Tough Future Predicted for 'Buy Now, Pay Later' Companies

A recent report by credit rating agency Moody’s Investors Service forecasts a challenging future for ‘Buy Now, Pay Later’ (BNPL) companies. Factors such as intense competition, increased regulation, economic challenges, and sustained losses have contributed to this prediction.

Decreasing Investor Interest

According to the report, investor interest in BNPL companies has been on the decline, and funding for their lending services has become more expensive. These factors have contributed to industry losses for the past five years. The report warns that many BNPL providers may deplete their equity in the coming years if losses are not contained and new equity injections are not secured.

Future of BNPL Companies

The report suggests the possibility of few BNPL companies remaining independent. Some may be acquired or cease operations if they fail to remain competitive in the market or navigate impending regulations. For instance, Australian BNPL company, Openpay, had to shut down in February.

Despite this, the BNPL industry has benefited from increased online consumer demand for installment financing services during the pandemic. Some consumers have started to turn to it amidst harsh economic conditions, and the general expansion of e-commerce may continue to boost BNPL.

BNPL Business Model

BNPL offers point-of-sale financing that allows consumers to purchase an item and pay for it over time, typically over six weeks, sometimes with no interest on the loan. To increase profits, some BNPL companies have started offering more interest-bearing loans and other services.

Intense Competition and Rising Regulation

Competition in the BNPL arena is intense. Low barriers to entry have allowed numerous startups to enter the market. Moreover, large banks like National Australia Bank, NatWest, Santander Bank, Citibank, and JPMorgan Chase have started offering BNPL-type services. These banks have an edge over BNPL companies due to their credit card networks’ extensive reach and more tested credit risk management.

Tech giant Apple has also entered the BNPL market, intensifying competition with its Apple Pay Later service. This service, backed by Goldman Sachs and Mastercard, provides Apple with a significant advantage due to its dominant position in the digital wallet market.

Rising regulation worldwide also poses challenges for the BNPL industry. Regulatory moves in the U.S., the U.K., Sweden, Singapore, Australia, and the European Union aim to protect consumers and ensure compliance, which may lead to shrinking profits and rising compliance costs.

Survival of BNPL Firms

Moody’s concludes that to survive, BNPL firms must reduce costs or increase revenues while maintaining volume growth and market shares. If they fail to do so, rising competition from incumbent banks and large tech companies may push many out of the market.