETF. Despite the haters in the country club, it's now an institutional asset class, and the price has spiked to $45k.?

The real action is underneath in the new assets.

One you might have heard of is Solana, but what about $BONK? (covered below in ???Things to Know).

Let's get this Fintech party started.?

PS. If you want my 2023 State of Fintech report, including 2024 predictions,?you'll find it here.

Here's this week's Brainfood in summary

???Rant:

?? 4 Fintech Companies:

1. Claim?- The social shopping and rewards app?
2. Crescenta?- Private equity platform for retail (Spain)?
3. Metcycle?- Secondary market for metals
4. Teal?- Real-time Payroll data for SMB lenders (US and EU)
5. ?? Things to Know:?Crypto is hot again, and Solana is now the 4th largest Cryptoasset.
6. Revolut posted ￡1.5bn ($1.91bn) of revenue in an unaudited account.
7. The UK will launch a refund scheme for scams.?

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Weekly Rant ??

BNPL is Good - I will die on this hill?

Buy Now Pay Later is the devil,?but is it really?

No.

BNPL is a useful financial product that gets an unduly bad rep.

Some people in Fintech and financial services?hate?this product.

But often, they don't hate BNPL; they hate?lending.?

BNPL just seems evil because it's almost?too?easy to use, and there's an opaque nature to how the credit reporting should work.?

Don't get me wrong, there are problems and things to fix.

The haters make some?great points.

But BNPL, done right, is a great product for?most people most of the time.?

I will die on this hill.

So let's do this.

??

1. What is BNPL?
2. Why do consumers use it? (in priority order)
3. BNPL criticisms
4. Counterarguments
5. The data
6. My take

1. What is BNPL?

Buy Now Pay Later appears as a button at checkout that allows consumers to have

• Installments at "0%" with little or no friction
• With a higher perceived approval than traditional credit products
• With a focus on cashflow for underwriting
• Driving more sales, higher order values, and repeat customers for merchants
• By giving consumers a sense of control and discovery of new items through the mobile app experience
• That creates a shopping/data flywheel moat for providers

Big-name providers include Affirm, Klarna, and PayPal.?

Merchants generally prefer BNPL to almost any other type of online payment acceptance.

Merchants get:

• Customers who are more likely to convert (higher?conversion)
• Customers who spend more (higher average order value or?AOV)
• More repeat customers and new customers

Despite the higher variable costs, merchants will always want a solution that is more likely to get consumers to click "buy" and spend more when they do.

BNPL providers also bring?new?and?repeat?customers to merchants driven by the mobile app ecosystem.?Providers like Klarna or Affirm re-engage users, often leading shoppers to choose these apps over direct searches on Google or visiting the merchant's site.?

?? This flywheel effect of shoppers who get re-engaged and can buy and then view their remaining products through that mobile app makes BNPL unique.

In a way, it's ad tech meets Fintech. Driven by the data and consumer preferences.

The data is the moat.

The product they’re selling to merchants is more customers, who convert and spend more.

Why wouldn't a merchant pay a higher fee for that?

It's the ultimate no-brainer business case.

But.

2. Why do consumers use BNPL?

This survey from?PYMNTS asked consumers what their most important reasons for using BNPL are.

a) To help with cash flow management.?53% say this is their primary reason, and 72% say it is a consideration in selecting BNPL. This speaks to the core value proposition BNPL offers. That?sense of control?is also such an important factor. Consumers feel out of control with a credit card that could be spent on anything. The fixed schedule helps consumers budget. Bankers and lending pros often massively underestimate the significance of removing this mental math.

b) The low or zero interest rate.?8.4% say this is primary, and 27% consider it a consideration. Fundamentally, paying in 4 installments at 0% is great?if you make all the payments on time. That breaks if you miss a pay ent.

c) Previous good experiences.?6% as the primary, and 20% consider that important. Nothing creates growth, like "This worked before, and I liked it, so I'll do that again." H gh-priced items managed over multiple months are a huge unlock, especially if you previously had no credit.

d) I trust the credit product provider.?6.2% of consumers' primary reason is their brand affinity with BNPL, which is huge when you think about it. 20.5% have that ffinity. If BNPL is evil, why do consumers (for the most part) seem to love it so much? Now things get a little more interesting.

e) An opportunity to build or improve credit.?Interestingly, 6% of people primarily select BNPL to improve cr dit. Given how little reporting BNPL has done historically, that's probably an education gap. I can imagine that if you have poor credit or got turned down for credit cards before, this one small loan for that one thing seems like a logical and safe way to build up from the bottom. Most BNPL providers don't report to the CRAs

f) Avoid hard credit checks or hurting credit scores.?A "hard" check is a full review of previous lending, available credit, and previous applications. The frequency of applications, plus reasons for any rejection, are shown in this file. Applying for but not getting credit can reduce your credit score. It's also a tedious process. Avoiding it entirely means consumers get to what they want with less friction and few r negative consequences.?

h) Unable to pay bills without it.?It's not surprising that people use credit when their needs are greater than their available cash. Surprisingly, people use BNPL, often associated with non-essential items, to cover those apps. While it's the primary reason for just 3.6%, it's a consideration for up to 9%. This is where the negative reputation, I think, centers.?Should you use BNPL for non-discretionary items if you can't afford to pay bills??

i) Only loan I could get.?2.2% of respondents' primary reason for BNPL is it's the "only loan they could get." We're entering error margins with this one. With 9.7% saying it's a consideration, BNPL is an option for consumers with no or poor credit access.

j) I had a financial emergency.?3.6% said they turned to BNPL because they had a financial emergency. When 1 in 7 "Millenials" say they have?used BNPL to buy groceries, BNPL is clearly used by those in financial stress.?

BNPL is meeting clear consumer needs.

3 BNPL criticisms

a) It is targeted at the vulnerable.?BNPL users are typically younger and have less education than other forms of lending. It is most likely used by the under 35s with a high school education or less.

b) People spend more than they can afford and buy things they shouldn't.?Is that a good thing if people spend 60% more on average? If someone is low-income, the ease of installments might "trick" them into buying more than they could/should reasonably afford. The argument goes that it is especially dangerous for low-income or financially vulnerable consumers. Given how many people live paycheck to paycheck, a job loss or financial emergency could unravel their finances quickly, and they'd still have to pay their loans back.

c) People use it specifically to avoid the credit check.?At least 19% are using BNPL (in part) to avoid the hard credit check, and it doesn't look good. Missed loan payments are not always reported to credit bureaus in the US (although they are in the UK). The bureaus are working to close this gap, but today, a consumer could take out multiple BNPL loans and create a significant financial burden without any upfront prevention.?

d) Its positioning hides the lending and credit implications.?So much of BNPL's success is in removing the friction at checkout. Can't afford it??Hey, here are installments!?Worried about r paying??It's 0%; it's not like a "loan" if you pay on time. The devil is in the detail. Not paying on time attracts fees and APY%.?

If you're keeping score, someone could have spent more than they could reasonably afford, taken out debt they couldn't manage and didn't realize was a debt instrument.

It looks bad.

Is it??

4. Counterarguments to the criticisms.

a) Is it targeted at the vulnerable? No, low income or no c edit doesn't imply vulnerability. BNPL?targets?the low-income segments because it's most useful for them. If you cannot get credit from a traditional lender, your historic choices aren't good—either a high-interest credit card or, worse, a payday lender. BNPL is a lifeline for some and the best option for others.

b) Do people spend more than they should? BNPL users spend more than?non-BNPL?users because they can spread the cost.?So, the question is complex. As is th question of what someone?should?spend on. We can quickly patronize low-income people for buying items they "shouldn't."?

BNPL lowers the complexity of managing debt overall. A large long-term loan is scary, and credit cards can be a slippery slope. high-interest debt like a credit card isn't a single use; it can be used for anything. It's also confusing. If a user only pays the minimums, they can pay mu h more than the advertised APY level because the debt compounds.?

c) Avoiding the credit check can be a feature, not a bug.?Not having a credit history is a catch-22 that is notoriously hard to break. No matter how good someone is at paying their bills, having a low income or multiple sources of income can mean they are locked out of traditional lending products like term loans.?

Since the invention of open finance, we've seen countless innovations in using someone's cash flow (current bank account or wallet status) to see if they can afford a loan and if they're likely to repay it.

BNPL providers are the masters of using open banking and cashflow data to manage risk. Whether people could get credit or not, the worry that being refused credit will be damaging is a huge barrier. We need an on-ramp into the lending world for good consumers to manage times of stress or high-value purchases.?

BNPL can be that on-ramp.

d) Does BNPL's positioning hide the fact that it is credit? It is successfully used as a 0% installment option by the?vast majority of users.?The success of BNPL for merchants is the ability to remove friction at checkout and increase the average order value. The success for consumers is the sense of control and being able to split the cost easily.

BNPL's low delinquency rate shows consumers might repay that loan first. A lot of this comes from that very sense of control.

5. The data?

a) Who uses it??This survey?found that 19% of consumers have used BNPL, and usage is higher in the sub-620 credit score. The BIS data showed they're typically under 35 and not college-educated.?

b) How does it affect credit??This Federal Reserve Bank of Philadelphia report?has some interesting findings (paraphrased below).

1. People who use BNPL are?more likely?to be offered revolving credit
2. Card and retail balances?mirrored the wider trends in nonusers?of BNPL in the US during the same period?
3. BNPL does not significantly affect a consumer credit profile in the short term (where reporting data is available)

The researchers caveat these are data correlations, not causation; however, they note this is at least a promising indication that BNPL usage mirrors traditional consumer credit, albeit with notable differences.

c) Delinquency overall vs delinquency in BNPL.?While historically, BNPL did have higher delinquency rates than credit cards, that trend is now reversing. Affirm?reported 2.3% delinquency?in Q2 of 2023, while S&P Global is reporting default rates are rising across lending products to an average of 2.5% and are likely to trend towards 4.5%. This could be a point-in-time snapshot or BNPL providers reaching maturity with their credit models.?

There is no "hidden debt bomb" here.

Delinquency in BNPL is falling as it increases in other product types.

When you compare the 30+ delinquency rate of Affirm vs someone like Capital One, it starts to look pretty good. It's not far from the prime and super prime cards like JP Morgan and the affluent-focused American Express. The?average delinquency rate?across all credit card programs in the US is 2.97%?

By far, the biggest concern is when you look at the entire financial life of a consumer. The CFPB found that BNPL borrowers were?more likely to have other credit products, too, and were 11% more likely to be delinquent in those products.

That is the nub of the issue.

• 9% of NPL users had a delinquency in a credit card
• 8% of BNPL users had a delinquency in a retail card

However, because this is looking at users with a low credit score, we're looking at a high-risk segment. The correlation is not causation.

AKA, people with poor credit are struggling to repay debt.

We need more time before we can say that BNPL is worsening the issue (or not). The North Star here is getting a more complete picture of consumers and their data, especially when they don't have a credit file.

d) BNPL stock is rebounding, and providers are becoming profitable.?Affirm stock has rocketed from $9 in January to $40 today. Klarna's downturn from $40bn to $6bn appears to have bounced back. The CEO says they're now profitable in the US and are looking at one final round (at $15bn) to bridge them to an IPO.?

e) BNPL providers are continuing to eat market share.

This is big business, and the unit economics are starting to get where they need to be.?

BNPL is equivalent to any other form of consumer debt in its risk level.?It has weathered an interest rate hiking cycle and high inflation reasonably well (and is trending better).?

Where it differs is in how it is positioned. Is the bigger issue lurking beneath the surface that it is available to people without credit scores and doesn't look like debt??

6. My take

We have to look at consumers holistically.?

Because people with low or no credit primarily use BNPL, we see all the complications of financial stress. They're often delinquent in?other?lending products.?

The fact that people who use BNPL also experience financial stress is a correlation, not causation.?

We need better questions.

Better questions.

• Does BNPL intrinsically make a consumer's financial stress worse??Not intrinsically. All forms of debt can make financial stress worse if poorly managed.
• Does the fact that BNPL isn't always reported by CRAs mean vulnerable consumers can take on more debt than they can afford??This is backward. Do vulnerable consumers take on more debt? Absolutely. This is true of any type of lending product.
• Will reporting to the CRAs stop vulnerable consumers from taking on BNPL??Yes, probably, but it would also break the product for low-income consumers who don't have credit but?are?good credit risk.?
• Is the positioning as "0%" installments a trap??No. For most people, it works like magic. But we need better safeguards and warnings. The BNPL providers have started to do this, but it's not uniform. There's no downside to the transparency of fees. Indeed, BNPL providers' fastest-growing revenue line is often their fees.
• What should we worry about??There is clearly a data, regulation, and education gap we need to close. Nobody has a full view of the consumer data, so it's hard to help manage their risk. Regulation is a grey area. The UK has decided it's not required, while the CFPB is still pushing for it. With all regulations, be careful what you wish for. And on education, we've proven time and time again that consumers don't understand credit. We need to simplify it and build guardrails; in my opinion, BNPL is one of the least-worst at doing so.
• Should BNPL be regulated??Dangerous question. If the answer is to regulate it as a personal loan and require a hard credit check before anyone can get installments, then that's a net negative. But if all CRAs make all BNPL performance available to anyone who inquires, that would be good. If we can make a fee disclosure regime that's lightweight and effective, it's better.

The big question.

?Is BNPL better or worse than credit cards??It's better for low-income or consumers without credit scores han a high APR credit card. It's not as flexible; it can't be used everywhere, but it's also not nearly as confusing or easy to get into trouble with.

The magic of installments for a single item is its simplicity.

Being poor doesn't make you vulnerable. Some people are vulnerable?and?poor?and?use BNPL, and like all credit, that can be a slippery slope if not well managed.

Requiring full credit checks likely won't improve consumer outcomes.?But it will ruin the consumer experience.

I always found it paternalistic that someone?shouldn't?use BNPL if they're low-income. BNPL is available for essentials already, and if it gives most consumers a sense of control and helps them manage finances, that's likely a better outcome than giving them a high-interest credit card that revolves.?

If BNPL helps a gig economy worker who doesn't have a credit score get through the holidays more effectively, even better.

Remember, payday lending and loan sharks are the alternative to a lack of affordable credit.

Which made me think of a spectrum.

On the left are more benign credit types, like credit union loans. On the right are the payday lending industry and loansharks.

For me, BNPL is more good than bad.?

Credit cards revolve, and the fees compound month over month.

A $200 monthly usage repaid at minimums can quickly become thousands to repay.

Multiple credit cards and just paying minimums can be a persistent debt-cycle trap.

BNPL doesn’t have a concept of minimums. It has set installments. Its default posture is more consumer-friendly. ?

Yes a user can get multiple BNPL loans with multiple providers, and we can’t see the complete credit history of that user. Yes, if the user misses payments, their fees can compound.

There are gaps we need to close.

No product is perfect. But BNPL is one of the better types of lending there is.

And can be a lifeline.?

So why the hate?

Chances are you don't hate BNPL; you hate credit.?

And I don't blame you. Financial stress and debt spirals are a curse on our industry.

But this Rant is about BNPL, not credit itself.

If BNPL is no worse or better than other consumer credit in the long run, then you have to question the hate it receives. The industry has serious questions to answer about how it discloses and charges fees, impacts consumer credit scores, and how it markets itself.?

We have to remember that BNPL is still a relatively young product.?

The providers like Klarna and Affirm are now adjusting to scale, the economic cycle, and changing interest rates.

They're a part of the landscape and here to stay.

The implication for anyone not offering BNPL is that the competitive landscape has shifted, especially in the US, where credit cards are up to 40% of all consumer payments.

As BNPL comes of age, it will report more to credit agencies; it will sort out its wording at checkout, further reduce delinquencies, and likely start to fall under some regulatory regime or other in most jurisdictions.

That is meaningful if it continues to eat market share as Bain predicts.

But what people are discounting is the data flywheel.

BNPL has item-level data for everything customers buy.

It's ad tech meets Fintech.

When you consider Google's revenues and margin, the opportunity ahead is massive.

ST.

4 Fintech Companies ??

1.?Claim?- The social shopping and rewards app?

Claim is an app that helps users discover new brands and get recommendations from friends based on things they've bought. It offers cashback and the ability to trade rewards. It is aimed at Gen Z consumers and claims to have delivered a 4.8x return on ad spend. Claim has nearly 50% of students active on campuses, and advertisers do not need new integrations.?

???The battle for Gen Z dollars is intense and valuable.?Seeing this app immediately reminds me of the consumer app for BNPL providers like Klarna and Affirm. Gen Z, however, is using TikTok and Temu more than traditional e-commerce. This pattern of discovery, dis out, and loyalty apps drives new sales for merchants in BNPL, and consumers seem to genuinely love it. I had two questions looking at this.?

1. Can Claim drive enough users to merchants to make partnering worthwhile??So far, it is a yes with students, Gen Z, and niche brands.?
2. And if they do, how do they make the economics work without BNPL or a credit card funding that incentive??At its heart is ad tech, not Fintech. It's giving merchants a way to discover and engage with consumers. The real test is, can Claim to continue to retain those users in the TikTok, low attention-span- theatre?

?I like the social aspect, and there's a lot to learn if you're building a modern consumer credit card (looking at your Yonder and X Card). Also, wouldn't it be nice if the new hype wasn't "buy more stuff consumer,?consume!"

2.?Crescenta?- Private equity platform for retail (Spain)?

Crescenta manages private equity funds and is authorized by the Spanish national securities regulator. The service allows retail or professional investors to buy private equity, debt, venture capital, or infrastructure funds. They're registered advisors who accept checks from €10,000 to €10 million. They have built an education portal for retail.

???I'd love to be able to invest in alternative assets but have no platform to easily do so.?While I suspect most of C escenta's early customers will be smaller family offices and ultra-high net worth ($xxm) clients, there's room for something closer to retail. The Spanish market has a ton of old money, but Madrid and Barcelona show real signs of life as tech hubs. There could be a new generation of high net worth ($xm) for whom this service fits neatly?

3.?Metcycle?- Secondary market for metals

Metcycle allows buyers and sellers of scrap metal to trade internationally. Metcycle takes ownership of the metal from sellers in the western hemisphere to buyers in the APAC region. The platform is aimed at professional traders operating at scale.

???Platforms like this will be crucial for more global trade.?While 75% of steel used in the US is recycled, just 22% is in China. Using scrap metal requires 60 to 80% less energy but isn't readily available in APAC, where the demand is high.

4.?Teal?- Real-time Payroll data for SMB lenders (U and EU)

Teal provides real-time data from platforms like Uber and Deel and traditional payroll platforms like ADP and Sage. The platform automates income checks, can handle payslips, and builds work lows. The aim is to reduce the amount of manual work involved in underwriting.

???Removing manual work is catnip for enders, but better data is the real play here. The rise of the side hustle and gig work has made affordability checks much more challenging. Going deeper into the gig platforms allows Teal to build a more complete picture for lenders. This could enable traditional lenders to address a segment they'd historically ignored without increased credit risk. Major competitors like Atomic and Pinwheel are US-only. The team is ex-Wise, Yapily, and Vivid Money. Good pedigree for European markets. We don't have a winner in the UK in this category, and it's all to play for.

Things to know ??

Here is a roundup of stories we missed during the break.

??1.?Crypto is hot again, and Solana is now the 4th largest Cryptoasset.

You know Crypto is hot when every All-in podcast host tweets about it. Bitcoin is over $45k, and Solana's *$SOL is now the 4th largest Cryptoasset, up 7x since its bottom last year.?

???SEC Approval for an ETF legitimizes Bitcoin.?That's a watershed moment. Bitcoin is finding its place as?digital gold for the under-40s. The over-50s financial world still seems to hate it, but that's becoming less relevant. Similar to how there was moral outrage over video games, attitudes shift with generations. But I'm more excited by what's happening at the more innovative end of the spectrum.

?? There's a dog coin driving some of the Solana price rises.?$BONK is a meme coin (similar to Doge oin) that has increased its price by more than 180x since its creation. Anyone who held an NFT on Solana was automatically airdropped a supply of $BONK on December 25th, 2022.?

???Remind me what Solana is??Solana is a competitor to Ethereum. It competes on being faster and working on lower-powered devices (like mobile phones. Some call it the "next Ethereum." While I don't think that's true, it has all the hallmarks of something built to last.?

???Solana has quietly won credibility despite being closely linked with FTX?(many of the same funds backed it, and FTX was famously bullish on *$SOL). The founder has worked at Qualcomm for over a decade as an engineer, and major brands like Visa or Circle often use Solana as a default for payments. That's because it works.?

???Memecoins feel stupid but point at something important.?Creating energy around a joke can drive adoption. BONK is also a core feature of the new Solana phone.?

???The Solana phone is a hint at the future.?In a post-truth world where your data is regularly breached, the world of Android, iOS, cloud, and social media isn't cutting it for consumers. The Solana phone is built to be private, secure, and most importantly. AST. If blockchains weren't adopted because they were too slow, Solana could fix that.

???Is Crypto back??Long term, it's a secular trend. But when the all-in podcast hosts start tweeting about an asset, it's time to run for the hills. The new inverse Kramer is the inverse all-in pod. That s id; I expect 2024 to be a huge year for Crypto overall, even if Q1 is a little soft.

?? 2.?Revolut posted ￡1.5bn ($1.91bn) of revenue in an unaudited account.

Bloomberg reports that Revolut financials are averaging ￡125m in revenue per month, with "unnamed sources" telling Bloomberg it is adding 300k customers per week and a total of "almost 40m customers globally." The same reports also put profit at ￡6m($7.64m), down from last year, but at a time when they more than doubled their headcount. This follows delayed accounts and a high-profile parting of ways with its auditor, BDO. Revolut is yet to receive a UK banking license but claims it is "imminent."?

???Revolut is an incredible product.?￡1.5bn of revenue and 40m users (no matter how many are active) is an amazing achievement. They've diversified revenue, geography, and customer segment. Revolut i a case study on how to build beautiful products at scale and a benchmark in UX. Every ther Neobank is trying to do what Revolut has. Kudos.?

???$33bn is a heck of a valuation to grow into.?That would be 4,319x profit or 15x revenue. Is someone pushing for a license and a path to IPO??

?? The PR strategy is really odd.?Constantly claiming a "banking license is imminent" is a crying wolf. Who are they reassuring with that press? Themselves? Investors? Likely both.?

???Credibility is won slowly, lost quickly.?If Revolut poured as much effort into having the most transparent, credible accounts, they'd win credibility. It wouldn't mean a license immediately, but it would help.?

?? 3.??The UK will launch a refund scheme for scams.?

It goes live in October 2024, allowing consumers to report a loss via n-n-card payments (like Faster Payments). The sending and receiving financial institution will split liability 50/50,?but?non-banks can charge up to ￡100 ($120) as an excess to prevent friendly fraud.

???Scammers will game this.?It's great that victims get made whole, but this doesn't solve fraud. What might is the rule allowing FIs to share data when fraud is reported. Most scams originate on social media, and we?must?bring big tech to this table.?

???The 50/50 liability split could kill small Fintech companies.?Imagine if there's a fraud issue at some massive bank, and it all gets washed into your tiny little Fintech company. You didn't originate those transactions but have to split liability anyway.

That's all, folks. ??

Remember, if you're enjoying this content, please do tell all your fintech friends to check it out and hit the subscribe button :)

(1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees.?

(2) All companies or assets the author mentions in which the author has a personal and/or financial interest are denoted with a?*.?None of the above constitutes investment advice, and you should seek independent advice before making any investment decisions.

(3) Any companies mentioned are top of mind and used for illustrative purposes only.?

(4) A team of researchers has not rigorously fact-checked this. Please don't take it as gospel—strong opinions weakly held?

(5) Citations may be missin , and I've done my best to cite, but I will always aim to update and correct the live version where possible. If I cited you and got the referencing wrong, please reach out. I am learning as I go; please don't take it as gospel—strong opinions, weakly held.?