When the economy was booming, the Buy Now Pay Later (BNPL) space thrived. But as inflation and interest rates have risen, consumer-focused players in this space have struggled with increased regulatory defaults and less discretionary spending.
Citing economic turmoil, Affirm announced last week that it would reduce its staff by 19% and shut down its crypto unit. He also missed analyst estimates for revenue and earnings; the valuation of Affirm it plummeted on the news, dropping its valuation to less than $3.700bn (When it went public in 2021, its valuation was $12bn). Swedish giant BNPL Klarna it also took a big hit to its valuation, coming in at $6.7 billion in July, down 85% from June 2021.
Morgan Stanley degraded the actions of Affirm also last week, saying that the company's offers "are too big given the narrow incremental benefits."
In September, the Consumer Financial Protection Bureau issued a report suggesting that companies such as Klarna, Affirm and Afterpay, which allow customers to pay for products and services in installments, should be subject to stricter supervision. The report may have been too small, or arrived too late. Many are concerned that BNPL is not responsible lending, and it is hard to know if the model itself is sustainable in the long term.
In July 2022 a report Fitch Ratings noted that some of BNPL's largest providers had seen delinquency rates more than double in recent quarters, while credit card delinquency rates were relatively flat, "underscoring the lower quality of BNPL's assets." BNPL”, according to said report.
In the case of Affirm, at least, the company reported in its Statement to shareholders for the second fiscal quarter of 2023 that monthly loan delinquencies, excluding Peloton, “improved sequentially across all stages during the quarter.” He also reported that its delinquencies “performed in line with or better than comparable periods in pre-pandemic years, a trend that has continued through January.”
BNPL's payment platforms became increasingly popular after the onset of COVID-19 "given the massive shift to online shopping and the need for merchants to generate incremental revenue when physical stores were closed," the company said. Fitch rating company. But the space faces greater challenges “due to increased competition, higher financing costs and credit deterioration, as BNPL's clients tend to be the high-risk and near-prime cohorts, segments likely to be hit hardest by high multi-decade inflation.
In fact, in a report April 2022 Harvard report cites a 2021 analysis by consumer credit reporting agency TransUnion of more than 4 million BNPL users: Compared to the average consumer, BNPL consumers are younger (77 % are between 18 and 50 years old) and, more particularly, 69% are subprime or near prime. The same analysis found that BNPL consumers are more likely to be more than 90 days delinquent on payments overall and more likely to seek credit.
“Affirm's lower-than-expected earnings reinforce our cautious view of standalone buy-now-pay-later business models facing both structural and cyclical challenges as American consumers cut spending while financing and prices increase. Credit costs squeeze margins," said Fitch Ratings senior director Michael Taiano.
Still, some industry watchers remain optimistic about Affirm's potential. Kevin Kennedy, analyst at Third Bridge, which provides investment research for private equity and hedge funds, believes there is room for Affirm to rally, perhaps expanding further into consumer lending.
"The Street focuses heavily on delinquency and loss rates by 2023, but our specialists are more optimistic about Affirm's ability to manage credit risk relative to other consumer finance vehicles. While there are clear concerns around the tighter liquidity environment, Affirm should have no problem leveraging incremental funding through additional securitizations."
If established players like Affirm and Klarna are struggling to this point, startups operating in BNPL are likely to face challenges of their own as well. Investor interest in consumer-focused BNPL companies appears to be waning, while B2B-focused startups continue to raise capital, even in today's changing and challenging environment.
“The [B2B] market is very underserved,” Speedinvest director Olga Shikhantsova told pitchbook in July 2022. “The pain points for businesses have always been much bigger than for consumers, but they have been somewhat ignored because they are more complicated to address. The [VC market] is smaller now, but the opportunities are huge in the B2B space.”
Tranch, a BNPL company for SaaS business spawned from Y Combinator, earned a Clear Haven's $95 million credit facility, based in New York, in January 2023. Tranch was founded in the UK, but focused on the US last year. In the second half of 2022, the total monthly value of invoices paid by Tranch increased 10 times. His clients include Goodwin Procter, a global law firm, and Tropic, a SaaS shopping platform.
Also in January, Berlin-based B2B BNPL startup Mondu added another $13 million to its Series A round, bringing the total to $56 million, according to tech.eu. Valar Ventures led that investment, with participation from the FinTech Collective. Also last month, actyv.ai, a Singapore-based AI-powered enterprise SaaS platform with built-in B2B BNPL, raised $12 million in pre-Series funds.
As a recession looms, discretionary spending is likely to only decline while defaults rise, creating ongoing challenges for consumer-facing BNPL players like Affirm. How well, or not, the company is able to weather the storm will continue to serve as an example for smaller players in the space.
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