Rising interest rates, bad debts put buy now, pay later sector on the brink

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 such as Daniel McCarthy’s butcher shop in regional Victoria, 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.”

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-up — including Afterpay and Zip – once dominated the scenebut traditional banks such as CBA, Suncorp and NAB, as well as Apple, are entering.

“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.”