When lawmakers asked the Consumer Financial Protection Bureau to do so last year look at business practices For some of the largest buy-now/pay-later fintechs, there seemed no end to their exponential growth.
Back then BNPL fintechs Confirm and Klarna each boasted a market valuation of around $45 billion, while Block (formerly Square) agreed to pay $29 billion to acquire burgeoning fintech BNPL Additional payment. Rivals Zip and PayPal were also ablaze as consumers flocked to their interest-free turnkey online loans in response to the pandemic’s impact on their finances.
A year later, that fire is far less bright.
In recent days, BNPL fintechs Klarna and Confirm released financial results that revealed fresh weaknesses, including a slowdown in BNPL loan growth rates. With rising inflation and economic uncertainty, consumer arrears have also increased for both companies, shaking investor confidence.
Although BNPL loans are still popular with consumers, ratings for Affirm and Klarna have increased steadily fallen in recent months, with both now hovering below $7 billion from previous highs around $45 billion.
“BNPL lending has introduced many innovations, but it’s based on 0% interest at a time when interest rates are rising, and it’s already backed off from the hockey stick growth we saw just last year,” says Nathan Hilt, Managing Director of the consulting firm Protiviti.
More pain could be inflicted later this month, as the CFPB said it will soon share insights from his analysis by five of the best-known BNPL lenders – Affirm, Afterpay, Klarna, Zip and PayPal – all of whom rely heavily on the “Pay in 4” model, where consumers pay no interest when paying back loans in equal parts. Most BNPL firms also offer longer maturities with interest.
The CFPB “looks like moving toward rulemaking or putting BNPL under CFPB oversight,” said Allen Denson, partner at Stroock & Stroock & Lavan.
The CFPB report is likely to reveal the good, the bad, and the ugly aspects of BNPL fintech practices, Denson said. On the positive side, BNPL loans could expand access to credit to new or underserved borrowers and build credit histories. On the negative side, unclear policies regarding penalty interest, late fees and inconsistent handling of sensitive consumer data.
“Any CFPB rule will almost certainly focus on requiring disclosures from BNPL lenders, with some clear guidelines so consumers and lenders work under the same framework,” Denson said.
The report is likely to be the first step in a long process that could take up to a year, based on previous rulemaking for similar fintech-based payment categories like prepaid cards, which the CFPB tackled a few years ago after lengthy industry consultation Denson, predicting that all rules will be announced towards the end of 2023.
Many BNPL providers could welcome regulation, as such guard rails often facilitate competition by creating stability in a new or chaotic market, Denson said.
Klarna, which has postponed a planned IPO, is the latest BNPL fintech to hint at imminent trouble.
In a biannual letter to shareholders, Klarna CEO Sebastian Siemiatkowski warned that Klarna has had a “very tumultuous” year so far, citing the Ukraine war, inflation and a “likely” recession.
Klarna’s revenue for the first half rose 24% year-over-year to $950 million. But pre-tax losses nearly tripled to $581 million in the same period from $141 million a year earlier. The overall default rate on Klarna consumer accounts is still relatively low at 0.7%, but higher than the 0.5% default rate a year ago.
Over the last year, Klarna has burned hard cash with heavy marketing investments and acquisitions, including the launch of a standalone debit card. The company cut 10% of its workforce in May to keep costs under control.
PayPal is the largest Pay-in-4 lender with a potential reach of more than 200 million US consumers through its existing relationships, while Affirm has approximately 14 million users. Klarna claims the most customers at 150 million worldwide (30 million in the US, its fastest growing market) and recently raised $800 million in funding despite a tight venture capital market.
“[Klarna’s growth rate] is slower than its peers but likely reflects the company’s maturity in core markets,” analysts at Sanford Bernstein & Co.’s New York-based Autonomous Equity Research Unit said in a Wednesday note to investors.
Affirm’s stock tumbled last week after the latest quarterly results showed rising arrears and slower selling momentum, while CEO Max Levchin warned of an impending downturn that could further hurt Affirm’s fortunes. Levchin also said Affirm is on the lookout for acquisitions that could complement the company, noting the likelihood of BNPL consolidation in the coming year.
A fusion – Zip’s planned takeover by Sezzle — fall through earlier this year.
The competition is also increasing. Apple’s BNPL service, Apple Pay lateris due to launch this autumn while several BNPL firms, including Klarna, Afterpay, Affirm and UK newcomer Zilch, are expanding or launching reward programs to attract and keep more customers.
Visas and MasterCard are also building momentum with BNPL platforms and technologies that enable banks to support BNPL loans at any participating retailer.
Because the BNPL industry is still relatively new and evolving, it’s difficult to predict how consolidation and enforcement of rules might complicate its development, Protiviti’s Hilt said.
“BNPL loans surged during an unusual time in the pandemic, when consumers were stuck at home and liked not having to go through a formal credit check,” he said.