BNPL firms are focusing on profitability rather than expansion amid rising inflation and interest rates concerns

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The global macroeconomic challenges have created troubles for buy now pay later firms. The business model which created one of the fastest-growing segments in the consumer finance space over the last two years is now undergoing a period of consolidation. Emerging from a low-interest rate environment, which enabled buy now pay later firms to offer point-of-sale loans at a relatively low cost, the sector is facing growing headwinds, as the factors which assisted its explosive growth are coming to an end.

Notably, the rising interest rates are pushing the borrowing cost for BNPL firms, thereby squeezing their margins. This along with the growing inflation is also dampening consumer spending, resulting in lower revenue growth for the BNPL providers. Amid these challenging times, BNPL firms have turned their focus on profitability rather than expansion as they seek to weather the storm of global macroeconomic challenges. For instance,

• In Q3 2022, Zip Co. Ltd. (Zip), one of the leading Australia-based BNPL providers, announced that the firm is shifting its focus to profitability amid the growing annual losses, which reached US$701.3 million over the 12 months through June 2021-22. As part of its strategy to focus on profitability, the firm announced that it is exiting operations in the United Kingdom in August 2022. This comes after the firm announced its exit from Singapore.

Notably, the firm had huge expectations from its expansion in the United States and elsewhere. However, the expansion strategy came to an abrupt stop amid rising inflation, interest rates, and global macroeconomic uncertainty. With its exit from the Singapore and United Kingdom market, the firm is now focusing on operations in the United States, Australia, and New Zealand. Notably, the strong unit economics in the domestic business is expected to assist the firm in achieving profitability, as it continues to review other global businesses.

• In July 2022, Openpay, another Australia-based BNPL firm, announced its decision to stop operations in the United States. The current macroeconomic and public market conditions have been the leading factors behind the decision. This along with the ongoing capital requirement to fund operations and progress in the United States has led to the firm shutting down operations in the country. The firm is directing the available capital to fund its operations in the domestic (Australian) market, where it continues to record strong growth. The unique market positioning and market-leading margins will allow the firm to drive profitability through its operations in Australia.

The shift in focus towards profitability is visible across the board in the global BNPL landscape and not just among Australia-based providers. For instance,

• In August 2022, Klarna, the global leader in the BNPL ecosystem, announced that the firm is switching focus from growth to profitability as its H1 2022 losses widened. Notably, the firm reported a loss of US$583.3 million in H1 2022. While Klarna continues to record strong growth across the business, rising macroeconomic challenges mean that the firm is looking to consolidate and capitalize on the strong foundation built over the last few years.
• Currently, the firm has more than 150 million active users in the global market and over 45,000 retail partners worldwide in 45 countries. Notably, the United States continues to be the fastest-growing market for Klarna with over 30 million users. It is also recording strong growth in the United Kingdom, where it has onboarded over 18 million consumers onto its BNPL platform.

In addition to the growing macroeconomic challenges, BNPL firms are also facing rising pressure from the surging competition in the space. With traditional payment firms, such as Visa and Mastercard, offering their own BNPL services to consumers, the competitive landscape is evolving rapidly in the deferred payment industry. This, along with the entry of cash-heavy giants such as Apple into the BNPL industry, means further competition for pure-play BNPL providers such as Klarna, Zip, and Afterpay, among others.

With investors seeking profitability from BNPL firms, PayNXT360 expects more and more players in the global market are expected to shift their focus from growth to profitability from the short to medium-term perspective.   

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