Browsing online during the lockdown, Jessica Friend spotted a pair of Ray-Ban sunglasses she loved, but the price made the 30-year-old Ohio resident think twice.
What persuaded her to click âbuy,â Friend said, was the short-term credit offered by Afterpay, which splits the $ 260 payment into four interest-free installments.
Afterpay is one of a handful of alternative credit companies that offer small loans, mostly to online shoppers, and make their money by charging merchants a 4-6% commission.
These Buy It Now Businesses (BNPLs) have benefited from a shift to online shopping during the coronavirus crisis in countries like the United States, where state aid has also boosted retail sales.
âI’m more inclined to use them because they make it easier for me to get the things I want at the same timeâ¦ and when I want to splurge on something,â Friend said of loans.
Some investors are now betting that shoppers will stay away from stores as coronavirus cases rise again in several countries around the world, boosting the activities of BNPL companies.
But the growing number of subscribers can also increase bad debts, mainly among new users who are more likely to default.
And as job losses increase and government assistance shrinks, the economic model will face its first real test during a recession.
âMuch still depends on the second waves of the virus and on the government’s means to continue to stimulate demand,â said Andrew Mitchell of Ophir Asset Management, which owns shares in Melbourne-based Afterpay, which has a market value. increased to $ 12.55 billion from over $ 100 million four years ago.
While a shift to online shopping was underway before the pandemic, the shift accelerated under the lockdown and Afterpay signed more than one million new active U.S. customers between March and early May, bringing its overall base to nine million.
Meanwhile, retailers keen to transport goods have also become more receptive to partnerships with BNPL companies, which, unlike credit cards or mortgages, grant loans instantly.
Klarna, Europe’s largest fintech start-up, said since March inquiries from retailers wanting to partner with it have jumped 20% on average globally.
With 7.9 million subscribers in the United States, Sweden’s Klarna has since signed on to outdoor gear maker The North Face, Disney streaming service and cosmetics retailer Sephora.
Most of the growth has been in higher margin discretionary spending categories such as fashion and fitness equipment, said Puneet Dikshit, McKinsey partner in New York City, who expects the sector to generate 7 to $ 8 billion in volumes this year in the United States, growing at over 150% per year.
Although fears of credit losses sparked an industry-wide sell-off in March, the entry of large tech investors and rising subscribers have since supported a strong rally, with stocks now hitting lows. record levels.
‘Close the taps’
The pandemic has forced most companies to tighten their risk parameters, which they say could increase loan denial rates, although Afterpay, Klarna, Zip and Sezzle declined to provide specific numbers.
âBNPL operators can turn off the taps and slow growth quickly if repayment risks increase,â Mitchell said.
While Afterpay, with bad debts totaling 1% of its loan portfolio in March, changed its requirements so that customers must pay off a quarter of their loan in advance, co-founder Nick Molnar said that rejection rates were roughly in line with the start of the year.
Molnar said the overwhelming majority of Afterpay customers, with an average transaction value of A $ 150 ($ 104), repay on time, while loans on new purchases are denied to those who don’t.
While some brokerages expect Afterpay to generate profits by 2022, rising costs of financing the expansion and the credit losses that eat away at receivables may mean BNPLs, which operate with low margins, will remain unprofitable for some time.
Klarna saw its credit losses more than double in the first three months of the year to reach around 0.7% of underlying sales as it expanded into Europe and the United States, where regulation sector is almost non-existent.
Only California said BNPL companies needed a license and fined some of them for lending without a license.
In Australia, where the sector first took off thanks to easy financing, the business regulator is expected to publish a follow-up report this year to the one it published in 2018, raising concerns over the excessive extension of users and calling for BNPL to be regulated online with other credit services.
Businesses, investors and analysts agree that young people with stimulus money in their wallets are boosting sales and that BNPL buyers the Reuters news agency spoke with were all under 35 years and have purchased household items, as well as skin care products and clothing.
âThe vast majority of our clients have income levels below $ 75,000, so I would say the majority probably have a stimulus check,â said Charlie Youakim, CEO of Sezzle, one of the smaller companies.
Younger ones are harder to assess because they lack a credit history, which means most companies use algorithms to perform real-time eligibility checks and assess default risk.
âOur internal engine assesses risk taking into account various metrics that will also include consumer payment history, what is purchased and is combined with various third-party data sources and authentication solutions,â the spokesperson said. by Klarna, Aoife Houlihan.
Sydney-based Zip, with bad debts of just over 2% of receivables, said it assesses public information and buyers’ credit scores.
About one in 100 customers are late on their payments each month, spokesman Matthew Abbott said, adding that Zip recently tightened the eligibility rules, resulting in higher rejection rates.