Key points:
- New regulation will hit the UK BNPL market
- Rising interest rates will also suck margins out of the business
- BNPL could be one of those industries that just doesn;t, really, work
The Buy Now Pay Later market faces a number of threats – Apple's (NASDAQ: AAPL) Pay Later can be seen as either a validation of competitive threat – but Block (NYSE: SQ), Affirm (NASDAQ: AFRM) and PayPal (NASDAQ: PYPL) really face two major new threats to the BNPL model. The first is rising interest rates, the second increased regulation. This is after the base problem with the sector itself, which is that new ways to lend money aren't the scarce thing in banking.
The latest news from the UK is that regulation on the sector is going to increase. The base idea will be similar to that which afflicted paycheque lending at Wonga and Amigo and so on. The lending company must first check whether the buyer can actually afford the extra credit before offering the purchase and loan. We'd probably think they already are doing such checks before handing out money but this will increase the expense of the process. Expect this to be a limitation upon the market at least.
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The other and possibly rather more important – as it affects every market, not just the UK – problem is rising interest rates. For currently, the standard such BNPL loan doesn't, in fact, charge interest at all – not so the consumer can see it that is. But of course money still has a time value so there is interest in there even if it's not charged out separately.
What actually happens is that the seller of the goods pays a fee to the BNPL firm for financing the purchase. It's worth it, given that sales on tick seem to be higher than those without such tick. The fee paid is, of course, the costs of running the BNPL form plus that interest cost of however much money for however many months.
OK, so now interest rates rise. That means that the fee must be larger. But are the retailers willing to pay a higher fee to the BNPL company? Given that near all of the BNPL companies already lose money quite possibly not – the retailers aren't even willing to cover all current costs, let alone ones made higher by greater interest charges. So, in a time of rising interest rates it's not obvious that the BNPL firms can widen their margins to cover the extra costs. That doesn't bode well for the business model.
Finally, there's the rather cynical view of banking more generally. Which is that there's never been a shortage of new and interesting ways to lend money to people. What there always has been is a shortage of people worth lending money to. The implication here being that every attempt to uncover new lending markets (says, peer to peer lending) runs into the problem that all the people actually worth lending money to are already well served by the extant banking and finance system. Any new method therefore, even if it succeeds, is cannibalizing other extant markets, not creating new ones. If that's true – and it isn't completely, it's how much it is true that matters – then the entire BNPL idea has a basic problem.
The BNPL market is going to get much tougher and it's not just governments and regulation that will make it so.