By Robert L. Cain, Coopyright 2022, Cain Publications, Inc.
They took a market served by check-cashing and payday loan stores and offered credit to their customers. Buy Now Pay Later (BNPL) began as a way to reach an underserved or ill-served $3.9 trillion credit market seen as a giant money-making opportunity. Making money hasn’t been part of the planned equation though. So far so bad.
BNPL companies such as Klarna, Affirm, Afterpay, Zip, and Sezzle lose money on every transaction. It costs them more to market their services than they make from lending with the 2 percent to 8 percent discount retailers pay when those companies’ borrowers buy from one of their merchants. Customers pay no interest if they pay off their purchase within six weeks. After that, depending on the lender, the interest rate can vary between 25 percent and 36 percent. One company, Affirm, advertises that it doesn’t charge late fees, something other companies do, but charges an interest rate of 36 percent after the six-week grace period expires and their customers still owe on the loan.
Even with extra, added charges and interest, the industry profit margin sits at a minus 2.6 percent. Apparently, they figure they can make up the loss in volume with the, according to Reuters, 180 million loans they made in 2021, a 200 percent income increase from 2019. Most likely, it just increases their number of losses by the 200 percent range.
Check cashing stores and payday lenders whose customers the BNPL companies are trying to gobble up have built-in safeguards. Check-cashing stores discount checks after they verify the funds, so they have no risk. Payday loan stores always verify customers’ employment before they loan to their customers. Traditional lenders such as credit card companies won’t even accept a customer who doesn’t meet their credit standards and report to credit reporting companies. The BNPL industry has no such safeguards in place. Their loans don’t show up on credit reports, and since they don’t communicate with other BNPL companies, don’t know if one of their customers has outstanding loans with other companies. Gee, how might that go wrong?
BNPL companies are maybe less than forthright in their marketing. For example, read the reviews on all their websites. All seem to have been written by the same person: same sentence structure and same syntax, perfect spelling and grammar, even the negative reviews. In fact, the negative reviews it appears were used as sales pitches because they all promise some kind of compensation to the “injured” reviewer. That’s no financial damage to the companies because no real customer had a problem that they published, anyway.
With the somewhat tarnished shine coming off the Yugo business model, the wheels have begun to wobble. Delinquencies are up with a 2.39 percent charge off rate in 2021, or $109 billion compared to a 1.83 percent rate, or $70 billion in 2020. In contrast, charge off rates for credit cards amount to 1.8 percent.
BNPL companies make it easy to borrow money by users installing apps on their phones that they can use at POS terminals much like using credit cards. Trouble is, they only work for companies that accept BNPL payments, which isn’t close to every one of them.
It’s Buy Now Pay Much More Later if these companies expect to turn a decent profit, something they don’t expect to do until 2026 or 2027, says the rosy picture management paints after being in business since 2008. Amazon, in comparison, showed a profit in 2003 after being in business selling books out of Jeff Bezos garage in Bellevue, Washington since July 5, 1994, but they sold tangible merchandise that people wanted with a business model that invited and propelled growth. They also didn’t loan money to the unqualified unlike the BNPL companies that rely on people who are hanging on by their fingernails.
Trying all kinds of revenue generation techniques, BNPL companies pull out the revenue-generating playbook. One technique is accepting advertising. Afterpay’s website is cluttered with ads. Whether those advertisers get a lower discount, Afterpay isn’t telling. Another idea is a “repeat user fee.” More than one BNPL company suggests that if borrowers borrow multiple times in a month, they’ll get hit with a fee for that. Of course, that would drive them to other BNPL companies where they could tack on more loans unbeknownst to any other BNPL company.
So what? Who cares if BNPL companies find themselves teetering on the edge of insolvency? If it only affected them, it would just add an item of interest. But it can and will affect the people who are supposed to be paying their loans back. Already, just as credit card borrowers have, BNPL customers use BNPL loans to buy groceries and gas, possibly tacking loan upon loan just to keep food on the table and gas in the car to get to work. Credit card borrowers who have maxed out their cards might even find themselves needing to use BNPL to buy food and gas with inflation chewing up their incomes.
When the recession and layoffs expected to hit next year begin, the BNPL customer base could well find itself unable to pay back its accumulated loans. Since BNPL companies already paid the bill their customers ran up, if borrowers have no money to pay back the loans, the lending companies will have to eat the money they already paid.
The successful issuers of credit have the good sense to qualify their borrowers before they let them run up bills. BNPL companies loan and hope. They hope their borrowers are qualified, but can’t find out for sure before they lend. They hope their borrowers will be able to pay back the loans but have no way of qualifying them except their experiences after they make the loan. They hope the economy stays afloat and the inflation abates so debts can be paid back. They hope to come up with additional revenue sources so they actually make a profit, even though even they don’t expect it for at least four years. That’s a huge impending downside.