The buy now, pay later (BNPL) sector is probably one of the most dramatic success stories on the ASX over the past few years. You only have to go back a few years, and the whole BNPL idea was one of relative obscurity.
Sure, investors were starting to notice a small company called Afterpay Ltd (ASX: APT), but you'd probably be unlikely to find too many people predicting that BNPL was about to become a mainstream concept.
Fast forward to 2020 and it's fairly obvious BNPL is here to stay. Not only has Afterpay spent the last few years making a bevvy of investors extremely wealthy (the Afterpay share price is up 200% in 2020 alone), but it has been joined by a small army of BNPL/payments/fintech competitors.
These include Zip Co Ltd (ASX: Z1P), Openpay Group Ltd (ASX: OPY), Sezzle Inc (ASX: SZL), Splitit Ltd (ASX: SPT) and (more recently) Laybuy Holdings Ltd (ASX: LBY). Following in Afterpay's footsteps, all of these companies have given investors healthy gains over the past year or so.
Even Commonwealth Bank of Australia (ASX: CBA) – a relative dinosaur compared to the up-and-comers just listed – is getting on the BNPL train with its 'Klarna' product.
Is BNPL credit?
Now, BNPL hasn't escaped its fair share of scrutiny. The sector was famously the subject of a parliamentary enquiry last year, which narrowly opted to not extend the same requirements as credit issuers to BNPL services. Although BNPL services do let customers spend 'other people's money', its use doesn't attract compounding interest like traditional credit products (such as credit cards and personal loans) do. That distinction had lead BNPL companies like Afterpay to argue that they are in fact, beneficial for customers who might otherwise use traditional forms of credit.
But reporting from the ABC yesterday pours some cold water on that notion. According to the report, the corporate watchdog ASIC (the Australian Securities and Investments Commission) has found that as many as 1 in 5 consumers are missing BNPL payments.
The report found that the number of BNPL transactions increased by 90% between FY2018 and FY2019 from 16.8 million to 32 million. However, that was accompanied by missing payment fee revenue climbing 38% to $43 million over the same period.
Young people swarm in
The ABC quotes the ASIC report as stating the following:
While working for the majority of users, some consumers are suffering harm… From our research, we also found that some consumers who use buy now, pay later arrangements are experiencing financial hardship, such as cutting back on or going without essentials – for example meals – or taking out additional loans, in order to make their buy now, pay later payments on time.
Of those BNPL customers who said they were cutting back, ASIC found that nearly half were under 30 years old: "Almost 70 per cent of those who had taken out another loan to make their buy now, pay later payments on time had also missed a payment, and half were under 30."
Users under the age of 35 accounted for 61% of completed transactions in FY2019. For transactions that incurred missed payment fees, customers under 35 reportedly accounted for 67%.
Even after these findings though, ASIC has "stopped short" of recommending that the sector be regulated in the same way as credit card companies. BNPL lives to fight another day, it seems.
