Buy Now, Pay Later Programs Stumble Amid Economic Headwinds

Pandemic Boom Years

During the pandemic, buy now, pay later programs, sometimes shortened to BNPL, proliferated as many Americans spent time in lockdown shopping. Consumers seemed to enjoy having the option to acquire an item when they wanted it, while simultaneously putting off payment.

The programs were especially appealing to “subprime” consumers with limited access to traditional credit. From Q4 2019 through 2021 about 43% of payment plan applicants were in this category. Now as stimulus payments have ended and inflation heats up, more of those same borrowers are making late payments.

Rising Rates

Investor sentiment seems to be souring on these companies’ prospects due to concerns associated with a slowing economy or recession. Namely, the concern is that defaults will rise. Another issue is the Fed’s rate increases. These are hitting BNPL companies’ profits, as the credit lines that support the loans they issue are getting more expensive.

During the boom years, these companies benefited from a low-interest-rate environment and their valuations took off amid strong consumer demand. Investors saw profit potential. In August 2021, Block Inc (SQ) announced a $29 billion deal to buy one of the industry’s largest companies in the BNPL space, Afterpay. Less than a year later Affirm (AFRM), another big player in the space, has seen its stock drop by about 85% from its November 2021 high.

Restricted Access?

In this tricky economic environment, the BNPL companies are implementing many changes to how they operate. These tactics include layoffs, slowing new originations, and implementing more stringent lending standards.

As Americans feel their wallets squeezed amid rising prices for everything from groceries to gas, as well as discretionary expenses like vacations, the option to pay later may be appealing. But as the companies providing these loans exercise more caution to protect their bottom lines, shoppers may find these payment options are also harder to come by.

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