The decline of the BNPL business model
The stock prices of the leading fintechs specialising in deferred payments, BNPL (Buy Now, Pay Later), have experienced historic declines. Concerns about a continued slowdown are growing as consumers cut back on spending in the face of rising prices and the likelihood of a recession, which, together with new players entering the market, will test this business model.
Valued at up to $50 billion and with more than 13 million customers, San Francisco-based Affirm is a leader among companies that rely on the deferred payment method to attract, sell to and retain customers, who can get instalment loans when they buy products online.
As has been seen with many other technology companies, the loss-making nature of this fintech was not an impediment to investors giving it a market capitalisation of billions of dollars after its IPO in 2021. Even so, the lack of profitability and shares that are on a downward trajectory – they have lost 60% over the last year – are just one example of a trend extended to other companies in the sector, which calls into question the future of this business model.
As Isaac Sène, product manager at 11Onze, explains, “the BNPL business is a risky model with negative interest rates, much of the risk is caused by the credit granted by the current players, which could be considered ‘subprime’. With potential interest rate hikes in the coming months, the business model as it stands today is challenged, and the repayment of the debt even more so.
“The entry of consolidated companies with large capital reserves and brand weight like Apple, can be a lethal competition for current BNPL startups like Klarna.”
Banks and tech giants want a slice of the pie
The digital revolution and the maturity of e-commerce spurred the rise of alternative payment methods to those offered by traditional banks. New generations of digital natives wanted more agility, lower fees, and a fully online experience.
Fractional payment shopping via e-commerce platforms was the logical evolution of a trend that was already established in large physical retail outlets. Demand for this type of service exploded during the confinement caused by the health crisis, when a time of economic stability was coupled with consumers who were bored at home, and could only shop online.
Still, it was only a matter of time before traditional banking and financially well-resourced technology giants, such as Apple, took advantage of the popularity of their platforms and large customer bases to integrate their own instalment payment applications, capturing much of the market that had previously been the preserve of BNPLs. “The entry of established companies with large capital reserves and brand weight, such as Apple, can be lethal competition for existing BNPL startups such as Klarna,” notes Sène.
Unregulated financing and uncontrolled indebtedness
Young people and low-income households are the most vulnerable to the risks associated with the use of these services, especially because of the danger of accumulating excessive debt. The ease of lending and the lack of checking credit profiles before granting loans can lead many families into over-indebtedness.
The sector is therefore facing a possible upturn in non-performing loans. The lack of diversification of companies dedicated exclusively to the BNPL model means that they often serve consumers with lower credit scores. A potential increase in defaults, coupled with declining demand due to consumer fear of a new crisis, generates a lack of confidence among investors that is evident in falling share prices.
Increasing policy and regulatory pressure from governments, coupled with consumers with increasingly tight budgets, point to diminishing returns from a business model based on impulse and impulse purchases. The sector could consolidate with more diversified companies that combine B2C with B2B – less prone to the volatility of ephemeral consumerism – or that understand the service of instalment payments only as an added value to their business.
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