A payments expert has predicted that ASX buy now, pay later (BNPL) shares are going to have a tough year in 2022.
One of the leading minds in the payments space has predicted that bad debts and losses will mount up next year.
Prediction of BNPL woes
According to reporting by the Australian Financial Review, Grant Halverson, who is the founder and boss of payments consultancy outfit McLean Roche, believes that ASX BNPL shares could see even higher bad debts in 2022 which may lead to lower credit ratings and higher funding costs.
Mr Halverson was quoted as saying:
The moment their bad debts go up their cost of funding will go up three or four times faster than the actual rate rises and the rating agencies will downgrade them, and then they'll get to junk status.
Because they're all frantically going at the US they're racing to the bottom. And that means probably more bad debts because they've gone after customers who haven't got credit ratings.
Looking at one of the latest arrears disclosures from a BNPL business, at 30 September 2021, Zip Co Ltd (ASX: Z1P) said that its arrears was 1.87%, which was an increase from 0.91% at 30 September 2020. Arrears are accounts greater than 60 days delinquent, whilst bad debts are defined as accounts delinquent that are overdue by 180 days on an annualised basis. Net bad debts were virtually unchanged at 2.44% at 30 September 2021.
Weak 2022 BNPL expectations
The McLean Roche boss doesn't have a good outlook for BNPL ASX shares like Zip and Afterpay Ltd (ASX: APT). Cash and cashflow may weaken from here.
The newspaper quoted Mr Halverson on his views:
They're going to have to try to raise a lot of money. It partly depends on how quickly interest rates go up, because if they go up quickly there could be carnage. If there's a slower uptick then obviously the carnage will be slower in my view.
More regulation coming?
There is growing noise that regulation could be on the way for ASX buy now, pay later companies that could allow merchants to pass on the BNPL fees to customers. Not only has the Treasurer Josh Frydenberg indicated this, the Payments System Board (which includes the RBA governor and other important financial officials) has also had its say.
The Payments System Board said in a statement that it concluded:
It would be in the public interest for 'buy now, pay later' providers to remove their no-surcharge rules, consistent with the Board's longstanding position on such rules. Given the complexity of the regulatory issues, the Bank will continue engaging with the Treasury on regulatory approaches.
