Thoughts on BNPL
I personally think the Buy Now Pay Later (BNPL) was a scheme. It encouraged consumer debt (1/3 of users are subprime) and will likely hit Klarna/Affirm hard as interest rates increase.
My main thesis is that these companies, Klarna and Affirm specifically, do not have the backing or credibility that an actual consumer credit company (think something like the debit/credit card you have now or a bigger firm like Mastercard/Visa) have.
Their main sell is 0% interest rates over some semi-extended period of time and having no affect on your credit.
What happens when interest rates go up, they can’t raise interest rates on their consumer loans (because the whole business revolves around 0% interest), and their cost of capital is increasing? It costs more for them to lend but they can’t pass that cost onto the consumer. Say the consumer defaults on a payment, or multiple payments, who takes that hit. Not the lender/underwriter.
Interested in hearing other opinions, maybe someone knows more than I. I could have some of this wrong and it could be a great play coming out of the predicted Recession but right now I think it’s a terrible long and a great CDS (or something else) move.
It’s an interesting thesis. If you are serious about it, worth looking at how much they make off merchants vs consumers. As I believe they actually make most of their money from merchants, not consumers. Merchant payments are subject to rates and volumes. What happens in a recession? Conceivably, sales volumes go down which causes merchants to renegotiate their rates to also lower those. And loan losses go up as consumers default. So they get hit on both sides. These companies have done a lot of layoffs recently so it seems like directionally they have clearly net suffered from recession/interest rates rising. So in your direction, but wonder if it’s priced in already.
I’m very much opposed to this method of payment as it’s encouraging very bad spending and savings habits so personally I would be happy to see them go away. Society should not be encouraging “buy now pay later,” but “save now, buy later.”
From what I've seen, the pay in 4 (bi-weekly type payments) charge the merchants and there are no fees on the consumer side (unless they start making late payments). This is also true of the 0% installment loans. However, I think these companies get most of their economics from the consumers on the regular, interest-bearing installment loans (typically your more big ticket items that are financed over many months / several years). Theoretically, the pay in 4 business model is pretty nice because they can turn these receivables over in ~6 weeks.
I am in consumer, specifically DTC, and BNPL has been a HUGE lift in average order value/conversion rates (two key KPIs) for us consistently. Even for brands with lower AOV.
If they raise their rates by 2% - 4% we'd still keep them FWIW. The lift in performance is simply too good. This is across ~10+ companies that I've personally managed A/B tests for. To be clear, it's all truly incremental revenue by flipping a BNPL on. IE you would have purchased $400 worth of product in a 6 month period but now you're buying $1000 more than you would have. Works beautifully for upsells - think of cars as a nice parallel. Would you upgrade the seats for an extra $4200? No but would you for an extra $69 a month?
For companies with high value products, IE furniture, musical instruments, etc... I can't see anyone moving off BNPL. It simply converts far better than the legacy options like Synchrony's white label card, etc.
BTW fun fact, for a while when BNPL was new, you could see aggregate customer credit scores. They were always really bad. To your point...definitely not good for poor and irresponsible ppl.
Anyways, just a "customer" perspective. Have any of the BNPLs published anything related to sensitivity around pricing for merchants? I will note that Sezzle, Affirm and AfterPay have all become a lot more strict with pricing lately. Klarna has been great for us, but last time we shopped rates, all of them told us "no" except Klarna. That's never happened. Usually they get in a bidding war with each other.
Super interesting perspective. The extra conversion rates the BNPL firms advertise, like 50-60% more for merchants to me seemed unbelievable but very interesting that it really is highly valued as real incremental revenue. Your example of upselling leather seats using a monthly payment plan to me is such an indictment of the consumerism and financial planning that society has, but it’s important to actually think like the target market if one wanted to really trade these firms.
To be clear, we definitely don't see 50% in incremental rev. It's a much smaller number - think 3% - 8% but that's still very very real and worth paying for. Truly incremental revenue is difficult to generate.
RE: consumers, yes. I'm sure we all have friends making $$$ but are somehow living paycheck to paycheck...somehow.
Theres been a few securitizations, don't remember what performance triggers they have off hand but intex and bloomberg should have that and the remits. One important thing that I don't remember off the top of my head, but the answer is probably yes given the bnpl duration and other ABS like comps, is itll potentially have revolving capacity for a few years. Any deal outstanding would be more economical vs. a warehouse (otherwise why would they securitize?) so they may have some time to figure it out. Like you said too, forward flow agreements could be in place, where affirm just clips a fee, but that'll be performance driven, too. Seen a lot of that in the mortgage space
They could either change their credit underwriting, in a similar fashion unsecured consumer have their own scoring models, reign in their product suite, or adjust their contracts to buy the debt at a greater discount to offset higher default rates
Hey thanks for the answer above - am working in ABS/RMBS structuring in a BB in London and recently we also started looking at BNPL. For context, the team does the classic senior warehouse and arrange public deals - but we also work in senior lending in forward flow and in some cases just straight up doing the whole forward flow ourselves
wanted to ask a bit more about your point about revolving period - since the WAL on these loans are basically 4 months (in the most vanilla form of BNPL), youre saying the revolving is there so you keep building up the portfolio otherwise it just amortises too quickly? To your point about warehouse vs public take out - what is the investor appetite for these given the duration is so short? A HF is unlikely to generate enough IRR? Also, what sort of excess spread do you see in these sort of public deals (perhaps could you give a name of a deal for reference so i can go on ConceptABS?)
Thanks in advance!
Most of these firms make money off "purchasing" the receivable at a discount - ex: you buy a peleton with affirm for 1000, peleton automatically sells the receivable to affirm for 900. Affirms yield would be 10%, peleton doesn't carry debt and receives 90% of revenue up front (at a cost but still made their margins).
Some of these firms have revolving warehouse and securitization capacity to continue to finance, albeit warehouses are probably floating a securitizations will have a smaller revolving period before amortization starts. Affirm can adjust what credit profile they buy from, resulting in lower volumes but better risk profile, change products they're willing to finance, make changes to the payment terms (no longer do 24 months, for example), or seek to purchase at a larger discount to par from the vendor
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