As interest rates climb, the “Buy Now, Pay Later” scheme is tested

Consumer spending is declining, interest rates are increasing, and credit conditions are becoming more complex, putting Buy Now Pay Later lenders in jeopardy.

According to GlobalData, Buy Now Pay Later (BNPL) companies have formed one of the fastest-growing areas in consumer finance, with transaction volumes reaching $120 billion in 2021, up from $33 billion in 2019.

The BNPL business model arose from a very low-interest rate period, allowing BNPL enterprises to acquire capital cheaply and provide point-of-sale loans to clients on online shopping platforms.

According to Investopedia, Buy Now, Pay Later (BNPL) is a sort of short-term financing that enables customers to buy purchases now and pay for them later, generally without incurring interest. BNPL agreements, sometimes known as "point of sale instalment loans," are becoming a more common payment alternative, particularly when purchasing online.

Consumers pay for their goods in weekly or monthly instalments, generally without interest, while BNPL companies charge online merchants a fee for each transaction. During the COVID-19 epidemic, the concept proved popular among young customers as e-commerce volumes skyrocketed, with Buy Now Pay Later transactions accounting for $2 of every $100 spent on the internet last year, according to GlobalData.

However, the industry is facing a reckoning as the conditions that fuelled its phenomenal expansion are fading, with consumers pulling down on their spending and increasing interest rates driving up BNPL businesses' financing costs, reducing profitability. find out more

Apple's (AAPL.O) announcement this week that it would launch its own deferred payments service heightened competition and temporarily dragged down the stock prices of publicly-traded companies like Affirm Holdings (AFRM.O), the largest BNPL firm in the United States, and Australia's Zip Co (ZIP.AX) and Sezzle Inc.

In 2022, shares of Jack Dorsey's payments company Block Inc (SQ.N), which purchased Australian BNPL provider Afterpay in January, are down roughly 48 per cent.

According to S&P Global Market Intelligence's 451 Research, there are more than 100 BNPL enterprises worldwide.

Klarna, a top BNPL startup valued at $46 billion after a fundraising round a year ago, recently let off 700 employees or 10% of its workforce.

The Swedish corporation said it is in negotiations with investors to seek extra money, citing changing consumer attitudes, inflation, and the situation in Ukraine as causes.

Accessing money to lend to customers will become more difficult for smaller businesses, many of which are start-ups.

Cordova's approach includes the possibility to pay in four payments with no interest and a scheduled payment every two weeks for purchases up to $600. Credova, like other BNPL providers, has a deal with Cornerstone Bank that allows them to provide long-term instalment plans with a 36 per cent APR maximum and retail instalment contracts, all on the same platform. This payment option was created as part of the company's ongoing evaluation and examination of client feedback.

The slump hasn't discouraged newcomers: Zopa, a British banking start-up that raised $1 billion in a capital round in October, revealed on Tuesday that it will include BNPL products in its portfolio.

According to Tim Waterman, Zopa's chief commercial officer, planned restrictions would entail more severe checks that consumers can afford to pay their bills and the need to declare a dependence on the services to credit reference bureaus.

According to Deutsche Bank's Keane, although this would benefit the major players, merchants may be willing to pay greater fees if BNPL businesses attract more users to their websites.

Although any lending product risks higher default rates during a downturn in the economic cycle, BNPL firms may be protected by their ability to control what kind of line of credit they offer based on a user's behaviour, as well as the fact that they typically offer shorter-term loans, according to Rob Galtman, senior director at Fitch Ratings.

According to Deutsche Bank, the sector may be worth $482 billion by 2025, accounting for 5.6 per cent of all e-commerce expenditure, including travel and events payments.