Buy-now-pay-later faces day of reckoning, but some stocks may survive and even thrive
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A major shakeup is about to hit the buy-now-pay-later (BNPL) sector, as the new Labor Government sets its sights on a ‘crackdown’.
The new financial services minister, Stephen Jones, said the Albanese government is planning on regulating the industry over the coming 12 months.
“Our government wants to regulate to ensure that it’s a safe product, and that there’s a level playing field,” Jones told 7News.
The government plans to put all BNPL companies under the National Consumer Credit Protection Act, a law designed to protect borrowers who use products such as credit cards or personal loans.
BNPLs have so far been able to operate under a legal loophole that allows them to offer credit without it appearing as credit. So instead of being regulated under the Act, they currently only have to follow an industry code of conduct.
“Can we stop having an argument about whether they’re credit or not? It really is a dead-end street. Because if it looks like a duck and sounds like a duck, it’s probably a duck,” Jones said.
For consumers, new regulations mean there will be extra credit checks before they can be registered as a BNPL user.
As to when the new legislation will likely take place, Jones said: “We won’t be standing around at this point next year still arguing whether we should do this or not. We’ll move to make it happen.”
The concept of buy-now-pay-later has actually been traced as far back as the 19th century, when instalment plans were used to purchase large consumer goods like furniture and farming equipment.
It became a true hit with the inception of Afterpay in 2014, especially among the Gen Z and Millennial consumers around the world.
The industry has exploded to a $350 billion global market in less than a decade, but now huge cracks are starting to show.
According to Nandan Sheth, a renowned payments expert and current CEO of ASX-listed BNPL company, Splitit Payments (ASX:SPT), there is indeed a seismic problem that’s plaguing the industry.
“I think the problem can be broken up into three very discreet areas,” Sheth told Stockhead.
“The number one problem is that, because the primary focus for BNPLs is to offer pay-in-four or maybe pay-in-six, it’s attracting subprime consumers.
“And trying to underwrite subprime consumers in real time is very difficult, and this has led to write-offs in the region of 300 to 500 basis points, which is unsustainable,” he added.
The second problem hampering the industry is the cost of marketing, according to Sheth.
“The cost of acquiring customers is going up, because the loyalty they thought would be factored in when you have 6 million consumers that have registered on your super app, is just not there.”
“The third problem facing the industry is about the disintermediation of the consumer and the merchant.
“Consumers are registering with a bunch of BNPL services at the same time, and these BNPLs cross-sell them offers from competing brands.
“So I think you’re seeing a merchant backlash, and the backlash is the disintermediation of the BNPL’s relationship with a shop,” Sheth said.
Most experts believe we will likely see more M&A activity in the BNPL space in 2022, as players consolidate to survive rising rates and intensifying competition.
Competition is coming fast from global companies like Apple, who has just announced that Pay Later will be available to iPhone users in September as part of the iOS 16 upgrade.
“I think the obvious place to go is consolidation, but I’m seeing a few other things too,” said Sheth.
“Firstly, BNPLs are smart and even with their lower valuations, they have a lot of money on the balance sheet.
“So I think we’re going to see many of the BNPLs turn into banks or fintechs that offer financial services to consumers,” Sheth said.
Sheth also reckons there’s going to be a pivot in the business model within the industry.
“We’re already seeing this pivot with many BNPL companies now issuing cards,” Sheth said.
“We’re also likely to see the smaller BNPLs that are in the consumer lending space to either be swallowed up by the larger ones, or frankly, they’re just going to disappear.
“And finally, I think we’re going to see a couple of big ones come together. So yes, there’s going to be consolidation. And unfortunately, there are going to be casualties too,” said Sheth.
Sheth believes that BNPL companies with a unique and differentiated business model will stand the most chance of surviving.
Since coming on board in January, Sheth has refocused Splitit’s business model to become the pick and axe for the industry, offering its technology as a white label, merchant-branded Installments-as-a-Service platform.
What this means is that Splitit logos will no longer be seen on merchant’s windows or checkout counters. Instead, customers can use their exisiting credit cards and choose to pay in instalments powered by the Splitit technology at the point of sale.
“Splitit is now a pure B2B company; we’re not selling to the consumer, we’re only selling to the merchant,” explained Sheth.
“But instead of acquiring merchants one by one, we’re going one to many. For example, our deal with WorldPay gives us immediate access to thousands of merchants.”
Sheth also said that new legislations won’t impact the Splitit business, because the company is just leveraging exisiting credit.
“We’re not driving new loans. We’re just unlocking existing credit, so there is no underwriting and there’s no registration required,” he said.
“I think our business model is the most elegant in the industry, because the friction at checkout goes away and our approval rates are in the 75% plus.
“We’re not encumbered by trying to do a real time underwriting of a subprime consumer,” he added.
Morningstar currently has a target price of 69 cents on SPT vs the current price of 16 cents.
“If you look at our business model, we’re fundamentally different from every single BNPL in the world,” says Sheth.
“That puts us in a very different category, and it gives us a path to profitability that’s significantly stronger, because we don’t carry the default risk.”
There are a couple of other BNPL stocks on the ASX that focus on the B2B segment.
Openpay focuses on the larger essential expenses targeting healthcare, veterinarian, automotive and home improvements segments.
The company says it sees clear demand and opportunity for OpyPro (B2B), an SaaS platform with leading Australian brands already onboarded.
The platform is already being used by 10,000+ small and medium enterprises (SME) over multiple years.
In its latest trading update, the company reported another monthly record for OpyPro, which posted a TTV of $6.2m, up 488% vs pcp, through over 34,000 transactions in May.
Credit Intelligence launched its corporate BNPL app, OneFlexi, in Hong Kong last October.
The OneFlexi app caters to SMEs in Hong Kong, and offers them a three-month interest-free BNPL option to pay for selected corporate services.
In Australia, Credit Intelligence owns Yozo, an AI-based financial management, funding and BNPL platform that also caters to SMEs.
The Yozo platform was built in collaboration with the University of Technology, Sydney (UTS).
At Stockhead we tell it like it is. While Credit Intelligence is a Stockhead advertiser, it did not sponsor this article.