Trendspotting: A Slowing Economy Threatens Buy Now, Pay Later

NewsWire: 6/17/22

• After a meteoric rise last year, “buy now, pay later” firms like Klarna and Affirm are coming back down to earth. Late payments and borrowing costs are both rising fast. (The Wall Street Journal)
• NH: Last year, “buy now, pay later” companies were a Big New Thing. (See “Young Americans Love to Buy Now, Pay Later.”) The number of retailers partnering with them skyrocketed, including big names like Amazon, Walmart, and Macy’s. The largest players in this space, Affirm Holdings (AFM) and Australia-based Zip Co. (ZIP), saw their valuations soar. Block (SQ) rushed to buy Afterpay in a $29B all-stock deal.
• But it looks like the party is over. Affirm, whose stock peaked at nearly $170 a share in November, has fallen below $20. The startup Klarna, which was valued at $46B last June, is now seeking funds that would value it at nearly a third less at $30B. Last month, the company laid off 10% of its workforce.

• One reason for the jitters is that Apple (AAPL) recently announced its own BNPL option. But even before this, BNPL companies were on edge. The trend thrived back when the real time value of money was zero--or even negative. And when consumers were flush with savings and shelled out freely for everyday purchases like clothes and household items. But rising interest rates and widening credit spreads have made borrowing more expensive for the firms offering BNPL. As for consumers, they are now starting to tighten their belts.
• The slowing economy and dwindling bank accounts have also made more subprime consumers--who make up, by one estimate, around 43% of BNPL users--fall behind on their debts. At the end of March, about 3.7% of Affirm’s outstanding loan dollars were at least 30 days late, up from 1.4% YoY.
• BNPL execs insist that, if anything, their companies will end up thriving during a downturn because they’re more forgiving than credit cards. Indeed, according to a Credit Karma survey, 60% of Americans say that inflation is making them more likely to use BNPL. But even if BNPL becomes more attractive for consumers, it may also be less profitable for retailers. In any case, the economy is moving away from the conditions that allowed BNPL firms to flourish: cheap funding and fat wallets.
• Those that have bank charters, like Block and Klarna, are better positioned than those that need to borrow funds. Smaller players will have a harder time getting money to lend out--and in turn may end up shuttering or merging with a larger firm.