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AUG. 26, 2022

Don’t Buy Now, it Won’t Pay Later

Once described as a European fintech unicorn, the Buy Now Pay Later (BNPL) company Klarna is now losing money, and last month it saw its valuation slashed by 85% compared to its maximum one year ago.

Last week, we spoke about companies cutting personnel due to the more challenging economic conditions they are facing this year; in June, Klarna cut 10% of its workforce.
Klarna is not alone: Affirm, the leading US-based BNPL payment provider, which is listed in the US, is down almost 70% YTD and more than 80% from its peak in November 2021. The situation looks so bad that it has been referred to as the “BNPL carnage”.

To understand what is happening, we must first understand how BNPL companies operate and what their competitive advantages are versus the existing consumer financing options. BNPL services are free for customers, but these companies charge substantial transaction fees to merchants that can be more than double those of credit card companies. The higher transaction fee is justified by the higher sales volume brought by offering the pay later option, which is advertised between 40% and 60%. Some BNPL companies also provide a consumer analytics platform included in the fee.
On the consumer side, the delayed payment is without interest as long as the installments are paid according to the schedule, missing a payment, however, results in high late fees and can damage the client’s credit score.

What went wrong for these once-promising business models? The significant growth for the BNPL sector happened during the pandemic, when people moved their shopping online and the pay later without interest option became attractive, especially to those facing income uncertainty. For short-term deferred payments, BNPL companies perform soft credit checks that take about 25 seconds. As a result, these companies ended up with many customers unable or unwilling to make their payments. When these credits are sent to debt collectors, the lender has to pay hefty administrative fees, which are now affecting the balance sheet of BNPL companies. Another part of the BNPL business is to waive interests for some time in order to acquire customers. Such practice could be profitable in a low-interest rate environment, but now with increasing interest rates, the costs of such practice are getting higher as well. To add even more uncertainty to the BNPL industry, there are regulatory pressures from the governments and competition by big financial corporations, which are now launching their own Buy Now Pay Later products.

The future is not dire for these companies, especially in the current conditions of high inflation and low unemployment: the demand for BNPL services should remain stable or even increase. Profitability remains challenging to achieve though, and there will be consolidation.

We thank you for your continued support.

The FAM team