A Deep Dive into the "Buy now, pay later" industry

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Axios Markets

Buy-now-pay-later, or BNPL, is a rapidly growing but controversial way for consumers to borrow money to pay for goods and services. Think of it as the Gen Z credit card.

Why it matters: The young BNPL industry has yet to be tested through an economic downturn. The next recession, if and when it comes, could put serious strains on borrowers and lenders alike.  

The big picture: BNPL has emerged as one of the most convenient online payment mechanisms for people without credit cards — which includes many young Americans, and a majority of online shoppers in countries like Germany. This year alone it is projected to grow by more than 43%, to $180 billion. 

In Europe, many BNPL services allow you to receive your order and decide whether you want to keep it before you pay for it in full. That's pivotal to reassuring e-commerce skeptics they won't get ripped off.

In the U.S., BNPL is generally pitched as a cashflow benefit — a way to pay for items over time if you don't have enough to pay in full today. 

Driving the news: Apple's iOS 16 iPhone operating system, coming this fall, includes an "Apple Pay Later" service whereby Apple will lend you the money to purchase pretty much anything, interest free, over four installments spanning six weeks. 

That includes perishable items like groceries or gasoline — goods that have little if any lasting utility.

Context: Affirm, the biggest BNPL company in the U.S., lends for longer time periods against durable goods — most famously, Peloton bikes. Though it does sometimes charge interest, it also makes a lot of money directly from merchants who find that buyers are more likely to pull the trigger on a big purchase if they can spread the payments out. 

The catch: If you buy a lot using BNPL, you can end up in real debt trouble. BNPL also lacks most of the consumer protections that come with credit cards.  

The industry remains largely unregulated, although the Consumer Financial Protection Bureau is looking into the industry. 

One big weakness: It's very hard for one lender to know how much money a consumer might already owe to other BNPL companies. 

The bottom line: Spreading out a purchase price over time makes sense — once. If it's something you do every month, however, the benefits rapidly evaporate. 

1. The fastest-growing form of debt

But the industry has yet to be tested through an economic downturn.

Illustration of President Grant's image from a $50 dollar bill next to a hand holding an old watch surrounded by various shapes

Debt

Buy-now-pay-later, or BNPL, is a rapidly growing but controversial way for consumers to borrow money to pay for goods and services. Think of it as the Gen Z credit card.Why it matters: The young BNPL industry has yet to be tested through an economic downturn. The next recession, if and when it comes, could put serious strains on borrowers and lenders alike.

Top stories & latest news on the Federal Reserve, real-time data, plus the biggest shifts happening in the U.S. and global economy.

Economy

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Pro Rata

Axios Pro Rata

BNPL valuations, like other beneficiaries of the pandemic's boom times, are getting a reality check.

Driving the news: Klarna, a Sweden-based buy-now-pay-later company, announced this week a stunning 85% valuation cut as part of raising $800 million in new funding.  

The big picture: The pandemic-fueled explosion in e-commerce was a boon for BNPL, which consumers usually encounter when they're ready to pay for their online purchases. 

"Affirm’s largest customer is Peloton – so as Peloton’s fortunes’ rose, so did Affirm’s fortunes," explains Better Tomorrow Ventures co-founder Sheel Mohnot. 

Between the lines: The pandemic boom led many companies to focus less on margins and profits, especially as new entrants thickened the competition.  

"Klarna was profitable in the first 14 years of its life, and then went with the growth play," Alloy COO Derek Joyce, who was an executive at Klarna until early 2020, tells Axios.  

By the numbers: Growth is slowing dramatically. In October and November of 2020, BNPL orders were growing at a 528% year-on-year pace, as Richard Collings reports for Axios Pro Retail Deals. By January and February of this year, that number had fallen to 53%.

Why it matters: The entire category — along with fintech companies in general — has seen a valuation reset.

Affirm, the biggest BNPL company in the U.S. market, currently has a market cap of  $6.25 billion — down almost 87% from $47.36 billion, its all-time high, reached this past November. 

Zip, which this week called off plans to acquire rival Sezzle, has seen its market cap drop by 75% since the initial announcement in February — on top of the 80% it had already lost from its highest level the year before. 

The bottom line: "Buy now, pay later" is a pretty good way to describe anybody who invested in BNPL in 2021.

2. Valuations: Down and to the right

BNPL valuations, like other beneficiaries of the pandemic&#x27;s boom times, are getting a reality check.Driving the news: Klarna, a Sweden-based buy-now-pay-later company, announced this week a <a class="gtmContentClick" data-vars-link-text="stunning 85% valuation cut" data-vars-click-url="https://www.cnbc.com/2022/07/11/klarna-valuation-plunges-85percent-as-buy-now-pay-later-hype-fades.html" data-vars-content-id="3ac691cb-ab05-4020-a207-acc3033b6839" data-vars-headline="Valuations: Down and to the right" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.cnbc.com/2022/07/11/klarna-valuation-plunges-85percent-as-buy-now-pay-later-hype-fades.html" target="_blank">stunning 85% valuation cut</a> as part of raising $800 million in new funding.

Fintech Deals

BNPL activity still doesn't affect consumer credit scores. 

Why it matters: As the BNPL industry has grown, so has the need to make borrowing activity more transparent.

What's happening: Over the past six months, the top three U.S. credit bureaus — Equifax, TransUnion, and Experian — have all begun working with BNPL firms.

Despite those efforts, the industry still can't agree on a standard reporting structure for the most common form of short-term installment loan.

As a result, many BNPL providers remain picky about what they are willing to share with the bureaus.

Where it stands: Klarna doesn’t report any account information or repayment histories to any of the U.S. credit bureaus today — though it began sharing that info with U.K. credit bureaus last month.

Affirm has been working with some credit bureaus to report longer-term, monthly installment loans for big-ticket items but has shied away from sharing data on short-term, "pay-in-four" installment loans.

Between the lines: BNPL borrowers who make on-time payments are not benefiting as they would from paying off credit cards or other loans.

Including BNPL data would increase most consumer credit scores, credit bureaus say.

That’s particularly true for so-called “thin file” borrowers, those with a limited amount of credit data.

The bottom line: It's unlikely that BNPL activity will make it into FICO or VantageScore models anytime soon.

3. Why BNPL doesn't affect your credit score

The industry still can't agree on a standard reporting structure. Adding BNPL data would increase most consumer credit scores.

Illustration of a clock next to an image of Hamilton from the $10 bill 

BNPL activity still doesn&#x27;t affect consumer credit scores. Why it matters: As the BNPL industry has grown, so has the need to make borrowing activity more transparent.

BNPL startups have only existed in a low interest rate environment. Rising rates will put their business models to the test. 

Why it matters: Some will feel the pain of interest rate hikes more intensely than others, depending on how they fund themselves. But no one is immune. 

State of play: Affirm has the most diverse mix of funding sources among major BNPL players. Most of its funding comes from long-term agreements that have locked in lower interest payments for 18 to 24 months. 

Yes, but: The danger is what happens when some of these agreements dry up. On top of that, one-third of Affirm's loans are funded via securitization. Earlier this year, the company paused plans to sell some $500 million in securitized loans. 

Affirm ultimately completed the securitization, but had to pay about 3 percentage points more in interest than it did on a similar deal last year.

Klarna says 85% of its loans are funded via deposits — which in theory should make it more resilient in the face of interest hikes. That's in part why the company maintains a bank license in its home country, Sweden, despite the more onerous capital requirements that come with it.

The bottom line: Interest rates alone won't break a BNPL company. But they are likely to play a big role in the firms' profitability during any coming slowdown.

Editor’s note: This story has been updated to include details of Affirm’s recent securitization deal.

4. The funding conundrum

Startups that have only existed in a low rate environment will see their business models tested.

Illustration of Benjamin Franklin from a $100 dollar bill surrounded by clock imagery 

BNPL startups have only existed in a low interest rate environment. Rising rates will put their business models to the test. Why it matters: Some will feel the pain of interest rate hikes more intensely than others, depending on how they fund themselves. But no one is immune.

What happens if you combine three financial innovations of dubious utility — BNPL, NFTs, and fees in lieu of interest? Answer: Supermojo! 

Why it matters: Wherever there's an arena into which mainstream BNPL companies fear to tread, startups will fearlessly enter. Supermojo finances NFTs; Grabagun.com (slogan: "shoot now, pay later") uses a service that helps customers finance guns at fees that can amount to the equivalent of triple-digit interest rates.

How it works: Supermojo is more of an old-fashioned layaway plan than an actual BNPL: It buys the NFT on your behalf and hands it over only once it's paid for in full. 

The company makes money not only from the "service fee" that it charges in lieu of interest, but also directly from merchants.  

💭 Our thought bubble, from Brady Dale of Axios Crypto: For people who believe an NFT is likely to go way up in price, Supermojo would be a great way to lock in today's price now, even if you don't have the money. 

If you actually want to use an NFT, though (like: land in a virtual world game), it won't be any good to you until you make that final  payment. (And who knows if the game will still be cool by then?) 

Editor's note: This story has been corrected to show the name of the company with the slogan “shoot now, pay later,” is Grabagun.com, not Credova. It also clarifies that Grabagun.com connects customers to fee-based loans rather than interest-based loans.

5. YOLO now, pay later

Buy now, pay later startup moves into NFTs

Illustration of President Lincoln from a $5 dollar bill next to an hour glass

What happens if you combine three financial innovations of dubious utility — BNPL, NFTs, and fees in lieu of interest? Answer: Supermojo! Why it matters: Wherever there&#x27;s an arena into which mainstream BNPL companies fear to tread, startups will fearlessly enter. Supermojo finances NFTs; <a class="gtmContentClick" data-vars-link-text="Grabagun.com" data-vars-click-url="http://grabagun.com/" data-vars-content-id="c0b7cccd-a41b-4549-a024-ed0d4e6d03b2" data-vars-headline="YOLO now, pay later" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="http://grabagun.com/" target="_blank">Grabagun.com</a> (slogan: &quot;shoot now, pay later&quot;) uses a service that helps customers <a class="gtmContentClick" data-vars-link-text="finance guns" data-vars-click-url="https://www.bloomberg.com/news/articles/2022-07-13/buy-now-pay-later-company-stands-out-for-allowing-gun-sales?cmpid=socialflow-twitter-businessweek&amp;utm_medium=social&amp;utm_campaign=socialflow-organic&amp;utm_content=businessweek&amp;utm_source=twitter" data-vars-content-id="c0b7cccd-a41b-4549-a024-ed0d4e6d03b2" data-vars-headline="YOLO now, pay later" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.bloomberg.com/news/articles/2022-07-13/buy-now-pay-later-company-stands-out-for-allowing-gun-sales?cmpid=socialflow-twitter-businessweek&amp;utm_medium=social&amp;utm_campaign=socialflow-organic&amp;utm_content=businessweek&amp;utm_source=twitter" target="_blank">finance guns</a> at fees that can amount to the equivalent of triple-digit interest rates.

Buy now, pay later (BNPL) is an industry where the rate of growth is exceeded only by the pace at which valuations are falling. Axios Markets unpacks everything you need to know in this deep dive.

Growth has been rapid — but BNPL hasn't really been tested in an economic downturn.