By Heather Rydings
The Buy Now Pay Later sector has grown rapidly over the past decade and was supercharged as the pandemic pushed consumers to online shopping.
In 2021, the value of BNPL transactions was estimated at $160 billion. This is set to almost double to $300 billion in 2023, according to the 2023 Worldpay report from financial services firm FIS.
However, tightening of financial conditions and rising competition has brought significant challenges for independent BNPL lenders, according to a new report from Moody’s, and made their quest for profitability “acute”.
Competition intensifies
The escalating popularity of BNPL services triggered a wave of competing products. Earlier this year Apple launched Apple Pay Later, making it the first instance of a big technology company challenging established BNPL lenders.
Though accounting for only five per cent of global card payments, Apple Pay dominates the mobile wallet world. According to Moody’s, the mobile wallet accounts for 92 per cent of transactions in the US and so has a competitive edge in the BNPL sector.
“Despite its gradual entry into the sector, the integration of BNPL into Apple’s Apple Pay ecosystem heralds the arrival of a formidable new competitor in the market,” Moody’s warned.
Consumer spending slows
Rising interest rates, slowing economic growth and sky-high inflation has made delayed online payments more attractive for an increasing number of cash-strapped consumers.
However, Moody’s warned that credit losses will likely rise for BNPL lenders as a result.
It pointed to a recent study by the New York Federal Reserve which showed that less creditworthy customers were most responsive to BNPL offers. A separate study by the UK Financial Conduct Authority last month echoed this research. It found that frequent users of BNPL were more likely to be in financial difficulty.
“Most BNPL products are largely unregulated and involve minimal underwriting on credit products…Even for companies with sophisticated credit modelling capabilities, like Klarna, the primary product is an unsecured consumer loan. This type of loan carries a significantly higher risk than the primarily collateralised lending undertaken by traditional banks,” Moody’s said.
Regulation ramps up
Regulatory pressure is rising across the world. New rules aimed at protecting customers will likely tighten underwriting standards and increase regulatory and compliance costs.
In the UK, the Financial Conduct Authority pushed some of the big players to update the terms in their contracts to make them fairer and easier for consumers to understand. In February, it published draft legislation for the sector.
For Moody’s, a more stringent approach to underwriting would make things less profitable for BNPL lenders to focus on small tickets. Worrying as the financial services firm noted that none of the major BNPL lenders turned a profit in 2022.
Big-name Klarna, for example, recorded a loss of $1 billion last year.
End of the road?
Moody’s made it clear that BNPL firms needed to slash their costs or increase their revenue while maintaining volume growth and market shares. If they can’t, Moody’s believes that rising competition will push many from the market.
“We anticipated that few BNPL companies will remain independent. Some may be acquired, others may cease operations in their products cannot remain competitive in the market, or if they are unable to navigate the impending wave of regulation,” Moody’s said.
“Companies that survive will likely be those that can achieve profitability quickly, or those that have managed to scale and provide additional value-added services to consumers.”
