If the ASX BNPL party is over, what's next?

ASX BNPL shares collapsed yesterday, continuing a trend that started on 28 August. If the BNPL party is over, where are tomorrow's superstars?

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Wednesday saw the S&P/ASX 200 Index (ASX: XJO) drop by 2.15% with large scale falls throughout the market. Moreover, the buy now, pay later (BNPL) sector was particularly hard hit with Sezzle Inc (ASX: SZL) the biggest loser. Sezzle saw its share price fall by 7.47%. Although, this was only the latest fall. The ASX BNPL sector has been on a slide since 28 August. 

The sudden fall of the ASX BNPL sector

The Sezzle share price hit its year to date high mark on 28 August. Since then it has collapsed by 39.95%, almost half. Most other ASX BNPL shares fared little better. From 31 August Zip Co Ltd (ASX: Z1P) has fallen by 27.84%, Openpay Group Ltd (ASX: OPY) by 31.9% from 28 August, Splitit Ltd (ASX: SPT) by 20.43%, and market leader Afterpay Ltd (ASX: APT) by 19.02%.

There are a few reasons for this. However, most of the falls came after Paypal Holdings Inc (NASDAQ: PYPL) declared it would enter the market with an existing network of 204 million users globally. This seemed to finally pierce the bubble of hype around these shares. It was followed shortly after by the inital public offering (IPO) of Laybuy Holdings Ltd (ASX: LBY).

Moreover, PayPal is not the only shark in the water. Commonwealth Bank of Australia (ASX: CBA) has already entered the BNPL market locally via its partnership with Swedish private bank, Klarna. To illustrate the point further, there are even more private companies in this sector like LimePay.

In case it hasn't already become blindingly obvious to us all, there are simply very few barriers to entry. In addition, there are many other players in the banking and payments industries that could easily and quickly enter the market.

So, what's next?

Along with ASX BNPL shares, we also saw industrial age shares like Oil Search Limited (ASX: OSH) fall by 7.79%. Likewise, information age companies like Megaport Ltd (ASX: MP1) fell by 6.08%. So what held up? Innovation shares. Companies in truly innovative areas held their ground or gained significantly.

I picked up on two great examples of this today. First, Brainchip Holdings Ltd (ASX: BRN) continued its fantastic run by rising by 2.74%. The artificial intelligence company has seen its share price rise by 316.67% since 13 August. It recently announced the first two proof of concept partnerships for its first-of-a-kind neuromophic chip.

Second, in a burst of 45.45%, was Shekel Brainweigh Ltd (ASX: SBW). This is an advanced weighing technology firm, integrating artificial intelligence into its technologies. On Wednesday the company entered a trading halt. The market is expecting news of its micro-market project 'Capsule', which is in an advanced stage of its pilot program. 

The Capsule is an innovative 24/7, autonomous micro-market. This is a range of very high tech vending machines within a sealed unit which provides owners with a large range of information on shelve movements, perfect real time inventory management platform, and customer tracking technology.

Foolish Takeaway

I don't think the ASX BNPL sector is dead, far from it in fact. It has just entered a new phase of growth. I think the steam is likely to come out of BNPL share prices very soon if it hasn't already, but moderate growth will remain.

In any case, the entire sector is becoming less and less like a final frontier. Sector leaders are emerging, and the predatory finance giants that have been sitting on the sidelines are starting to enter. Just as today every bank has a mortgage section, every alternative finance company can have a BNPL section, and in future I believe it will be regulated.

I still own some shares in Sezzle, and I like Zip Co, but I have sold down to take profits at this stage. However, I am looking more and more into the amazing innovation companies we have on the ASX. Companies that are building the future before our eyes. 

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends MEGAPORT FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended MEGAPORT FPO and Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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