Problems that BNPL Companies and Customers Face

I will try to analyse the problems of BNPL from both the customers` and companies` perspective.

In the last article on BNPL, I mentioned about the customer segment of BNPL. Companies did a very good job on targeting a segment of customers that were and are neglected by the banks and they targeted younger generations with no or low scores because of the low financial transactions and who are also technology savvy and likes to try new things rather than old/traditional banks.

This customer segment started to have some problems with BNPL

·???????Since many BNPL companies do not report the usage to credit bureaus, customers do not get the benefit of creating a credit history. So BNPL usage is not creating a base for getting a loan or a credit card in the future if you pay on time.

·???????But if they pay late, then it will be a reported to credit bureaus. So while the good behaviour is not creating a good credit history, bad behaviour creates a bad one and impacts the future product ownership of the customers.

·???????Late payment charges BNPL companies are applying are really high and in the event of late payment, the total payment for BNPL, becomes a real burden.

·???????Since these customer segments are less educated about financial management and financial health, they started to “overuse” the BNPL and bought things they would not buy without BNPL [1]. This causes over spending and less savings for the future.

And this brings us to the first problem companies face:

·???????As customers are spending more than they should and as the customer segment that is frequently using BNPL have less financial power, companies are facing increasing delinquencies. BNPL’s rapid growth is driven primarily by younger consumers, with two-thirds of BNPL borrowers considered subprime, making them especially vulnerable to economic shocks or a possible downturn. And 42% of consumers who’ve taken out a buy now, pay later loan have made a late payment on one of those loans.[2]

You can have a look at the Klarna delinquencies below[3]. While the gross merchandise volume (GMV) has increased 42% YoY between 2020 and 2021, delinquencies increased 84% in the same period. With the impact of inflation and decreasing purchasing power of customers in 2022, we might expect more increase at the year end financials of BNPL companies.

·???????As the number of customers who are using BNPL and who have problems paying back increases regulatory scrutiny is growing. There are a variety of initiatives to tighten up regulation are underway. Australia has the leading role here but other geographies are catching up. In Europe, Ireland is taking the lead and Germany seems to be the laggard. [4]

·???????And the third problem BNPL companies facing is the increasing competition. Apple BNPL, PayPal BNPL are already launched. Block (Square) entered the BNPL market by acquiring AfterPay for USD 29 billion. And of course the entry of new big players are pushing the current players to expand to new geographies and make new M&A deals which increase the pressure on the costs. Increasing costs and increasing credit losses are making the BNPL companies` net losses increase year over year.

Despite all the problems mentioned above, I believe BNPL is going to grow in the upcoming years reaching out to new customer segments and providing services beyond payments to their customers through the M&As and partnerships that they are doing. ?

[1] https://finhealthnetwork.org/wp-content/uploads/2022/03/Buy-Now-Pay-Later-Brief-2022.pdf

[2] https://www.cnbc.com/2022/05/13/buy-now-pay-later-is-not-a-boom-its-a-bubble-harvard-fellow-says-.html

[3] https://thepaypers.com/expert-opinion/buy-now-pay-later-rapid-growth-but-challenges-on-the-horizon--1258045

[4] https://thepaypers.com/expert-opinion/buy-now-pay-later-rapid-growth-but-challenges-on-the-horizon--1258045