Inflation and rising interest rates are becoming new challenges for BNPL companies

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Buy Now Pay Later (BNPL) has become a commonplace method for payments and credit among global consumers in recent years. However, most of the population has access to bank services and credit cards; a lending gap still exists in most countries. BNPL is catering to this lending gap by allowing customers to buy and pay in monthly installments with little or no interest.

BNPL companies were created one of the fastest growing segments in consumer finance, and now they are set to experience a crush on their margins because of rising interest rates. In addition, consumers are cutting down their household expenses due to rising inflation. Currently, more than 100 global companies are operating in the BNPL space. Many BNPL companies face debt issues regardless of how big or small the company is. For instance,

• A Swedish BNPL company Klarna Bank AB has recently witnessed its borrowing costs rise to the highest on record. Rising interest rates are negatively affecting the company’s equity and debt valuation. Klarna’s discount margin, a measure of the credit spread over benchmark borrowing costs, is increased to 272 basis points in May 2022. Klarna has laid off around 700 employees, which amounts to 10% of its workforce.
• The co-founder of Snapmint, an India-based BNPL platform, has announced the company’s cost of debt will go up by 100-150 basis points. The company’s partner merchants are tightening market spending due to the rising debt cost resulting in less traffic. The recent repo rate hike by 0.5 percent to 4.90 percent by RBI increased interest rates. 

Furthermore, Apple’s announcement of launching the BNPL service undoubtedly intensified competition among major BNPL players and knocked down share prices of key players such as Affirm Holdings, Australia’s Zip Co and Sezzle Inc. For instance,

• Affirm Holdings, a US-based BNPL provider’s share prices are already 75% down this year. Stocks are collapsed as investors are anxious about the company’s widening losses, the long-term sustainability of BNPL, and increasing leverage. Moreover, higher interest rates are a major challenge for Affirm as the company consistently borrows the money it lends to users. The company is not interested in raising its interest rates or merchant fees as per the recent 10-Q filing. Hence, raising fresh funds is difficult, as the company is willing to operate at losses without burdening its users. 
• Australian BNPL firm Afterpay has recorded a net loss of around US$ 345.5 million over six months to December 2021, just months after being acquired by Block Inc. Surge in bad debts and higher marketing costs are major driving factors for losses.

Most BNPL providers do not have access to deposits, as they are not financial institutions. They usually borrow funds to lend out to their customers, and an increase in interest rates will eventually cost these BNPL providers more. These interest rates will create immense pressure on the company’s margins. In addition, the BNPL companies also face increasing scrutiny from regulators and customers for cutting their household expenses due to rising costs. 

To know more and gain a deeper understanding of the global BNPL market, click here.