Buy Now, Pay Later – just more consumer debt in fintech clothing
Market acceptance and the continued expansion of Buy Now, Pay Later (BNPL) service providers will widen the wealth gap in Australia. Despite valuation festivities, under the social filter of ESG-minded business practices, these organisations are found wanting.
The swift rise of these agile credit providers has been underpinned by:
- explosive growth in internet consumerism (reinforced by pandemic lockdowns);
- consumer demand for instant retail gratification;
- low friction transactions; and
- low funding interest rates.
Of the points above, I would suggest only the 4th could be argued to have a shelf life. (That said, if the price expansion seen in healthcare, education and financial assets – which are core expense items for most Australians, either out-of-pocket or in superannuation – spreads into broad basket inflation and higher interest rates, it may become advisable to shift cash into material items that hold their value! Hyperinflation: another BNPL demand driver? I hope not… but I digress…)
BNPL organisations target younger, internet-savvy consumers. According to Mozo’s 2019 sector report, as many as 30% of Australian adults now have one or more BNPL accounts, which makes for roughly 5.8 million users nationally. In the United States, according to Forbes, BNPL is a US$24bn industry that has been popular in 2020: 7% of all Americans have made a BNPL purchase this year, with particularly strong growth among high-income earners and millennials.
For consumers, BNPL service providers pitch themselves as a superior replacement for credit cards or a type of contemporary lay-by system. Features include lower interest rates, more responsible issuance of credit lines, less dishonour fees etc.
In reality, the success of the BNPL industry depends on increased indebtedness and these services provide another format to make purchases beyond your means – now with fintech innovation to increase the speed with which a consumer can gain this credit.
Debt is debt – a mortgage on a consumers’ future, no matter the notional amount.
In line with targeting young consumers, evidence from the United States, the United Kingdom and New Zealand suggest higher levels of debt while a student are significant predictors of stress and secondary negative health consequences. This study also points to other evidence of serious consequences more generally. Higher levels of debt have serious long-term consequences, including mental, neurotic or psychotic disorders, depression, suicide attempts (or suicide completion), problem drinking and drug dependence.
Meanwhile, the benefactors of BNPL so far have been the early investors into these businesses – professional and wealthy investors – and the payment networks themselves. The story of BNPL so far has played out in an anti-Robin Hood fashion – wealth transfer towards already wealthy investors.
ASIC’s Report 672 “Buy now pay later: An industry update” shows 1 in 5 customers across the broader BNPL industry have missed a payment. Further, the report found half of users aged between 18 and 29 cut back on essential items to make repayments and 15% of users (including half of all customers under the age of 29) had taken out additional credit to pay for the services. In a win for BNPL organisations, ASIC opted not to impose new rules on the sector.
In true investor relations style, the major listed BNPL organisations have thanked the regulator for their commercial mindset towards the industry. However, each organisation was clear that their business is different to the ‘sector’ and that their internal consumer research found alternative results to those of ASIC.
The fundamental demand for the services of BNPL organisations is solid, with room for local and international market growth, despite regulatory uncertainty.
I believe the social impact of frictionless and increased indebtedness fails the social filter of ESG investing. Normalising these small credit lines at scale gives little thought to long-term debt consequences. I fear BNPL services will further anchor lower income Australians to that socioeconomic class.
