In my previous post I outlined how the different shapes of money we are currently dealing with are likely influencing the way we perceive money: its purpose, its value and its finiteness. A good way of perceiving the limitations of money is to live within one’s means, and not incur debt. Of course, if the opposite holds true, we have a clear case for different payment methods having an effect on our perception of money.
One such payment method which seems to mess with the perceptions of money’s limit has been credit cards. And if we cast our eyes towards the 21st century, they would be buy-now-pay-later (BNPL).
The BNPL sphere has captured the payments market by storm, starting in Europe with Klarna, with Affirm in Australia and Afterpay in the US (most popular currently). Exacerbated by the covid-19 pandemic, people shifted the majority of their spending online. With wages becoming increasingly uncertain (pandemic, gig economy), an option to not have to pay the full price at the (online) till, but have payments spread out in equal terms across a set timeframe with no interest (but with late fees), became very enticing indeed.
Now the market capture of BNPL has been largely driven by young adults (<34), but other age groups are swiftly following, with a large chunk of 34-40 and 40-45 using BNPL products regularly as well. To put it in generations: in the US, Gen Z has a usage rate of 36.8%, Millennials follow with 30.3%, Gen X with 17.2% and the Boomers close with 6.2%. All these numbers are projected to increase in times to come.
Now there are several reasons why BNPL became very popular:
1. It was marketed very aggressively by both the BNPL service providers and the merchants they tied themselves to.
2. The pandemic shifted spending online, where BNPL thrives.
3. The pandemic exacerbated trends of volatile income (gig economy).
4. BNPL is a financial service (loan) with no regulation (read: no credit checks).
Now what do you think happens if you merge all these things together?
Think about it.
There’s no credit checks.
From the perspective of the BNPL providers, if you lend money to people who can’t pay it back, well, they’re not going to pay it back. The debt becomes a write off (the debt has gone bad). The BNPL sector’s rising bad debts and losses became most apparent after pandemic stimulus payments from the government (US) ended last year. Suddenly, debts weren’t being repaid anymore. Why not? Because the consumer simply didn’t have any money to repay it with.
From a consumer perspective, not repaying your debts is very often not the first point of action. Most people do try their best to repay the debt. But if you literally do not have the money, there’s another way of doing it: stacking debt.
I was far from surprised when I was made aware of the idea of “double debt” or “debt stacking”, which is the moving of the BNPL loan onto a credit card.
What now happens is that the fortnightly repayments are simply being charged to the credit card. Keep in mind, the BNPL doesn’t charge interest rates, it charges late fees which can be avoided by this measure. However, the credit card does (tend to) charge interest rates. If a person cannot repay a BNPL loan, they are unlikely to be able to repay the now growing credit card debt.
In terms of the perception of money, this is a nightmare. Debt is being moved around with no real means of repayment. It’s also been shown that people overspend on BNPL, just as lots of research has shown with credit cards. This double stacked approach could have devastating consequences for the ability to make or even adhere to budgets, and live within one’s means, something people continue to struggle with.
Don’t for a second think that I am subscribing to the viewpoint that (younger) consumers are simply living beyond their means and that this is a consumer, or individual, issue. I think the fact that a lot of people are resorting to BNPL rather than credit, and then still have to put part of the BNPL loan on the credit card is a strong sign of a systemic issue, in which people nowadays simply cannot afford life. To think that this is simply an issue of overconsumption or lack of self-discipline is naive and dangerous.
This problem is starting to get recognized and dealt with. BNPL has become increasingly scrutinized. The UK has rolled out regulations in early 2022 arguing that BNPL is a credit product, and Australia is following the UK’s lead by moving BNPL into the credit card domain, from a regulatory perspective.
You wouldn’t be amiss in thinking “oh damn, things don’t look too good for BNPL” and you’re right. You might even be inclined to say that “the market is collapsing”. However, new players do keep entering the market. Zopa has announced it’s coming to play (UK) and Apple has also announced (focused on the US) that it will launch a BNPL simply called Apple Pay Later.
Now there are other issues with BNPL (I’m not kidding). The introduction of the new players was met with raised eyebrows as they moved in during a period in which other BNPL providers were suffering: Sezzle’s market valuation has gone from a high of $2.33 billion last year to a low of $80 million this week. Zip’s market cap is closer to $600 million now, after a 87% decline in its share price in the past year. Afterpay’s owner Block is down about 60% in a year. And Klarna has just laid off 10% of its workforce. The main driver of these has been the massive amounts of bad debts: measuring bad debts as a percentage of outstanding consumer loans, Afterpay leads the pack at 13.9%, followed by Zip with 9.7% and Klarna at 8.1%.
Besides the bad debts there’s other reasons for the dropping share prices: investors have been pulling back due to a variety of reasons, the most prominent ones being rising interest rates (other assets have become more appealing) as well as it becoming unclear whether BNPL providers can actually make money. With Zip and Afterpay not having made any profits yet.
The BNPL providers suffering most are those that “stand alone”, they don’t (yet) offer services beyond BNPL and BNPL itself is struggling to make money. Like many fintechs, what standalone BNPL providers, such as Afterpay, are doing is to capture the market, at the expense of profit. This is a high-growth strategy, but one that’s difficult to convert into a money-making strategy, as BNPL providers don’t charge interest rates. And we all know that’s how loans, such as credit cards, make money.
This is becoming an interesting mess of mergers, share price drops, technological developments, regulations and consumer decision-making. I’m definitely keeping a close eye on this sphere; its developments are rapid and seldomly beneficial to the consumer. When I know – you will too!
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