The buy now, pay later space has faced a lot of challenges in recent months, following a years-long run where it was the golden child of fintech. Once high-flying stocks like Affirm have come crashing down to earth.
We also imagine the extent to which Square overpaid for Afterpay has finally sunk in. And Klarna is clinging precariously to its unicorn status, having seen its valuation fall from a peak of $46 billion to $6.5 billion today.
Much of the decline in BNPL valuations has been tied to the overall deflation of fintech. And specific to BNPL, growing anxiety over rising defaults in the BNPL space.
Still, despite these headwinds, we are seeing funding rounds for BNPL startups that offer a unique twist on BNPL. Two recent examples are Playter, a B2B-focused BNPL. Zilch is a direct-to-consumer model. Zilch works with any merchant that accepts Mastercard. These two companies have raised more than $50 million each in recent weeks.
Gathering Headwinds
Yet the pain is likely far from over for BNPL. In June when Fed Chair Jerome Powell announced a 0.75% increase in interest rates, we imagine some BNPL CFOs choked on their chai lattes. Still, the hike was expected, as are subsequent rate hikes designed to cure inflation (even if the cure kills the host).
Why is this such a problem for BNPL? Well, buy now, pay later is a business that relies on a certain set of conditions. Consumers need to be confident. And money needs to be cheap. Why? If a consumer is confident, they will make purchases on installment, which is what BNPL is, knowing they are able to make the payments. If they are not confident, they may pass on the kinds of impulse purchases that tend to drive BNPL.
In June, U.S. consumer confidence fell to its lowest level since February 2021.
As for interest rates, BNPL platforms need a low cost of funds to stay afloat.
The Motley Fool summed it up well in a recent article.
“BNPL companies thrived when low interest rates ensured cheaper funding costs and plenty of cash to loan to consumers. However, BNPL companies rely heavily on borrowing to continue financing their business, and the cost of borrowing for these firms has increased significantly in the last year. For example, Klarna saw its borrowing costs rise to the highest on record. As borrowing costs increase, it will be harder for BNPL lenders to grow as quickly as they once did.”
The factors continue to stack up against BNPL platforms — inflation, interest rates, shaky consumer confidence, and regulatory scrutiny. This won’t kill BNPL. After all it still only represents a fraction of global payments. And the explosion of niche applications continues to keep interest in the industry high.
But it’s fair to say the happy times are over. We will see an acceleration of the culling process in the coming months. And the more disciplined players will survive and scoop up or bury the weak.
