A tough time for buy now/pay later fintechs | Payment source
When lawmakers last year urged the Consumer Financial Protection Bureau to investigate business practices For some of the biggest buy-now/pay-later fintechs, there seemed to be no end in sight to their exponential growth.
At that time, BNPL’s fintech Say and Klarna had market valuations of around $45bn, while Block (formerly Square) agreed to pay $29bn to acquire rising star fintech BNPL. Post payment. Rivals Zip and PayPal they were also on fire, as consumers flocked to their interest-free turnkey online loans in response to the pandemic’s influences on their finances.
A year later, that fire is much less bright.
In recent days, BNPL fintechs Klarna and Say released financial results that revealed new weaknesses, including a slowdown in BNPL’s loan growth rates. With rising inflation and economic uncertainty, consumer delinquencies also rose for both companies, shaking investor confidence.
Although BNPL loans remain popular with consumers, Affirm and Klarna valuations have constantly fallen in recent months, with both now hovering below $7bn from previous highs of around $45bn.
“BNPL lending has introduced a lot of innovation, but it’s based on 0% interest at a time when interest rates are rising, and it’s already slowed down from the hockey stick growth we saw last year,” he said. Nathan Hilt, managing director of the consulting firm Protiviti.
More pain could be inflicted as early as this month, as the CFPB said soon post results from his analysis from five of the most prominent BNPL lenders: Affirm, Afterpay, Klarna, Zip and PayPal, all of which rely heavily on the “Pay in 4” model, in which consumers pay no interest if they repay loans in equal installments. Most BNPL firms also offer longer terms with interest.
The CFPB “appears to be moving towards making rules or putting BNPL under CFPB supervision,” said Allen Denson, a partner at Stroock & Stroock & Lavan.
The CFPB report will likely expose the good, bad and ugly aspects of BNPL’s fintech practices, Denson said. Positives could include the ability of BNPL loans to expand access to credit to new or underbanked borrowers and build credit histories. The negatives could involve unclear policies on penalty interest rates, late fees, and inconsistent handling of sensitive consumer data.
“Any CFPB regulation will almost certainly focus on requiring BNPL lenders to provide disclosures, with some clear guidelines for consumers and lenders to operate under the same framework,” Denson said.
The report is likely the first step in a lengthy process that could take up to a year, based on previous regulation for similar fintech-based payment categories, such as prepaid cards, which the CFPB addressed several years ago after lengthy consultation from the industry, according to Denson, who predicts the rules will be released by the end of 2023.
According to Denson, many BNPL providers might welcome the regulations, as such protective measures often facilitate competition by creating stability in a new or chaotic market.
Klarna, which has postponed a proposed initial public offering, is the latest BNPL fintech to signal trouble ahead.
In a semi-annual letter to shareholders this week, Klarna CEO Sebastian Siemiatkowski warned that Klarna is having a “very tumultuous” year so far, citing the Ukraine war, inflation and a “likely” recession.
Klarna’s revenue for the first half of the year increased 24% to $950 million compared to the same period a year earlier. But pretax losses nearly tripled over the same period to $581 million from $141 million a year earlier. The overall delinquency rate on Klarna consumer accounts is still relatively low at 0.7%, but higher than the 0.5% delinquency rate a year ago.
In the past year, Klarna has blown cash on heavy marketing investments and acquisitions, including launching a separate debit card. The company cut 10% of its staff in May to help control costs.
PayPal is the largest Pay in 4 lender, with a potential reach of more than 200 million US consumers through its existing relationships, while Affirm has around 14 million users. Klarna claims the most customers with 150 million globally (30 million in the US, its fastest growing market) and recently raised $800 million in funding despite a tight venture capital market.
“[Klarna’s growth rate] it is slower than its peers, but likely demonstrates the company’s maturity in major markets,” analysts at New York-based Sanford Bernstein & Co.’s Autonomous equity research unit said in a Wednesday note to investors. investors.
Affirm’s shares fell last week after its latest quarterly results showed rising delinquencies and slowing sales momentum, while CEO Max Levchin warned of a recession that could further damage Affirm’s fortunes. Levchin also said that Affirm is keeping an eye on acquisitions that could complement the company, pointing to the likelihood of BNPL’s consolidation in the coming year.
A fusion: Zip’s proposed acquisition by Sezzle— he fell at the beginning of this year.
Competition is also intensifying. Apple BNPL Service, apple pay lateris set to launch this fall, while several BNPL firms including Klarna, Afterpay, Affirm and UK newcomer Zilch are expanding or launching rewards programs to gain and retain more customers.
Visa Y MasterCard they are also gaining momentum with BNPL platforms and technology that allow banks to underwrite BNPL loans with any participating retailer.
Because the BNPL industry is still relatively new and constantly changing, it is difficult to predict how consolidation and implementation of rules could complicate its evolution, Protiviti’s Hilt said.
“BNPL lending soared during an unusual time in the pandemic, when consumers were stuck at home and liked not having to go through a formal credit check,” he said.