It’s the time of year where consumers feel under pressure to buy presents for family and friends. Many might turn to alternative credit financing options such as buy now, pay later (BNPL) offered by Affirm, Block and PayPal, increasing calls for regulation to protect consumers from falling into debt.
- BNPL revenue increased 72% in the last full week of November
- It’s experiencing significant growth, with 4.5% of Q3 2022 non-grocery retail purchases made using BNPL payment plans
- The ETFMG Prime Mobile Payments ETF, which holds all three of Affirm, Block and PayPal, is up 6.3% in the past month
According to data from Adobe [ADBE], revenue from BNPL rose 72% year-over-year in the US in the week 21 to 27 November, which included Black Friday. Overall, orders were up 68% versus the same period in 2021, while the number of items per order rose 10%.
"In an uncertain economic environment, a more cautious consumer is embracing more flexible ways to manage their budget," the company said in the research, which was seen by MarketWatch.
Affirm, Block and PayPal are just a few of the public companies offering BNPL payment solutions to consumers looking to spread the cost of purchases, especially millennials. The Block share price is up 5% in the past month through 5 December, but the PayPal and Affirm share prices are down 2.1% and 19.35% respectively.
Black Friday boosts Block
Affirm has plunged since reporting its first quarter 2023 earnings in early November, when it warned of softening sales. Full-year revenue is expected to come in between $1.60bn and $1.675bn, lowered from previous guidance of $1.625bn to $1.725bn.
Although the PayPal share price has been on the decline, the fintech firm reported BNPL volumes had increased 157% year-over-year in Q3. It boasted 25 million BNPL users, with 280,000 merchants offering BNPL as an option, by the end of September.
The upwards momentum in the Block share price, meanwhile, can be partly attributed to robust performance at the start of the holiday season. On 29 November, the company announced that BNPL transactions through its Afterpay service grew 120% over Black Friday and Cyber Monday compared to pre-holiday for both online and in-person purchases. According to Afterpay’s Festive Forecast report, one in six consumers were planning to rely on BNPL to buy Christmas presents.
Demand for splitting payments to rise
The demand for BNPL is expected to only get stronger, which will push more retailers to offer the payment option at the checkout, both online and instore.
“BNPL is one of the few payment methods to exhibit significant growth in 2022, accounting for 4.5% of non-grocery retail purchases during Q3 2022, but just 1% during Q4 2021,” noted PYMNTS’ November edition of its Digital Economy Payments report.
Affirm founder and CEO, Max Levchin, explained on the Q1 2023 earnings call that consumers "are not done in the higher income brackets spending through the pandemic stimulus." However, "lower income groups are already done and they’re trying to turn to various forms of debt."
Though this may result in more revenue for the likes of Affirm, Block and PayPal, it is likely to also lead to more scrutiny and calls for regulation. The Australian government may soon be requiring BNPL lenders operating in the country to carry out background checks before being approved credit, reported Reuters on 28 November.
“What it means for the companies is, yes, it would be harder to make money," Jamie Hannah, deputy head of investments and capital markets at VanEck Australia, told the news agency.
Funds in focus: ETFMG Prime Mobile Payments ETF, Global X Fintech ETF
All three of Affirm, Block and PayPal are held by the ETFMG Prime Mobile Payments ETF [IPAY]. PayPal is the fifth-biggest holding with a weighting of 4.88% as of 3 December. Block accounts for 3.86% of the portfolio and is the ninth-biggest holding, while Affirm has a 0.94% weighting. The fund is down 29.9% year-to-date, but up 6.3% in the past month.
Block is the third-biggest holding in the Global X Fintech ETF [FINX] portfolio with a weighting of 6.66%. PayPal’s weighting is 6.46% and the stock is the fifth-biggest holding, while Affirm makes up 0.92% of total assets as of 5 December. The fund is down 50% year-to-date, but up 3.1% in the past month.
Block is also the second-biggest holding in the Ark Fintech Innovation ETF [ARKF] with a weighting of 10.05% as of 6 December. The fund is down 61.7% year-to-date, but up 2.6% in the past month.
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