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Buy now, pay later surged in popularity during the coronavirus pandemic, as low interest rates and stay at home directives fuelled online shopping. As the easy money dried up and inflation-wary shoppers pulled back on spending, the assumption was that the industry would struggle to continue its blistering pace of growth.
It seems not. Despite the economic headwinds — or perhaps because of them — consumers are shifting more of their spending to BNPL lenders. Worldwide spending on BNPL purchases grew 18 per cent last year to hit $316bn, according to a report from payments processor Worldpay. In the US, the payment method, which is popular with Gen Z shoppers, made up $95bn, or 5 per cent, of ecommerce sales last year.
At Affirm, one of the largest US players, gross merchandise volume last quarter increased more than a third from a year earlier to $6.4bn. Square parent Block, which acquired Australia’s BNPL lender Afterpay, also reported similarly robust results: GMV was $6.98bn in the first quarter, up 25 per cent year over year.
This is all the more striking given that some of America’s largest retail banks have seen loan growth stall. The average loan balances at Wells Fargo, Bank of America, PNC and Truist Financial either shrank or were flat during the first quarter compared with the prior year period.
If more shoppers are embracing BNPL as an interest-free way to shop, the same cannot be said for investors and pure-play BNPL companies.
Despite rallying over the past 12 months, shares in lossmaking Affirm remain down 80 per cent from their 2021 peak and are trading below their initial public offering price. Sweden’s Klarna has seen its valuation collapse from $46bn in June 2021 to $6.7bn just over 12 months later. Elsewhere, at least a dozen smaller BNPL firms have ceased operations, including Openpay and LatitudePay in Australia, ShopBack PayLater in Malaysia, Zest in India and Pace in Singapore.
Higher funding costs are one problem. Greater regulatory scrutiny is another. Critics say the continuing growth of BNPL should be seen as a sign of consumer stress and warn about “phantom debt” — BNPL loans are not reported on consumers’ credit reports so there is a risk that users could have debt that is invisible to both lenders and financial regulators.
Ultimately it is mounting competition from big banks and payment groups that is the biggest problem for standalone BNPL companies. Apple, JPMorgan, Visa and Mastercard are among those that have launched BNPL services in recent years. The winners in the BNPL race are increasingly those for whom BNPL is not the primary business model.
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