BNPL ASX shares in for a 'tough time': expert

BNPL ASX shares might be facing a tough time according to one expert.

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Key points

  • The buy now, pay later (BNPL) sector could be in for a tough time in 2022 according to one expert
  • 2022 has already seen a big decline for many of the players, including the Zip share price which is down 30% this year
  • Brad Kelly points out that almost none of the BNPL ASX shares are making a profit, which will make it harder to raise capital

The buy now, buy later (BNPL) ASX shares could be in for a "tough time" according to one of the experts of the payments industry.

There are plenty of BNPL businesses on the ASX like Zip Co Ltd (ASX: Z1P), Block Inc (ASX: SQ2), Sezzle Inc (ASX: SZL), Splitit Ltd (ASX: SPT), Laybuy Holdings Ltd (ASX: LBY), Openpay Group Ltd (ASX: OPY) and Ioupay Ltd (ASX: IOU).

Big declines

Investors have already seen major declines of the share prices of plenty of the buy now, pay later players.

In 2022, the Zip share price has fallen 30% so far. Over the past six months it has slumped 60%.

Since listing on the ASX a couple of weeks ago, the Block share price has fallen 17%. Block is the American company that recently acquired Afterpay.

In the calendar year to date, the Sezzle share price has fallen 27%. The past half-year has seen a 71% capitulation of Sezzle shares.

And so on. There has been a huge deterioration since the last reporting season.

'Tough time' coming

According to reporting by News.com.au, an expert of the payments sector called Brad Kelly has some negative expectations for the industry.

Mr Kelly, the managing director of Payment Services, said:

They are very good at marketing spin and PR, good at using the services of highly paid consultants to get around the Consumer Credit Act and are able to offer credit without it appearing as credit.

The reality is the BNPL provider's bad debts are astronomical, none of them have made a profit, none of them have paid a dividend and share prices are down 70% to 80% to even 90% in some cases.

Mr Kelly points out that nearly all of the companies in the buy now, pay later sector are reporting annual accounting losses.

Another, expert, Grant Halverson, the founder and chief executive of payments consultancy McLean Roche, thinks there is a danger that the buy now, pay later sector could see rising bad debts and the ASX shares could end up with a 'junk' rating regarding their debt.

Mr Halverson warned that the BNPL sector could suffer from rising interest rates, which would make it trickier to make a profit and raise money. Speaking to the Australian Financial Review, he said:

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.

What are some of the issues?

The experts point out that several large financial players have entered the BNPL space including Commonwealth Bank of Australia (ASX: CBA), Suncorp Group Ltd (ASX: SUN) and Citibank. PayPal is another player that now offers a buy, pay later option.

News.com.au reported that Mr Kelly believes that with no profit and none being sustainably profitable yet, it's likely that there will be consolidation in the sector.

There is also the longer-term risk of regulation and interest rate rises, which could impact growth too.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Block, Inc. and ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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