The Zip Co Ltd (ASX: ZIP) share price has tanked to fresh six-year lows today. But some company insiders may not be surprised by its dramatic fall from grace.
Zip's CEO and co-founder Larry Diamond was warned eight months ago that there was trouble ahead for the buy now, pay later (BNPL) sector, according to reporting in the Australian Financial Review.
The warning was issued following a meeting at Morgan Stanley. The investment bank believed the BNPL sector was about to be hit by rising interest rates and surging inflation.
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Zip's share price fall won't surprise some
The prediction looks prescient in today's environment. Zip shares tumbled 21.42% this morning to 49.5 cents. That's the lowest the share price has been since 2016.
Diamond reportedly called Zip's other co-founder in Sydney, Peter Gray, and told him the grim news. He said, "there are some clouds gathering on the horizon". He also said they needed to shift their thinking from global expansion to self-preservation.
BNPL shares facing multiple challenges
Once a darling ASX share, Zip and its peers are now facing multiple challenges. Central banks around the world, including the Reserve Bank of Australia, are rapidly lifting interest rates and tightening liquidity.
This global trend created four big headaches for ASX BNPL shares in one fell swoop. Rising interest rates mean higher costs of funding for all companies. But it hits BNPL players harder due to their need to fund their interest-free payment offering in a business than generates slim margins.
The second issue is bad debt. As rates rise and the economy inevitably slows, more consumers are at risk of defaulting on payments.
Squeezed from all sides
Meanwhile, even BNPL users in a healthier financial position will likely be tempted to cut back on spending. We are already seeing consumer sentiment take a hit from higher rates and cost of living pressures.
Finally, higher rates are bad news for ASX growth shares. They tend to suffer most as the risk-free rate rises. As we have seen, this derating is most pronounced among ASX tech shares and BNPL shares.
Zip shares aren't the only ones on the nose
It isn't only the Zip share price that's crashed. The Block Inc CDI (ASX: SQ2) share price, Splitit Ltd (ASX: SPT) share price, and Openpay Group Ltd (ASX: OPY) share price have also been pummelled.
The bad news doesn't end at higher interest rates, either. Growing competition from much larger and better-resourced companies is threatening to overtake these industry pioneers.
National Australia Bank Ltd (ASX: NAB) is the latest ASX big four bank to start offering a BNPL service. Then we have tech giants like Apple Inc (NASDAQ: AAPL) joining the fray.
Last man standing?
The BNPL industry is likely to endure more volatility.
When Afterpay was acquired by Block Inc (NYSE: SQ) in January, Zip became the largest BNPL share on the ASX.
At the time, Zip shares were trading above $3. Today, Zip shares are down 88% year to date.
