‘The whole market is collapsing’

The local clones have opted for security at scale by proposing mergers: Zip with Sezzle and Humm with Latitude Financial Group.

Both Latitude and Humm are incarnations of conventional financial firms. Latitude was GE Money, which still regulates Harvey Norman’s consumer finance agreements. Humm emerged from Flexigroup.

Brown isn’t a fan of the Zip/Sezzle deal, but some of the biggest critics are no longer outside skeptics like him. The most destructive voices come from within.

Latitude’s pressure to swallow Humm has particularly killed the company’s largest investor and founder, Andrew Abercrombie. He says the sale of traditional consumer finance is worth more than the modest BNPL operations used to justify the merger.

“This is the Humm board telling the world that” [BNPL] the competition is getting worse, when in fact the whole market is collapsing.”

Abercrombie says that until a few years ago, Humm wouldn’t do a BNPL service for less than $500 because they thought it would attract people with low credit risk.

Bad debts have finally been caught up by operators who buy now, pay later and their growth model at any cost.

Bad debts have finally been caught up by operators who buy now, pay later and their growth model at any cost. Credit:Bloomberg

However, Afterpay and Zip were targeting transactions around $100. “And that’s what kills all these guys. (They) are losses,” Abercrombie says.

Immediate gratification, delayed pain

Afterpay planted the seeds of BNPL as a global consumer phenomenon in 2018 with its launch in the US market, liberating millennials from traditional credit products with four-term payments. In March 2019, the company was worth more than Harvey Norman, despite the retailer offering interest-free products on much more generous terms.

The key to Afterpay was that retailers loved it. Behavioral scientists have described the service and the viral impact it has on users as a perfect storm of instant gratification and delayed payment pain. It essentially misleads users into buying more than they otherwise would.

It’s a boon for retailers because BNPL customers are upgrading their purchase, or don’t bother waiting for sales discounts, and while it drove stock prices up, it’s also been a boon for BNPL investors. But that changed last year as investors began to look at the massive bad debt and a growing reality that many users are also spending more than they can afford.

In a recent column, Scott Galloway, a marketing professor at the NYU Stern School of Business and a critic of BNPL, points out that U.S. consumer debt is rising to record highs, with BNPL playing a dominant role, but at the cost of mounting losses such as bad debts and marketing costs. boomed.

“Any hope of profitability depends on overburdened consumers somehow making their payments and continuing to hit the buy button,” he says.

“Any hope of profitability depends on overburdened consumers making their payments somehow and continuing to hit the buy button.”

NOW Professor Scott Galloway

The sudden turnaround in the market’s fortunes has provided a rough introduction for Zip chair Diane Smith-Gander, who took over the position in February of last year. The stock peaked within weeks, valuing the Afterpay rival at just under $10 billion. This week, the market value fell to $420 million.

Speaking at a conference last month, Smith-Gander was open about the recent missteps that prevented the sector from changing its strategy for growth at any cost as new challenges such as inflation and rising interest rates emerged.

“The industry as a whole, which has seen bad debt rising, has really missed that moment. And we need to get out of that now,” she says.

Like Abercrombie, she suggests the industry was too blasé and justified bad debt as a necessary cost of BNPL’s astonishing growth story.

“In the industry, there was a bit of a sense that these are small amounts, so the payback for recovery and collection activities is not the same as collecting mortgages that have gone bad,” she said.

Diane Smith-Gander says the 'buy now, pay later' sector is now focusing on profit margins rather than just customer growth.

Diane Smith-Gander says the ‘buy now, pay later’ sector is now focusing on profit margins rather than just customer growth.

Everyone now recognizes that it makes no difference, meaning the operators’ thinking has only just caught up with old critics, such as payment veteran Grant Halverson, who heads consulting firm McLean Roche.

He has smashed what he describes as the strategy of high-growth all-cost BNPL providers, ignoring basic consumer lending risk criteria. “With high losses and very low margins, you will never make a profit, no matter how much growth is achieved,” he says. “BNPL apps also enjoyed record-low interest rates, which are now changing and making any path to profit impossible — in fact, every dollar of revenue goes straight to losses.”

He has the numbers to back this up.

Drastic measures

After measuring bad debts as a percentage of consumer loans outstanding, Afterpay leads the pack at 13.9 percent, followed by Zip at 9.7 percent and Commonwealth Bank-backed Klarna at 8.1 percent, according to McLean Roche.

For Australia’s largest credit card issuer, the Commonwealth Bank, the bad debt write-off estimate for 180-day delinquent accounts is 0.31 percent, according to McLean Roche data.

BNPL operators have resorted to drastic measures as the cost of debt financing rises, and fragmented valuations mean it will be difficult to obtain further financing from investors.

“The industry as a whole, which has seen a rise in bad debt, has really missed that moment. And we’ll have to dig ourselves out of that now’

Zipper Chair Diane Smith-Gander

“The last six to nine months have really been the perfect storm for these BNPL companies… which is now compounded by the fact that the decline in the share prices of these companies means their access to capital is non-existent,” said Brown of East72. . †

Sezzle is a good example. Market valuation has gone from a high of $2.33 billion last year to a low of $80 million this week.

Klarna, backed by the Commonwealth Bank, is laying off 10 percent of its staff to cut losses.

“While it is crucial to stay calm in stormy weather, it is also crucial not to close your eyes to reality,” Klarna chief executive Sebastian Siemiatkowski said when he announced the staff cut last month.

The same is happening at Minneapolis-based Sezzle, which last week notified investors of its plans to also cut 10 percent of its workforce and pull out of some of its new markets to save money ahead of its merger with Zip. .

Analysts have noted that BNPL operators have used other levers to reduce bad debt and red ink. This includes being more judicious about which customer transactions they fund. But there are consequences.

Last month, UBS analyst Tom Beadle noted a drop in the transaction frequency of Zip customers.

“We remain concerned that there is a tail of inactive customers that could fall out of Zip’s active customer base in the coming quarters,” said Beadle.

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Analysts at Macquarie Group raised a red flag in April when BNPL’s web traffic fell year over year for the first time since it began recording the data, suggesting customers may finally be dropping out.

“We view BNPL more as a customer acquisition tool, and in the event of declining customer numbers, the value of BNPL decreases,” Macquarie said.

All of this means that while Afterpay is relatively safe in Block’s bosom, its standalone rivals will be left with questions about their survival.

with Clancy Yeates

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