All I want for Christmas is… more debt. 🎄 Some shoppers may have Black Monday sales and the Christmas splurge marked on calendars, but alongside retailers and credit card companies, another industry might be thinking this wonderful time of year is excellent: buy now pay later (BNPL) providers. 

Last week on the heels of Swedish-founded BNPL company Klarna getting ‘choosier about who it lends to’ amid the fintech’s potential IPO, rival San Francisco-based BNPL company Affirm (AFRM) beat Wall Street’s estimates for their first quarter (Q1). The big number was their gross merchandise volume (GMV) - aka transactions - which Affirm CFO Michael Linford told Yahoo Finance Live increased 28%, growing ‘three times the pace of e-commerce growth in the quarter’. 

Increased transactions were boosted by Affirm ‘adapting to interest-rate changes’, the company told investors, as well as growth in debit card and one-time virtual card use. Linford explained this helped the company’s revenue to climb 37% year on year, up US$496.5 million from US$361.6 million, ahead of both Affirm’s guidance of US$455 million and analyst expectations of US$444.5 million. 

Linford added that BNPL is being used for general merchandise - anything from car seat covers to a new fridge - by consumers who may be weathering tough macroeconomic conditions. He attributed Affirm’s competitive rise in the credit industry to applying ‘the world's best machine learning and data science applications’ in their underwriting process to help reduce the company's credit risk - a tactic not making the company completely immune from people defaulting on loans, however.

Another number that helped Affirm’s results was less loss. 💸 Affirm’s Q1 loss fell to just US$0.57, down from US$0.86 in the same quarter last year, shrinking from US$251.3 million to US$171.8 million. FactSet’s polled analysts expected a loss of US$0.70. 

BNPL is a multi-billion dollar business💰 

In New Zealand, BNPL is expected to account for US$1.45 billion of retail payments by the end of 2023. In the US, the market size is projected to reach US$71.93 billion in 2023 - up nearly 20% since 2022 - and expected by some to rise to US$124.82 billion by 2027. So who could benefit?  

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• Affirm (AFRM) holds a market cap of US$6.917 billion, with their stock climbing nearly 70% since November last year with a lofty rise of nearly 153% year-to-date (YTD)
• Block (SQ; also listed on the ASX as SQ2) acquired Afterpay for US$29 billion - Jack Dorsey’s deal completed in 2022 - and this year came under fire from Hindenburg Research for being the ‘wild west’ for criminals using Block’s cash app to transact illegal stuff. Block has a market cap of US$31.957 billion, and their stock may have felt the sting of investor sentiment following Hindenburg’s report, with their stock falling nearly 21% since one year ago, and down nearly 25% YTD. 
• PayPal (PYPL) provides Pay in 4 ‘interest-free installment loans’, and says they do ‘not charge any sign-up, application, late, or NSF (non-sufficient funds) fees’. The company, once co-owned by a group including Elon Musk, has a range of consumer and business products, and holds a total market cap of US$58.538 billion. Paypal’s stock has plummeted 36% since November last year and nearly 29% YTD. Paypal has a 1.3 star rating from Kiwis on Trustpilot.

Dangerous debt ahead? 

Lending that’s slipped through the ‘debt’ loophole. ⚠️ But alarm bells have sounded in the US and New Zealand as BNPL grows popular with some already debt-laden young people. While Genoapay, and ASX-listed company’s Humm Group’s (HUM) Humm and Bundll have closed in New Zealand, Afterpay, Zip and Laybuy continue, and not everyone’s a fan.

• AUT research found a quarter of the 705 people aged 18 to 34 they surveyed were caught in a cycle of debt when payment deadlines were not met
• Consumer NZ reported last year that one in five BNPL users use a credit card to pay off BNPL debt.

In New Zealand, BNPL sits outside the Credit Contracts and Consumer Finance Act 2003 (CCCFA). This is because the short-term loan duration is less than eight weeks, meaning only a ‘soft’ credit check is required before users are accepted for BNPL loans. But it also means users are not protected by responsible lending laws. The New Zealand government proposed - then this August, ‘ditched’ - potential legislation requiring BNPL lenders to make ‘affordability checks’ following opposition from BNPL providers. 

In the US, data shows that the pool of BNPL users is barely growing, and the frequency of use has stayed around twice per month on average, but BNPL users show ‘worrying signs about their financial health’:

• 69% of BNPL users are Millennials (32%) or Gen Z (37%) who show less satisfaction or have less access to traditional financing, such as from banks
• In the US, BNPL users typically have significantly more debt overall than the average US population, with around two out of five BNPL users having snowballing debt from using BNPL with a quarter being stung with late fees, 27% seeing declining credit scores and 22% facing debt collectors
• Nearly 50% of users are concerned about their financial futures and being unable to ‘have the things I want in life’, with 57% concerned about savings or their money lasting. 

Amazon to offer Affirm’s BNPL to business customers

Prime Day BNPL shopping soared. This July, Amazon’s Prime Day gained US$461 million revenue from shoppers using buy now pay later. With soaring demand, no surprises that this November Amazon (AMZN) opened the doors for Amazon’s millions of small business customers to use Affirm at checkout - helping Affirm’s shares to jump 19% following the news. Perhaps another reason eBay (EBAY) is feeling the heat after missing estimates, offering a ‘bleak’ Christmas outlook, believing themselves to be at risk of losing customers to Amazon and Walmart (WMT).

Apple launched their own Pay Later scheme earlier this year

Apple Pay… Later. 📱Since March this year, Apple Pay users have been able to access small loans between US$50 and US$1000 subject to ‘good financial position’ soft credit checks with the usual four payments spread across six weeks. Apple Pay Later has the advantage that Apple Pay customers can track and manage their loans in Apple Wallet.

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Like this? 👍 Then you might like: Did Block’s Cash App become the Wild West for the criminal underworld? 🤠