Is the payment revolution beholden to buy now, pay later?

Payment Revolution

This new business model was enough for some to consider BNPL a payment revolution. Some credible commentators, including The Age/Sydney Morning Herald business writer Ross Gittins (arguably the best business writer in mainstream media) have argued that BNPL is truly different.

Drawing on research from the equally credible Australia Institute (admittedly in this case commissioned by a top BNPL program), Gittins argues that BNPL is a highly competitive and innovative challenge to traditional credit systems. , usually handled by banks, especially credit cards.

He believes that BNPL “is genuinely disruptive, giving users what they can rightly consider a better product. Regulators should think twice before trying to discourage it.”

There is no doubt that BNPL innovates. Nor that, for nearly a decade, betting against BNPL was a widowmaker’s job for investors. However, the world has changed. BNPL share prices crashed. And that has forced a reassessment of what BNPL offers. Just another way to pay? Or a whole new business ecosystem?

Moreover, even if it is the latter, can the business model survive a sudden change in the business cycle?

Threat of regulation

BNPL models have been attacked on several fronts. One is the threat of regulation. At first, regulators were content to monitor the development of BNPL until it became large enough to pose a threat to financial stability. It is now likely that BNPLs will face some sort of regulation as credit providers, while merchants will be allowed to apply a consumer surcharge to recoup some of the service fees charged to merchants, as is the case for credit cards.

The threat of greater regulation has itself dealt a blow to valuations, but it grows at a time when BNPL players – and there are thousands of them, from tiny fintech startups to big brands – are also facing the winds. adverse macroeconomic and monetary conditions that backfire on startups.

Interest rates are rising, presaging both funding restrictions and deteriorating credit conditions. Because the vast majority of BNPLs were in the growth phase, they are unprofitable – which is only good as long as investors can see a gain in the future. Once that gain is riskier, due to rising rates making safer investments more attractive and credit problems looming, investors sell.

And we have seen many BNPLs lose 80% and 90% of their value in recent months. Meanwhile, bad loans in the sector are indeed increasing, already exceeding 20% ​​of the loan book in some US markets. This coming winter will not only chill BNPL, but the wider fintech lands as well.

As The Economist Noted“Rising interest rates and the threat of an economic slowdown are weighing on the industry. Many listed fintechs have seen their market capitalization plummet by more than 75% since July 2021; private companies are forced to carry out “down rounds” which value them at a level lower than their previous value. In recent weeks, a dismal group of multibillion-dollar fintechs, from Klarna, a BNPL company, to Wealthsimple, a trading app, announced layoffs.

Enter the ring

Then there is the competition. As BNPL began to gain momentum, established payment systems like Visa and MasterCard either rolled out or purchased BNPL offerings. Like some banks. That drove valuations down, but the heaviest hit came this month when Apple added a BNPL feature to its wildly popular Apple Pay product.

Apple Pay Later users can now simply choose to pay for a purchase in installments. BNPL’s valuations were hit again. Apple basically offers BNPL for free to merchants.

For those disinterested, what happened is a fascinating test of whether BNPL is in fact a brand new innovation in payments or just another clever fintech that has had its day.

Proponents – and Gittins argues this – argue that the true value of BNPL is that it is an ecosystem, not just a payment instrument. That is, it brings buyers and sellers together through a community. Shoppers are offered special offers and other attractions; sellers a more engaged audience and a lot more behavioral data about them. The kind of data that Google, Facebook, Apple and others have collected.

It could be true. Time will tell, but in my view what we are seeing is much like what we saw in Australia in the 1990s when mortgage originators entered the market and at some point contracted nearly one in four mortgage loans.

Their appeal was their innovation in unbundling the mortgage product. They did not have the expensive branch networks needed to increase the deposits banks used to fund mortgages. Instead, they bundled their mortgages and sold them on the markets via securitization.

They changed the mortgage market forever and consumers were the winners: about 250 percentage points were cut from the cost of a mortgage. Today, those original companies have morphed into something else, been taken over by bigger players, or gone bankrupt. Their models have not survived economic cycles and competitive responses.

The innovation continued, the business model that delivered it did not.

Andrew Cornell is editor of bluenotes

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