Things Have Changed
Things Have Changed
Unraveling the Crash of the BNPL Revolution
On our previous episode, we spoke about the Buy Now Pay Later industry and the players that rode the pandemic to all time highs! But what we didn’t talk about was the chaos that ensued post covid!..Affirm's stock price dropped over 90% since November 2021, AfterPay fell more than 80%, and Klarna saw a decline of over 70%.
So what's behind this turbulence? Rising interest rates, inflation concerns, and worries about consumer debt have left investors scratching their heads. But don't worry, we're here to make sense of it all!
In this episode, we'll explore the challenges facing the BNPL industry and how it's adapting to the economic storm. We'll also discuss the importance of responsible spending and share some tips to ensure you're making informed decisions when using BNPL services.
Regulatory Scrutiny. BNPL is a relatively new product, and there is no clear regulatory framework for it. This has led to concerns about consumer protection and financial stability. Some BNPL companies have been fined for violating regulations. For example, in 2022, the Financial Conduct Authority (FCA) in the United Kingdom fined Klarna £39 million for failing to adequately assess the affordability of its products to consumers. The FCA also fined Clearpay £20 million for similar reasons.
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On our previous episode we spoke about the buy now, pay later industry and the players that wrote the pandemic to all-time highs, so called buy now, pay later.
CNBC:Space like Affirm and Clarn and others is also booming but it could be a dangerous place for people taking on debt And in April, 42% of buy now, pay later users admitted they'd paid late on one of those loans.
Shikher Bhandary:But what we didn't talk about was the chaos that ensured post-COVID.
CNBC:Affirm is cutting 19% of its workforce.
Shikher Bhandary:Affirm's stock is down 90% since November 2021. Afterpay 80% down. Clarn is 70% down. So what's behind the turbulence?
CNBC:Yeah, i mean buy now, pay later. To my mind, is financial dynamite Now pay later. Companies like Affirm shares are moving down after the US Consumer Financial Protection Bureau and now it's plans to begin regulating businesses like Affirm Blockwall afterpay, which is owned by Block PayPal Clarno, due to worries that the buy now, pay later products are harming consumers.
Shikher Bhandary:There's rising interest rates, inflation concerns and even worries about consumer debt have left investors scratching their heads. The number one factor for consumer stress that we're seeing is really things have cost more than I expected them to. Things like gas, things like food. Especially if you're feeding a large family, those expenses are starting to blow. But don't worry, we at Things Have Changed are here to make sense of it all.
CNBC:A total of $24 billion is loaned out in 2021 through these types of companies, and so we are seeing them decline.
Shikher Bhandary:So in this episode, we'll explore the challenges facing the BNPL industry and how it's adapting to the economic storm. That said, affirm isn't giving credit as freely as it did a couple years ago. We'll also discuss the importance of responsible spending and share some tips to ensure you're making informed decisions when using buy now, pay later services. Well, we want to ensure that, while there is competition and while there is innovation, that the harmful effects of poor marketing practices and poor lending practices don't impact particularly on vulnerable communities.
Jed Tabernero:If you had known how important the technology economy was 20 years ago, would you have done things differently? The internet, cell phones, the cloud and data Things have changed. We're here to talk about it. Hi, I'm Jed.
Shikher Bhandary:Hi I'm Shikhar, welcome to. Things Have Changed your new Economics and Technology podcast. Important announcement If you're part of any company, any public company right now and you want your stock to like double the next day, just scream AI like 100 times on any call on CNBC, and that's how you get it. It's a new thing, dude, it's a new flame.
Jed Tabernero:It's the new wave. That's what gets people going.
Shikher Bhandary:Yeah, it's provocative.
Jed Tabernero:Jim Kramer hears about it If he hears you say AI, bye, bye, bye, dude, bye, bye, bye. You know what's not?
Shikher Bhandary:bye, bye, bye. right now, though, bnpl Man. If AI is trending in one direction, bnpl companies are going the other.
Jed Tabernero:It's kind of great segue dude.
Shikher Bhandary:Great segue. I was just making it up as I was going. you know your firms, your Clarina Square, buying Afterpay. It was just the hottest thing in tech after blockchain. Right, and it's gone the way.
Jed Tabernero:It's a big thing to say.
Shikher Bhandary:Yeah, yeah, yeah, and it really got hammered. I mean, all those companies that I mentioned are down like 70 to 80% since the pandemic. So like since 2022, right, 75, 80% drawdowns are staggering.
Jed Tabernero:But, like you can't really ignore, you know how they all rose so quickly during the pandemic. You know like this fall from grace is because they were just experiencing a shit ton of growth in 2020 when the pandemic hit. And just to give you a little background on that, if you didn't remember, we started buying a ton more stuff online. You start already on Amazon like crazy. You started buying more products. Companies like Affirm, afterpay and Klarna. You know the BNPL industry enjoyed a great lift, you know up, because during the time we were going to e-commerce also, the trend of BNPL as a form of payment was just, you know, destroying roofs all over the place. So that's why, like, looking at these huge declines in the recent quarter seems a little more believable because of that insane growth. Maybe things are just getting back to valuation, right, but you know why. Why are these things happening in the current quarter? I mean, we've blamed this shit for the past two years when it started happening post pandemic, when rates were rising right Crazy crazy time.
Jed Tabernero:We lightly spoke about its effect to traditional financial institutions who, you know, make money off of these margins from the federal funds rate. Right, and the interesting thing about how the rise in the interest rates are affecting the BNPL industry is because of the structure of business, dude, it's just the way they run their loans, right. They are not inherently a capital intensive company, right? They don't have a lot of cash to put down on these actual loans that they're making to these customers, because, if you remember, we explained in the previous episode how these BNPL companies work. They pay the merchants that they work with ahead of time, right? So where do they get all this money? They themselves have to borrow as well.
Shikher Bhandary:So okay, i get it. now. They are borrowing themselves and then lending, so then your interest rates increase, they are borrowing at a higher rate and they have to still somehow lend that right. So, yeah, they're probably getting squeezed on both sides because consumers are not spending as much and rates are higher, so they're borrowing at higher rates and lending it to fewer customers. Geez.
Jed Tabernero:Crazy stuff happening in the industry right now.
Jed Tabernero:Like any you know corporation that borrows a ton of money when the rates rise, you just have problems on that front as well, on financing your business. So, you know, for these BNPL lenders, getting that squeeze for them is enough for the slowdown that's happening right now in the markets, and it's kind of like for me it's been a good enough explanation of why this industry is experiencing some downfalls. But that's not the only thing that's going on in this industry. I mean, if your paying attention to like fintech kind of stuff and regulation, that's one thing again that's hitting this space so hard, dude, because regulators are starting to go hold on just like how they had to regulate these financial companies. You know, at opposed to 2008 world, this is again a new product that's getting a lot of traction. That's hitting a lot of consumers' pockets, right. So the government gets involved, naturally, and I feel like that's another reason of why we're seeing kind of a slowdown in this space, because we have an increase of interest from the government to regulate this industry.
Shikher Bhandary:Everyone was able to use this method to pay for certain items high cost items, expensive items And ultimately, when you look at it, this business can be quite risky in the sense risky lending or providing risky loans right When you, when you break it down to what's actually the core of this business. So it's no wonder that you know, because they've seen some regulatory scrutiny, because in many ways there's a risk of overspending here, And also they target consumers because, yeah, that's how they increase the revenue that they generate.
Jed Tabernero:Yeah, i know, and these examples that are coming out today are what's causing the players in the space to go hold on. We got to relook at the way we're actually approving customers. We got to relook at the risk profiles. You know it's. it's a chance to rethink how they do business.
Jed Tabernero:And one of the things that was interesting, at least when we both did this process of like, we both me and Shikhar both have experienced BNPL schemes, right, we've used it for one reason or the other, and one of the things that come along with this is that you don't realize that if you don't clear the payments, there is a risk to the consumer, right? You? irresponsible spending is what we called it in in the first episode, and this is kind of the risk that regulators are out there to try to protect you from, just like how they try to protect you from banks, right, having your deposits in a place and having insurance for that kind of thing. This is what's going to happen in the next few years. I believe they're going to target, like responsibility in the space for companies to step up and maybe do some credit checks. when we did those things, we didn't have credit checks, right. So it's a super quick process dude, and that maybe is you know what's going to end up being such a high risk for regulators to try to remediate.
Shikher Bhandary:Yeah, and the issue here is they're also there were cases of them targeting vulnerable consumers right With poor credit scores. So what happens now is you know lending is easy. You can give money to whoever you want. you know to buy whatever product they want. It's the recovery. How are you going to get the money back? And if the consumer defaults or those loans default, now you are in big trouble. right, you're the company. the BNPL company is liable And they would have to bear a big part of the loss in that case. So I think all these factors are working towards the market looking at these companies differently now High interest rates, consumers not spending as much or default on the loans that you get.
Jed Tabernero:You know it's interesting. When I was looking into the numbers of what kind of payment methods for folks using to pay off BNPL, i noticed that a large majority of folks are using their debit cards for BNPL instead of like credit. That is a little more accessible. So there was this kind of shift as well, which I didn't know before I started reading about this episode. There was a shift during the pandemic of folks using more of their debit cards than their credit cards as well. So there was kind of this like shift from credit to debit, and BNPL is kind of in that space of using your debit card for these kind of payments.
Jed Tabernero:Right, for folks who aren't too willing to sign up for a new credit card or have access to like a range of credit products, debit might be the way to go. That's the easiest to set up. Right, and that's kind of what's risky about BNPL as well is that's what they rely on. Is that debit pile of folks, and you know, typically these folks are having trouble paying for other things, you know. So it's already an inherently risky profile of the folks that are in there, and there does need to be some protection here for people who are just signing up pressing buttons. Dude, it's way too easy right now.
Shikher Bhandary:That's the world we live in. you know. consumerism is everywhere, But what should these BNPL companies do, Because it seems like they're under everything? There seems to be a good business here.
Jed Tabernero:When we were watching like a lot of videos on the CEOs and what they had to say about the industry. After these like downfalls. They a lot of them are on the news lately after PACEO, firmco, and what they're preaching is like you know, how do they survive this environment right now? And what they're preaching is like really strong partnerships with merchants, like the merchants that you work with right now. Typically, bnpl will know a lot more about their customers than traditional credit companies. For example, your credit card doesn't know exactly what the SKU code is of what you bought, right, it just knows that you bought X amount of thing for X amount of dollars in X place.
Jed Tabernero:But BNPL companies, dude, they have so much more data. You know the merchants are trusting the BNPL companies with this kind of data of, like you know we got the idea of the type of purchase you made. They actually have the ability to market you something that is specific to your taste. Dude, that's how much data they're getting in the BNPL space. So strong partnerships with the merchants over there will lead to continued success. You know, for example, a firm signed up with Amazon quite recently, right, like that's a huge headstone. Amazon customers are sticky AF. Okay, they sign up for this really expensive program to be on and purchase thousands of dollars a year. So that's one thing like really strong partnership with merchants. And then I think what have made a firm so successful, just in my view, is that dude, ui was great, bro, like when I was buying these things, making that decision with the purple bed my God, it was easy.
Jed Tabernero:It's one of the options that came up for me of how to pay.
Shikher Bhandary:And it says literally click off a button. I'm not even like exaggerating. It was a click off a button And so quick you were financing it over a few months.
Jed Tabernero:Yeah, no, that's that's what I'm saying is like, having that is amazing Because, again, that lends itself to the strong partnership with the merchants. If you have that clean integration, it's going to be ultimately easier for you to get those customers. I've there's two scenarios that I've seen in this bro. One is a link that would take you through learning about the whole BNPL transaction, And there was a case where I see it written in Apple Pay, a firm and you know it's just cleanly integrated. I think that's the best way to go. I think that's the best way to go, But yeah, I think those are two things I feel like the big guys are doing to stay afloat.
Shikher Bhandary:I'll take the example of the regional banks fallout that we're seeing over the last few days. We covered it in our previous episode A couple of weeks ago, where we broke into how JP Morgan, the biggest bank in the land, is getting bigger. Right, and maybe we don't need that many regional banks. There are like 6000 regional banks in the US. Similarly, i'm thinking do we really need four $60 billion companies in this space? if it's a feature, you know, and that's what we're seeing like Apple's coming And now, if you have an Apple savings account or Apple card, you get BNPL on Apple And it is such an interesting business model because Apple has made itself into like a luxury tech brand that everyone aspires to have. Right, you aspire to have a thousand dollar MacBook or a thousand dollar cell phone. It's wild, the cell phone and the MacBook are the same price.
Shikher Bhandary:They know a lot about the consumer and are able to maybe use that knowledge, that data, that insight in the back end to lend with low risk of default, because Apple just caters to that set of customers.
Shikher Bhandary:You will spend a grand on a phone And so it could just be a feature in Apple's suite of financial products, and we did speak about Apple, too in the episode, in the episode just a few weeks ago. Another way that I'm thinking this industry unfolds is maybe they stop lending to everyone, right, and they start becoming picky, because I read some articles where you have these big customers now pulling back. They're like maybe you don't need this product, maybe you don't need the fourth sneaker, maybe you don't need the fourth third Gucci bag you ordered in the past year, right? So some really interesting observations where the BNPL providers have actually had to slow down lending And, yes, that's hitting their growth targets But it's better to implement those tougher credit requirements because then, okay, you're not going to be targeted as much by regulation, right? And also you kind of form up your balance sheet to last this storm.
Jed Tabernero:Yeah, interesting dude. It's an interesting development in that space. And, as we're talking about Apple coming into this space, I read a lot about what the other CEOs if the other CEOs were afraid that Apple would take up a significant market share, And an interesting answer from after PACE CEO and a firm CEO is that they believe Apple is just on a completely different customer base than these other folks who are buying furniture and whatnot because they have such. again, we just mentioned how luxury product Apple is right now. So they feel like they're not competing in that space. But you know what, When this regulation starts coming down and these companies are going to have to spend a lot of resources and money on improving their processes and adding more bells and whistles into their product, I think companies like Apple are in a good position to withstand all of this scrutiny. They're used to this kind of stuff already.
Jed Tabernero:Tech is used to getting regulated at this point right Always taught me getting fines left and right right. So companies like Apple and PayPal, who are really large customer bases, are in a good position to do really well in this space and maybe take that concept that had come from this buy now, pay later scheme and just freaking universalize it. So it'll be interesting what happens and who comes onto it. Honestly, that wraps up our episode of Things Have Changed podcast. We really hope you enjoyed our exploration into the BNPL space. We learned a lot during this episode and we hope that you got valuable insights along the way.
Jed Tabernero:As the BNPL landscape kind of evolves, it's crucial to stay informed about how these products actually work, what are the terms and conditions of what you're signing up for, know how much you have to pay if you miss a payment. You have to know what happens to you if you don't get to fulfill what these companies are asking you to do. So stay informed, read up on these kind of things. Really appreciate you for joining us on this ride and tune in next time as we talk more about the fintech space. As always here at Things Have Changed podcast, stay curious.
