In principle, Buy-Now-Pay-Later (BNPL), a way to access credit quickly and easily, is a brilliant concept that is applicable to anything from retail purchases to everyday groceries, to impulse spending.
The point-of-sale design of BNPL was the payment world’s answer to what Open Banking did to budgeting or Financial Infrastructure APIs did to start-ups. The capability to offer the customer a completely new level of convenience and innovation.
However, like many fintech pursuits, it’s also something of ‘a wild west’ according to McLean Roche CEO, Grant Halverson. BNPL is very popular with younger cohorts, in no small part because it suits their needs. With access to less capital but a high level of engagement to retailer goods like fashion or technology, BNPL offers those on lower-income the zero-interest answer to their everyday desires. Therefore, it seemingly is often more their wants rather than their needs that BNPL has been solving.
In Australia, like many of the developed economies where BNPL has flourished, a sudden and jarring crash in early May 2021 resulted in serious questions being asked of the industry as a whole. In particular, its continued struggles to be marketed as a safe service without the regulation that many other financial products have. While many BNPL stocks have recovered from those May-lows, regulatory questions remain a key overhang for the sector moving into 2022.
The Australian market stock index is likely to see far more interest in the interim, as growth stocks like Afterpay attempt to put out the fires and boost confidence in their business once again. The reason for the popularity of index share trading is largely its ability to act as a quick measure of a market’s state, by taking all the contents into account. Typically, they’re low-cost and allow traders to invest, and often provide returns that can rival an expensive, individual fund manager, and are often more consistent in performance, too.
However, they aren’t nearly as sought after as the growth stocks like Afterpay can be – at least until drops like the one in May occur. Understanding the reasons behind the drop reveals more about the concerns of governing bodies as it does any sort of fundamental ‘flaw’ in the BNPL business model.
Other Australian tech companies such as Altium and Appen have proven volatile in 2021, and Australian BNPL companies were all in the red after a wave of US sell-offs occurred in May. Quantifying that impact, between May 1 and May 31, the entire Australian BNPL complex witnessed significant share price declines: Afterpay plunged 21.1%, Sezzle crashed 22.9%, and Zip declined 12.7%. And although the likes of Zip and Afterpay have seen their share prices recover from that May sell-down, they continue to trade firmly off their 52-week highs.
Some of the major concerns that may have led to those drops included the major issue of rising interest rates fuelling BNPL sell-off, as well as criticism of unrestricted lending practices. This resulted in customers being charged heavy late fees. The rising interest rates are thought to be mostly rooted in the possibility of inflationary pressures in the US market that would likely cause the Federal Reserve to raise interest rates.
Rising interest rates are seen as particularly concerning as they’re seen as more detrimental to the profit margins of start-up and early-stage businesses or retail-reliant models like BNPL. If the Fed does as is feared by many investors, and interest rates do rise, borrowing costs go up and high-growth stock like Afterpay loses its shine somewhat.
The future of BNPL in Australia is difficult to ascertain today. Clearly, regulation has to play a greater role, although it equally can’t be the role of the regulator to protect all people from bad credit scores or heavy repayment fees. Investors will presumably hope that their growth stock can find harmony between the regulation they will likely face, and the viral manner in which they have won the loyalty of shoppers all over the country.