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Young, dumb and living off mum. That was how the Bank for International Settlements characterised the average buy now, pay later user in a recent report.
This form of unsecured lending allows users to pay in several interest-free instalments. Its popularity is surging. BNPL use on Black Friday was 30 to 40 per cent higher this year. It is expected to feature heavily in Christmas shopping this year.
Back in 2020, Lex took the view that BNPL was just the kind of risky lending that banks were no longer willing to do.
Regulators around the world are now taking a long hard look at the sector as signs of consumer weakness appear and delinquencies rise for BNPL lenders. There is a growing sense that loopholes in consumer credit laws allow affordability checks to be circumvented.
For investors, regulators may be as big a threat as lending books built on lax credit standards.
The Bank for International Settlements found that more than half of BNPL borrowers globally were under 35 years old. It also discovered that a quarter of US users earned under $30,000 a year. Only a tenth had been to university. Research from the UK’s Financial Conduct Authority echoes the sentiment; users are more likely than average to be young, unemployed and living in rented accommodation.
Swedish BNPL lender Klarna says all its customers have one thing in common; a deep distrust of the traditional banking system. The antipathy seems to be mutual.
Credit losses in BNPL appear to have stabilised this year. Delinquency rates for borrowers are about 6 per cent or three times more than those for credit cards.
BNPL balances are smaller. Profits remain elusive. Return on assets hit a new low in 2022. They average minus 15 per cent for the sector. BNPL lenders make most of their money from fees paid by merchants. As a result, interest rate rises have had little positive impact.
These lenders are stuck between a rock and a hard place: an unprofitable business model and rising regulatory scrutiny. Their acronym might easily be applied to their investors too.
Read the full article here