Buy now, pay later (BNPL) took off like a rocket during the pandemic, in an age when interest rates were at historic lows and stimulus payments left many consumers feeling relatively flush with cash.
And now comes the stress test. Maybe.
Fitch Ratings said in a recent report that the twin forces of higher inflation and advancing interest rates could impact these nascent providers, who also are facing growing competition.
But at the moment, and as detailed in corporate filings, the pressures are manageable ones, the losses are low, the payment rates on those installment loans high.
The Fitch report stated that “the ‘pay in four’ BNPL product has captured a sustainable niche in consumer credit by providing a zero-cost, convenient and seamless financing option to consumers while also driving higher average tickets and reduced cart abandonment for merchants.”
But now, credit losses will rise, Fitch contended, as some BNPL providers have seen delinquency rates more than double over the past few quarters, while credit card delinquency rates are relatively flat. That’s a sign that BNPL as an asset class is of lower quality.
“BNPL products could become loss leaders as funding costs and credit losses normalize, leaving BNPL platforms that are heavily reliant on pay-in-four products more vulnerable to profit pressure and capital erosion,” Fitch said.
But it’s worth digging into the details, into the latest earnings reports, to get a sense of where various BNPL firms and larger providers such as PayPal, with BNPL wrapped within its offerings, see BNPL’s opportunities and challenges.
PayPal’s $4.9 billion in volume was up 226% year over year — and the payment option was used by 22 million consumers and offered by more than 200,000 merchants. CEO Dan Schulman said during a conference call that “we do have a unique approach to buy now, pay later… we don’t charge any merchant fees. We have no late fees to consumers. We make our money not off of the buy now, pay later but the ‘halo impact,’” where consumers use the service in tandem with other PayPal offerings.
As for losses, PayPal’s commentary and filings do not break out, specifically, the puts and takes with BNPL. But the filings show that the transaction and credit loss rate, as a percentage of total payment volume (TPV), was 13 basis points, up from five basis points a year ago. That is indeed more than a doubling, albeit off a previously (nearly) non-existent base.
Block, parent company of Square, said in its earnings commentary that BNPL contributed $104 million in the quarter in the wake of the Afterpay acquisition. And while that’s a proverbial drop in the bucket compared to the $4.4 billion in consolidated top line in the quarter, management has noted BNPL is a significant contributor to an ecosystem that crosses a variety of use cases. Management said too that losses on consumer receivables were 1.02% of gross merchandise value (GMV) during the second quarter, an improvement compared to 1.17%. Overall, said CFO Amrita Ahuja, “we continue to see healthy consumer repayment behavior with 90% to 95% of installments paid on time.” Filings by the company noted that the allowance for credit losses subsequent to the closing of the Afterpay deal were $121.6 million.
Australian installment platform firm Sezzle reported in its latest earnings results that its underlying merchant sales were up 1.9% year over year. The company said that despite the macro pressures, the firm had reduced its provision for uncollectible accounts for two consecutive quarters. The provision had reached 1.9% of underlying merchant sales, a 149-basis improvement as measured year on year.
None of this is to suggest that, should the macro pressures persist, these (and other) BNPL providers would be immune. No firm is entirely immune, after all — but for now, macro challenges seem contained.
Read More: BNPL Providers Handle Inflation, Credit Pressures