When the economy was booming, the buy now, pay later space thrived. But as inflation and interest rates climbed, consumer-focused players in the space have struggled with increased defaults amid less discretionary spending.
Citing economic turbulence, Affirm announced last week that it was reducing its staff by 19% and shutting down its crypto unit. It also missed analysts’ estimates on revenue and earnings; Affirm’s stock plunged on the news, lowering its valuation to under $3.7 billion. (When it went public in 2021, its valuation was $12 billion.) Swedish BNPL giant Klarna has also taken a massive hit to its valuation, coming in at $6.7 billion in July, down 85% from June 2021.
Morgan Stanley downgraded Affirm’s stock last week as well, saying the company’s offerings “are too large given narrow incremental benefits.”
In September, the Consumer Financial Protection Bureau issued a report suggesting that companies like Klarna, Affirm and Afterpay, which all allow customers to pay for products and services in installments, must be subjected to stricter oversight. The report may have been too little, too late; many are concerned that BNPL does not constitute responsible lending, and it’s hard to tell whether the model itself is sustainable in the long term.
In a July 2022 report, Fitch Ratings noted that some of the largest BNPL providers had seen delinquency rates more than double over the previous few quarters, while credit card delinquency rates were relatively flat, “underscoring the BNPL’s lower asset quality,” according to the report.
In Affirm’s case, at least, the company reported in its second fiscal quarter 2023 shareholder letter that monthly loan delinquencies, excluding Peloton, “sequentially improved across all stages during the quarter.” It also reported that its delinquencies “performed in line with or better than comparable periods in pre-pandemic years, a trend that has continued through the month of January.”
BNPL payment platforms became increasingly popular following the onset of COVID-19 “given the massive shift to online shopping and merchants’ need to drive incremental revenue when physical stores were closed,” the ratings firm said. But the space faces increased challenges “from growing competition, higher funding costs and credit deterioration, as BNPL customers tend to be the near prime and subprime cohorts, segments likely to be most impacted by multi-decade-high inflation.”
Indeed, an April 2022 Harvard report cited a 2021 analysis by consumer credit reporting agency TransUnion of over 4 million BNPL users: In comparison to the average consumer, BNPL consumers are younger (77% are between the ages of 18 and 50) and, more notably, 69% are subprime or near prime. The same analysis found that BNPL consumers are more likely to be over 90 days past due on payments generally and more likely to be seeking credit.
“Affirm’s lower-than-expected earnings reinforce our cautious view of standalone buy now, pay later business models that face both structural and cyclical challenges as U.S. consumers cut back on spending at the same time rising funding and credit costs compress margins,” Fitch Ratings senior director Michael Taiano said in an email to TechCrunch.
Still, some industry observers remain bullish on Affirm’s potential. Kevin Kennedy, an analyst at Third Bridge, which provides investment research to private equity and hedge funds, thinks that there’s room for Affirm to recover, perhaps by expanding further into consumer lending.
“The Street is heavily focused on delinquencies and loss rates for 2023, but our specialists are more optimistic on Affirm’s ability to manage credit risk relative to other consumer finance vehicles. While there are clear concerns around the tightening liquidity environment, Affirm should have no issues tapping incremental funding through additional securitizations.”
If established players like Affirm and Klarna are struggling to this extent, startups operating in BNPL are probably facing their own challenges as well. Investor interest in consumer-focused BNPL companies appears to be waning, while B2B-focused startups are still raising capital, even in a challenging environment.
“The [B2B] market is very much underserved,” Speedinvest principal Olga Shikhantsova told PitchBook in July 2022. “The pain points for businesses have always been much larger than for consumers but in a way ignored because they’re more complicated to address. The [VC market] is smaller now, but the opportunities are massive in the B2B space.”
Tranch, a BNPL company for SaaS businesses and a Y Combinator grad, secured a $95 million credit facility from New York-based Clear Haven in January. Tranch was founded in the U.K. but it moved its focus to the U.S. last year. In the second half of 2022, the total monthly value of invoices paid by Tranch increased 10x, a spokesperson told TechCrunch. Its customers include Goodwin Procter, a global law firm, and Tropic, a SaaS procurement platform.
Also in January, Berlin-based B2B BNPL startup Mondu tacked on another $13 million to its Series A round, bringing the total to $56 million, according to tech.eu. Valar Ventures led that investment, with participation from FinTech Collective. Also last month, actyv.ai, a Singapore-based AI-powered enterprise SaaS platform with embedded B2B BNPL, raised $12 million in pre-Series A funding.
As a recession looms, discretionary spending will only likely decrease while defaults increase, leading to continued challenges for consumer-oriented BNPL players such as Affirm. Just how well — or not — the company is able to weather the storm will continue to serve as an example for the smaller players in the space.