Buy now, pay later, the party is officially over

While there may be value in BNPL as a provider of targeted marketing leads to traders, it remains unclear how this competitive advantage can be transformed into a sustainable and profitable model for the BNPL sector.

The 78 percent drop in the value of Sezzle since then and Zip announcing their merger on February 28 helps explain why the deal fell through.

Whatever gains from the scale and cost-cutting deal on offer – $130 million in total synergies – appear to have been overshadowed by growing concerns about bad debts in the BNPL sector, as questionable credit risk management in the business collides with rising interest rates, falling consumer spending. and slower economic growth, especially in the US market which is the target of most of the BNPL group.

Shares of Sezzle immediately fell 35 percent after the deal’s termination was announced, with Zip up 4 percent.

The end of the merger leaves the obvious question of how will these two businesses survive on their own?

Consolidation does look like an obvious way for weaker players to navigate the sector’s nuclear winter. But as conditions have deteriorated in the sector it seems that the Zip and Sezzle boards have come to the view that a larger customer base and lower costs don’t help if it just means a bigger bad debt pile and more losses.

CBA still slightly ahead at Klarna

Sezzle and Zip’s mess aside, Klarna’s half-cup fundraiser was completely over; Klarna’s chief executive, Sebastian Siemiatkowski, claimed late Monday that the gains were “a testament to the strength of Klarna’s business… during the sharpest decline in global stock markets in more than 50 years”.

Indeed, if Siemiatkowski is rebuked by the fact that the company’s valuation has fallen from $45.6 billion to $6.7 billion since June 2021 – when the famous Japanese VC giant SoftBank invested heavily – he is not showing it.

He suggests decreasing valuations in line with the listed peers and valiantly presents a table showing how the valuations of Klarna and BNPL counterparts have fared since late 2018.

Affirm and Block (formerly Square and which acquired former giant BNPL Afterpay last year for $38 billion) saw their valuations rise 78 percent and 54 percent as of the end of June 30, while PayPal fell 18 percent, respectively.

But Klarna’s value has jumped 219 percent from $2.1 billion to $6.7 billion – although the company did not say it raised $3.5 billion during that period.

Commonwealth Bank, which owns just under 5 percent of Klarna, put more money into the business in its latest fundraiser, effectively allowing it to retain its shareholding.

CBA acquired its 5 percent stake for US$300 million across stages for US$100 million and US$200 million in August 2019 and January 2020.

While the bank will reflect a major drop in Klarna’s valuation in year-end accounts in August, it is still slightly ahead in its investments, with its stake worth around $US335 million at its current valuation.

That’s a far cry from what Klarna stock was worth $2.3 billion a year ago. But like Siemiatkowski, the bank sees the bright side of the road.

“We continue to support Klarna and this is reflected in our participation in raising capital,” said a spokesperson.

“Since our initial investment in 2019, Klarna has nearly tripled global revenue, customer base and transaction volume, and now generates $US1 billion in gross profit from established European markets.”

New young customer

But CBA inadvertently makes an important point here. While chief executive Matt Comyn got into the business to learn more about BNPL and the shift away from traditional banking products such as credit cards – he also has Klarna operations in Australia and New Zealand – the CBA effectively says most of Klarna’s new product valuations don’t come from BNPL, but from traditional European banking operations, which take deposits in Germany and Northern Europe.

This does not mean that CBA believes BNPL is dead.

The view within the bank is that the astonishing growth in BNPL services in recent years – Klarna has grown to 30 million active users in recent years in the US and has tripled in volume in the last 12 months – reflects the desire of younger consumers to stay away. of credit cards and willingness to use alternative payment methods.

In addition, CBA sees the ability of BNPL service providers to introduce new and young customers to merchants as extremely valuable in an omnichannel world where customer acquisition is difficult and expensive.

While paying in installments has clearly become a commodity, BNPL players who can prove to traders that they can provide quality leads from a large customer base can still charge for the service.

But the big question is how can these BNPL providers actually make money in a sustainable way?

Acquiring a customer base is expensive, especially if lowering credit standards to build customer numbers means higher bad debts in a deteriorating economic environment.

Intense competition means increasing merchant fees will be difficult. And regulation is likely to increase compliance costs and limit the ability of BNPL players to pursue bad debts and increase costs for late payments.

The CBA clearly remains confident that Klarna can be one of the last remaining players in a shrinking industry and, to be honest, there are signs that Klarna has been able to tweak its model to suit different market conditions.

First, Klarna’s traditional banking business provides a stable source of income but also capital to lend.

However, this business that has been around since 2005 has also demonstrated a level of resilience that some rival BNPL groups seem to lack.

Having signaled earlier in the year that he was entering a difficult new world, Klarna cut its costs (mainly by cutting its workforce by 10 percent) and reduced its appetite for growth and credit risk. While loan growth declined, non-performing loans in the March quarter fell from 11.9 percent in the December quarter to 7.6 percent.

Could mixing the more conservative BNPL model (which pursues less growth but also suffers less loan losses) with a more traditional banking business be the secret sauce?

The Klarna will be the butt of jokes in financial markets for a long time, but at least $800 million is enough to figure out what the new model will look like.

More about buy now, pay later

• Zip will pay Sezzle $16 million upon completion of the deal Zip will pay Sezzle $16.3 million as part of the joint termination to cover, among other things, Sezzle’s legal, accounting, and other costs associated with the transaction.
• Buy now, pay later regulations inches closer A booming sector will be treated as credit, said Assistant Treasurer Stephen Jones, paving the way for tougher regulation.
• No winners in the chaos Humm The battle for control of the ASX minnows has been bruised for some of the biggest names in Australian business. And it’s not over yet.
• UK tightens BNPL rules, will require ‘affordability check’ UK and Australia are going down the same path to repeal buy now, pay later rules but final model for checking customers remains to be determined.
• How a Wall Street giant issued a storm warning for BNPL Morgan Stanley boss James Gorman delivered a frightening forecast of an expansionary mindset driving buy now, pay later exports from Australia.

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