Start now to profit from the booming financial subsector “Buy now, pay later”
Make an online purchase these days and it’s likely that at checkout you’ll have the option of paying in installments, often without interest. The option to buy now and pay later – or “BNPL” – is popular with consumers and retailers. BNPL spending has quadrupled to $ 99 billion in the United States this year alone and is expected to exceed $ 1 billion globally within four years, according to Bloomberg. It’s no wonder then that tech start-ups like Klarna and Clearpay have been frantic to capture market share. BNPL could be another way for investors to profit from the ever-evolving e-commerce boom.
Its operation is relatively simple, which is why it is so popular. The traders sign an agreement to have a BNPL provider offering its service appear at their cash register. If the consumer accepts it, the purchase is made and the merchant receives their money for the full amount, less transaction fees, from the BNPL service.
The retailer is now largely out of sight and the buyer pays with the BNPL service, usually in equal installments over a few months. A big draw to the consumer over using a credit card is that there is usually no interest payable, which perhaps makes it look less like debt; the BNPL service provider is paid via its license fee from the merchant.
Of course, no one wants to pay interest. But this difference, which appears to benefit BNPL at the expense of more established funding channels, such as credit cards and bank loans, highlights how changes in the world’s population, and therefore social attitudes, are disrupting so many people. established sectors. Consider that about two-thirds of American internet users are either Millennials or Gen Z, according to market research group eMarketer: Everyone is between 10 and 40 years old. At the same time, around half of the world’s population is under the age of 30.
We live in an increasingly young world and surveys show that among the younger population there is a distrust of the general public and a preference for alternatives in areas ranging from cryptocurrencies to products of natural origin. Previous financial crises have made people under 40 wary of chains of debt and interest. BNPL, with its quick, interest-free repayments, ticks the box as a sort of house halfway between living debt-free and turning to traditional lenders.
A booming market
The forecast from RBC Capital Markets underscores the trend. It predicts a compound annual growth of 4% in credit card use between 2019 and 2023. The use of digital wallets, which may include new payment technologies such as Google Pay and Apple Pay, is expected to increase by 18% per year. But for BNPL, the expected annual growth rate is 28%.
These changes in consumer preferences as society evolves are profound. BNPL will grow, underpinned by the practical reality that retailers have no choice but to bring these suppliers to their shopping platform checkouts. The polls support this conclusion. More than nine million people in the UK, for example, said earlier this year that they would not use retailers without the BNPL option to purchase goods, according to personal finance specialist Finder UK.
Investors, meanwhile, are increasingly comfortable with the concept. Take based in the United States Affirm holdings (Nasdaq: AFRM). It only hit the market in January of this year and after a first rise, stocks languished. Shareholders were not convinced by BNPL’s overall idea and noted that the group derives more than a quarter of its sales from Peloton, the home exercise equipment maker that flourished during shutdowns when gyms were closed.
The turning point for equities came this summer. We first heard that Amazon would offer Affirm’s BNPL service to its customers, which spurred a strong rally in the stock. In September, the company produced a very bullish forecast for future sales, which sent stocks back up sharply again. The stock is now testing $ 160, up from $ 60 in the spring. If Warren Buffett’s mentor Benjamin Graham was correct in describing the stock market as a voting machine, then this is a big boost for investors.
Nevertheless, questions about the BNPL sector’s business models and their sustainability remain. There are inevitable pressures of expansion costs while competing with others determined to win in such a rapidly growing market. The potential bad debts resulting from the rush to acquire new customers are of concern. And along with success and greater visibility comes regulatory oversight over consumer protection, which could prove cumbersome in the future.
The stock price gains for Affirm, as well as private fundraisers like Klarna’s earlier this year, imply little difficulty in raising capital. Thus, BNPL companies can continue to grow. Their value for now is more determined by the economic footprint they can create through their partnerships with large, established retailers and the adoption of their associated applications and products.
When it comes to bad debt, analysts argue that while some people have had financial problems with ‘plastic’ due to low monthly payments and mind-blowing interest rates, BNPL is different: it usually covers short periods, while the equal repayment amounts are straightforward. and write off the interest-free debt. How they determine how much a customer can afford is scrutinized by governments.
We probably won’t know how successful they are at assessing creditworthiness until the end of a full business cycle. The past few years have been relatively benign times for credit. Advanced algorithms and artificial intelligence are said to help lenders judge better but, again, time will tell. In the meantime, the regulations are being phased in, with a UK consultation ongoing until January next year.
A key problem for regulators is that BNPL is “low friction”: getting credit is too easy, with little delay for consumers to question whether it is reasonable to borrow money. Additionally, consumers could easily get confused about a variety of loans from different BNPL providers.
Big names are interested
What we can say with more certainty is that despite concerns, overall industry growth figures make it inevitable that larger and more established players will enter the market, which will lead to consolidation. BNPL still only accounts for around 2% to 3% of e-commerce sales in the United States, for example, so there is a huge, open and rapidly growing market to play for. Giants such as Apple are said to be working with Goldman Sachs, while major Visa and Mastercard processors, as well as major fintech disruptors such as PayPal, are involved. The big banks will seek to use their financial weight and their strong presence with consumers to force their entry.
How can investors get on board? For those who like risk, some of the new entrants are listed on the stock exchange and therefore it is possible to go straight to coal with relatively young companies. Affirming is a purchase. It is booming and if it can keep pace with the partnerships it is establishing, like the one with Amazon, then it looks set for the long haul.
Another supplier to consider is Square (Nasdaq: SQ), a slightly larger payments service that recently bought provider BNPL Afterpay for $ 29 billion. The purchase makes it a market leader with significant opportunities ahead. Once again, more broadly, PayPal (Nasdaq: PYPL) establishes itself in the BNPL sector with its own offer, which it strengthens through acquisitions and regional expansion. PayPal’s existing payments business, on the other hand, generates significant free cash flow, giving it the firepower to continue to grow its platforms.
Shares of PayPal have lagged behind the overall market this year and have recently come under pressure from interest in purchasing social sharing site Pinterest to expand its reach with consumers. Investors disapproved and the stock fell. But there is now no deal going on for Pinterest and with stocks yet to recover, this weakness is a good chance for long-term investors to buy.
Finally, for those who like the theme but don’t want to take the risk of individual stocks, the best route is a broad-based, actively managed financial technology (fintech) fund. This will not only capture BNPL’s growth, but also capitalize on other developments in e-commerce and financial services, giving you a bigger place in the e-commerce boom.
One to consider is the Robeco FinTech Fund, a £ 1.3 billion fund with ongoing charges of just under 1% per annum. With a strong inclination towards the United States, it includes innovators such as PayPal as well as long-established growth stocks including Visa. The fund has generated a return of 12.8% in the first nine months of 2021. Since its inception in early 2018, it has generated a return of 16.9% per annum, a substantial premium over the 11% of global equities. in general.
Stephen Connolly writes on finance and business, and has worked in investment banking and asset management for almost 30 years ([email protected])