Trouble Brewing for Buy Now, Pay Later Providers

Consumers flocked to buy-now, pay-later loans during the pandemic. BNPL providers flourished until 2022 when investor interest cooled and authorities turned their attention to the lending practices of the largely unregulated companies.

How BNPL Works

A BNPL loan usually consists of a four-installment payback, typically with a down payment of 25% and the remaining three installments due in two-week intervals. When a borrower misses a payment, many BNPL lenders charge a late fee, around $7 per missed payment on an average loan of $134.

BNPL providers offer the service in two ways. First, they contract with online retailers to embed their payment options on checkout pages. The retailers pay a fee to the providers for the service.

Second is a direct application acquisition model where consumers complete a credit application with the BNPL provider. Once approved, consumers receive access to a virtual shopping mall of merchants. Some BNPL providers are issuing cards to consumers to use in brick-and-mortar stores.

In either case, merchants receive payment in full at checkout.

Inflation Squeezes BNPL Providers

BNPL providers borrow the money they lend to consumers. Inflation has caused those borrowing costs to soar. BNPL companies also expanded the number of markets they serve between 2019 and 2021 and hired more employees. Now, as their losses mount despite more users and higher revenues, they are laying off workers and cutting other costs. Public companies have seen their stock prices plummet, and private companies have had valuations slashed.

Despite the troubles, BNPL remains extremely popular with shoppers. BNPL will account for about $438 billion — 5.3% — of global ecommerce transaction value by 2025, up from 2.9%, or $157 billion, in 2021, according to payment processing firm Worldpay.

Top BNPL Companies

Affirm. Shares of San Francisco-based Affirm declined 80% in 2022 from their November 2021 peak of $164.23. Affirm is the largest provider in the U.S. market with a 40% share. It also operates in Canada and Australia.

On January 9, 2023, a class action lawsuit was filed against Affirm on behalf of select investors. The lawsuit alleges that the company made materially false and misleading statements and failed to disclose that Affirm’s BNPL service “facilitated excessive consumer debt, regulatory arbitrage, and data harvesting,” among other allegations.

Afterpay. Australia-based Afterpay was acquired in 2021 by U.S. publicly-traded company Block (formerly Square). Afterpay suffers from ballooning bad debt and increased operating costs. It is now earning a substantial percentage of its revenue from late fees and is suffering huge losses. Operating in the saturated Australian market does not help. Australia is home to 12 BNPLs, the most of any country. Afterpay also operates in the U.S., Canada, France, New Zealand, Spain, and the U.K.

Klarna. Based in Sweden, privately-held Klarna is the largest global provider of BNPL loans. It was once Europe’s most valuable fintech with a valuation of $46 billion. Twenty percent of its 150 million customers live in the U.S. In 2022 it raised $800 million from investors in a down round at a $6.7 billion valuation, with the sharp decline attributed to higher costs.

The company’s aggressive expansion in the U.S., the U.K., and other markets during the pandemic has caused massive losses. It considered going public in 2022, but economic conditions stopped the plan. The company laid off 10% of its workforce last year.

PayPal. With so many consumers using its platform to transfer funds, publicly-traded PayPal had an advantage when it entered the BNPL market. It now offers two options — a “Pay in 4” for smaller purchases with four payments over six weeks and a “Pay Monthly” option for larger purchases spread out over six, 12, or 24 installments. According to the company, 22 million customers used its pay later offerings in 2021.

Sezzle. Minneapolis-based Sezzle operates in the U.S. and Canada and is publicly traded.
It is a Public Benefit Corporation and Certified B Corporation. Its stock price peaked in April 2021, reaching $11.50 per share. It was trading at 37 cents on January 13, 2023.

Zip. Australia-based Zip provides services in 13 countries, with its core markets being Australia, New Zealand, and the U.S. In September 2021, Zip acquired South African BNPL provider PayFlex. Zip is a public company on the Australian stock exchange. In December 2022, Zip raised AUD$13.6 million from institutional investors at a 13.2% discount of 62 cents per share. The stock is now trading at 61 cents from its peak of AUD$9.80.

Consumer Problems

BNPL delinquency rates are outpacing those of credit cards, mainly because financially vulnerable households are nearly four times more likely to use BNPL, according to the Financial Health Network, which surveyed BNPL users in late 2021. Loan stacking, where a borrower takes out concurrent BNPL loans at different lenders and cannot repay some or all of them, is also a concern.

The BNPL industry is less transparent than legacy credit products because of sparse public data and the lack of repayment reporting to credit bureaus. This worsens the risk of loan stacking and overextension by consumers.

In December 2021, the Consumer Financial Protection Bureau, an agency of the U.S. government, requested data from five firms that offer BNPL loans in the U.S. — Affirm, Afterpay, Klarna, PayPal, and Zip. The five lenders originated $24.2 billion in gross merchandise volume loans in 2021 in the U.S., nearly triple the $8.3 billion in 2020.

The CFPB announced plans to regulate BNPL lenders in the U.S. similarly to credit card issuers. In the U.K., the government announced its intention to regulate the sector through its Financial Conduct Authority, focusing on misleading advertising by BNPL lenders. Australia is also considering stricter regulations.