Last year, when lawmakers urged the Consumer Financial Protection Bureau to look at business practices of some of the biggest buy now/pay later fintechs, there seemed to be no end in sight to their exponential growth.
At the time, BNPL fintechs To affirm and Klarna each had market valuations of around $45 billion, while Block (formerly Square) agreed to pay $29 billion to acquire rising fintech star BNPL After-payment. Rivals Zip and PayPal were also on fire, as consumers flocked to their turnkey zero-rate online loans in response to the pandemic’s influences on their finances.
A year later, this fire is much less intense.
In recent days, fintechs BNPL Klarna and To affirm released financial results revealing further weaknesses, including a slowdown in BNPL loan growth rates. With rising inflation and economic uncertainty, consumer delinquencies have also increased for both companies, shaking investor confidence.
Although BNPL loans are still popular with consumers, the valuations of Affirm and Klarna have fell steadily in recent months, with both now sitting below $7 billion from previous highs of around $45 billion.
“BNPL loans have introduced many innovations, but they are based on 0% interest at a time when interest rates are rising, and they have already fallen from the hockey stick growth that we experienced last year,” said Nathan Hilt, chief executive of consultancy Protiviti.
More pain could be inflicted as early as this month as the CFPB says it will soon publish the results of his analysis of five of BNPL’s largest lenders – Affirm, Afterpay, Klarna, Zip and PayPal – all of which rely heavily on the “Pay in 4” model where consumers pay no interest if they repay loans in equal segments. Most BNPL companies also offer longer terms with interest.
The CFPB “appears to be moving towards rulemaking or putting the BNPL under CFPB oversight,” said Allen Denson, partner at Stroock & Stroock & Lavan.
The CFPB report will likely expose the good, bad and bad aspects of BNPL’s fintech practices, Denson said. Positives could include the ability of BNPL loans to expand access to credit to new or underbanked borrowers and to build a credit history. Negatives could involve unclear policies regarding penalty interest rates, late fees, and inconsistent handling of sensitive consumer data.
“Any CFPB regulation is almost certain to focus on requiring BNPL lenders to provide information, with clear guidelines so consumers and lenders operate under the same umbrella,” Denson said.
According to Denson, who predicts that all rules will be released by the end of 2023.
Many BNPL providers might welcome the regulations, as these safeguards often facilitate competition by creating stability in a new or chaotic market, according to Denson.
Klarna, which has postponed an IPO plan, is the latest BNPL fintech to report upcoming issues.
In a half-year letter to shareholders this week, Klarna CEO Sebastian Siemiatkowski warned that Klarna is having a “very tumultuous” year so far, citing war in Ukraine, inflation and a “likely” recession.
Klarna’s revenue in the first half of the year rose 24% to $950 million from the same period a year earlier. But pretax losses nearly tripled in the same period to $581 million from $141 million a year earlier. The overall delinquency rate on Klarna’s consumer accounts is still relatively low at 0.7%, but higher than a delinquency rate of 0.5% a year ago.
Over the past year, Klarna has splashed the cash on heavy marketing investments and acquisitions, including the launch of a standalone debit card. The company cut 10% of its workforce in May to help control costs.
PayPal is the largest Pay in 4 lender, with a potential reach of over 200 million US consumers through its existing relationships, while Affirm has approximately 14 million users. Klarna boasts the most customers with 150 million globally (30 million in the United States, its fastest-growing market) and recently raised $800 million in funding despite a tight venture capital market.
“[Klarna’s growth rate] is slower than its peers, but likely demonstrates the company’s maturity in core markets,” analysts at New York-based Sanford Bernstein & Co.’s Autonomous equity research unit said in a note. to investors on Wednesday.
Shares of Affirm fell last week after its latest quarterly results showed rising delinquencies and slowing sales, while CEO Max Levchin warned of a coming slowdown that could further damage fortunes of Affirm. Levchin also said Affirm is keeping tabs on acquisitions that could complete the company, highlighting the likelihood of BNPL consolidation in the coming year.
A merger — Zip’s acquisition project by Sezzlé — fell through earlier this year.
Competition is also intensifying. Apple’s BNPL service, Apple pay lateris due to launch this fall, while several BNPL companies, including Klarna, Afterpay, Affirm and UK newcomer Zilch, are expanding or launching rewards programs to win and retain more customers.
Visa and MasterCard are also gaining momentum with BNPL platforms and technology allowing banks to support BNPL loans with any participating retailer.
Because the BNPL industry is still relatively new and in flux, it’s difficult to predict how consolidation and rule implementation might complicate its evolution, Protiviti’s Hilt said.
“BNPL lending skyrocketed at an unusual time during the pandemic, when consumers were stuck at home and liked not having to go through a formal credit check,” he said.