Despite a recent survey suggesting that 70% of adults have increased their use of buy now, pay later services thanks to the cost of living crisis, companies in the space have seen enormous losses through 2022. With heavier regulation on the way, analysts remain upbeat about the space, but expect it to face renewed challenges.
- The cost of living crisis is driving buy now, pay later adoption up 80% among young adults
- Analysts believe that regulation is on the way for the sector
- Global X Fintech ETF provides exposure to Affirm, Block and PayPal
The share prices of platforms offering buy now, pay later (BNPL) services such as Affirm [AFRM], Paypal [PYPL] and Block [SQ] struggled in 2022 despite a marked increase in their use as the cost-of-living crisis stretched consumer finances.
A late November survey conducted by Forbes Advisor found that 70% of the 2,000 British respondents had increased their use of BNPL platforms and attributed that to rising living costs.
The Forbes Advisor survey also found that 63% of UK consumers were planning to use this kind of payment method over the festive period in order to keep up with spending needs.
Younger people are increasing their use of BNPL more than older age groups, with 80% of respondents aged 18 to 24 saying their use had increased over the last six months, more than any other group. The second-largest increase was 75%, reported by 25-34 year olds.
Despite this, BNPL platforms saw their share prices collapse during 2022. Affirm, for example, fell 90.4% to the end of the year. Major fintech players dipping their toes in the BNPL water have also struggled: PayPal and Block, which owns Afterpay, both fell more than 60%.
BNPL not immune to economic pressures
While rising inflation and living costs can drive usage of BNPL services among consumers, Global X research analyst Tejas Desai says that it simultaneously puts pressure on BNPL companies. “BNPL isn’t going to be immune to declining consumer strength,” he tells Opto.
“However,” Desai continued, “a big part of the value proposition is transparency and fee savings. Consumers being able to see how much they pay in fees and interest, on what timeline, could be extremely valuable in a cash crunch period.”
BNPL firms have been able to seize market share by positioning the service as less complicated and easier to access than a traditional credit card. On this basis, these firms could continue to gain over the long term. “As the economy regains strength, the share shift will be irreversible, further strengthening the BNPL industry. More broadly, digital commerce overall powers $14trn-plus in economic value per year. Digital native credit being built around online data generated was long overdue. This is a permanent shift.”
The question for BNPL companies is whether the shift is large and fast enough to reach profitability. Despite revenues increasing 34% year-over-year, Affirm’s latest earnings report saw operating losses increase 72.9% to $287m.
Regulation is on the way
Besides squeezed margins, BNPL firms may also face regulatory challenges over coming years.
In the UK, BNPL is coming under the purview of the Financial Conduct Authority (FCA) for affordability, for example. Gideon Valkin, an investor at VC firm Entrée Capital, expects regulation to test the hypothesis, telling Opto that BNPL “has further benefited from a lack of regulation. So the model will be tested more rigorously when regulation catches up.”
Philip Benton, principal fintech analyst at consultancy firm Omdia, also views regulation as a sign of the industry’s coming of age. New entrants are embracing the regulatory scrutiny and offering fundamentally different propositions to consumers.
He points to Zilch, a next generation payments platform, founded in 2018. The UK-based company operates with a so-called BNPL 2.0 model, and is already licensed by the FCA and offers 2% cashback to customers who pay in one instalment, as well as 0% interest for those who pay in four instalments over six weeks.
Funds in focus: Global X Fintech ETF
While BNPL is new enough that pure-play thematic ETFs are few and far between, several fintech ETFs offer exposure to specialists and to larger firms that are entering the space. Most of these have struggled during 2022 thanks to the challenges facing the fintech industry more broadly.
For example, the Global X Fintech ETF [FINX] fell 51.8% through the year. Affirm has a 0.71% weighting in FINX as of 30 December. Block is the fund’s second-largest holding with a 6.97% weighting, and PayPal makes the top five with 6.55%.
An August report from Mordor Intelligence expects the BNPL industry to grow at a CAGR of 22.4% during 2022–27. Refinitiv analysts hold consensus 12-month price targets of $19, $90, and $100 respectively for Affirm, Block and PayPal, implying upsides of 96.5%, 43.2% and 40.4%.