Buy now, pay later, products such as Afterpay and Zip have become a popular payment method, but the industry is facing a perfect storm of rising interest rates, bad debts, a crowded market and of impending regulation.

For businesses like Daniel McCarthy’s butcher shop in the Victoria area, offering customers the option to use a buy now, pay later (BNPL) service has led to sales growth.

“It’s been critical to our online business,” McCarthy said.

The payment method is used for about 60% of his company’s online sales, and customers also use it in-store.

Its customers using it also spend more — an average of $140, compared to $30 using other in-store payment types.

“People can buy packaging in bulk and not shell out their money for it,” he said.

“They can put it on a payment plan, and it just works with their budgets.”

Daniel McCarthy says his clients like using BNPL because they can split their repayments. (ABC News: Simon Tucci )

Buy now, pay later Firms effectively buy a customer’s debt in exchange for a merchant commission.

The client reimburses BNPL in installments and the service is interest-free.

Fees apply if refunds are missed and some companies also charge other account fees.

However, while BNPL has been great for many retailers, especially during the COVID-19 pandemic, some say the glory days are over for the sector.

Start-ups – including Afterpay and Zip – once dominated the scene, but traditional banks such as CBA, Suncorp and NAB, as well as Apple, have taken over.

“You’ve seen a land grab where these companies are spending a lot of money on sales and marketing to acquire new customers,” said UBS analyst Tom Beadle.

“These customers are not necessarily good customers.

“In fact, you could almost say that they screen the bad quality customers themselves. So what these companies have to do is kind of focus on keeping those good customers who are reimbursing and obviously weeding out those [who] don’t.”

Zip Co’s bad debt and expected losses quadrupled to $148.3 million in the six months ending December 2021, compared to the same period a year earlier, according to the company’s latest half-year results. society.

Afterpay’s expected credit loss rose 50% to $151.112 million in the six months to Dec. 31, according to the company’s latest update to the U.S. Securities and Exchange Commission. .

Mr Beadle said bad debts were rising due to pressure on household budgets.

“And with these bad debts increasing, then it creates a circular effect because companies are buying, now paying later, and then tightening their lending standards,” he said.

“So that’s further slowing revenue growth.”

Afterpay’s bad debt as a percentage of outstanding consumer loans stands at 13.9%, according to payments consultant Grant Halverson’s analysis covering calendar year 2021.

Zip’s percentage sits at 9.7%, followed by major non-ASX listed players Klarna’s (8.5%) and Affirm’s (6.5%).

By comparison, Commonwealth Bank’s 90-day arrears for credit cards for the same period were 0.5% and 1% for personal loans, the data showed.

Mr Halverson expects the ABC’s 180-day strike rate to be about half.

Inflation and rising interest rates are also hitting the sector hard in other ways, causing massive layoffs in the industry.

Market analyst Roger Montgomery has long criticized the sector and argued that it is a bad investment.

“As interest rates go up, in response to rising inflation, then of course what’s happening is your costs are going up,” Montgomery said.

“So the margin you make on your loan portfolio goes down and, at the same time, consumers spend less, so your revenue line is actually down.

“I call them profitless prosperity stocks.”

BNPL shares the tank

Buy now, pay later Stocks have fallen in response to the many issues facing the sector.

On the Australian Stock Exchange, Afterpay is down 50% from $176 to $84.33 since its merger with US compensation giant Square earlier this year.

The Latitude and Humm merger was scrapped when the companies’ shares fell, down 40% and 45% respectively from a year ago.

Zip Co shares have fallen 93% from $8.21 to 53 cents in one year. He plans to buy Sezzle, which has fallen 96% from $8.24 to 30 cents.

Despite the drop in Zip Co’s share price, Zip Co’s chief operating officer, Peter Gray, is optimistic.

“In March, we took proactive steps to reduce our overall cost footprint. And we will see the benefits of these in the [2023 financial year] as we accelerate our path to profitability.”

A businessman is sitting at his desk.  He is the boss of the company
Peter Gray argues that the BNPL industry should not be subject to the same regulation as credit cards.(ABC News: John Gunn)

Mr Montgomery said the end of cheap money meant some BNPL players would not survive.

“Some of these companies will disappear and we will never see them again,” he said.

“It’s a fact in this environment. There will be no more funding for them.”

Regulation in sight

The BNPL sector has so far managed to avoid regulation because its suppliers technically do not charge interest and there is a loophole in the National Credit Code.

Some BNPL companies have signed a voluntary code of conduct, which consumer advocates say does not contain enough protections.

Financial Services Minister Stephen Jones said that was about to change.

“[I’m] not interested in having an argument over whether or not it is credit. This is clearly the case,” he said.

“Whatever its structure, it’s credit.”

Financial Services Minister Stephen Jones leans against a railing of Parliament
Stephen Jones says BNPL will be regulated by mid-2023. (ABC News: Nick Haggarty )

Details of how BNPL products would be regulated would be worked out after consultation with industry and consumer advocates, he said.

Mr Jones said that could start with legislating the industry’s code of practice and a strategic review to find out what the gaps were.

“This does not mean that every term in national consumer credit law applies in exactly the same way. It will not. But it will be incorporated into the national consumer credit law rubric consumption.”

He pledged to present the legislation to Parliament within 12 months.

“I don’t want us to have this conversation next year,” Mr Jones said.

The impending regulation of BNPL globally is another blow to the sector.

Mr. Gray said Zip remains in favor of proper regulation.

“The Minister suggested that the first steps would be industry code legislation, and that it would be part of the National Credit Act, rather than being subject to all the components of the act,” said Mr Gray.

“We believe that our services are credit [but] they don’t need the same kind of regulation that governs a mortgage.

“And, of course, we’ve seen that regulating the banking sector doesn’t necessarily produce better results. It’s more about product construction and vendor intent.”

Consumer advocates – such as Financial Rights Legal Center chief executive Karen Cox – have said there is no reason BNPL products should not be subject to the same rules as other forms of credit.

Karen Cox says BNPL products should be treated no differently than credit cards.(ABC News: John Gunn)

“The proof is in the pudding,” Ms Cox said.

“So whatever checks they do is not the same as doing proper and responsible loan checks as required by credit law.”

Michael Fredericks is the Managing Director and Founder of FuPay, which offers a budgeting service as well as BNPL products and cash advances.

He said the voluntary code did not provide enough protections for consumers and argued for BNPL to be regulated under the National Credit Code as it is.

Mr Fredericks said the regulations would also allow BNPL players to extend repayment terms that were shorter and therefore exempt them from credit laws.

“Some people are struggling to make refunds within that time frame,” he said.

“It’s only really suitable for a small amount of money, [is] below $200.

“We think the balance is to have more flexibility beyond that, which means you have to be regulated but not have indefinite credit…stay away from that debt trap or , in our view, of the bad credit model of credit cards.”

Mr Fredericks said FuPay does not publish the bad debt percentage of its sales because it is not a publicly traded company.

“It’s in the single digits and it’s going down,” he said.

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