Ann: December Quarterly Activities Report, page-105

Hi Dan. On the BNPL side, the issue is painfully simple to me. In the last 12 months the cost of debt globally has shot up. Current cash rate in Australia is 3.35% and most pundits expect it to get to around 4%. From what I can tell, Malaysia’s bank lending rate is a shade above 5.0% at present (this makes sense, Australia was much slower to move than other economies).

Based on the BNPL numbers I’ve tracked (per the chart earlier in this thread) IOU have done TTV of $43.4M since inception, earning revenue of $2.9M – so net revenue rate of 6.7%. They can’t self-fund this forever as their cash balance is too low – they’ll be unable to grow and will keep burning cash on expenses. So eventually this has to be funded by a debt warehouse. But the cost of that debt would erode probably 80% of their current margin, so they’ll basically never be in a position to make the BNPL profitable unless it becomes absolutely massive in scale (i.e. huge TTV’s) whilst keeping the current cost base static.

You can do the numbers yourself. Let’s be generous and say it only costs about $2.5M cash burn a quarter to run BNPL. They currently earn a margin of 6.7% on their TTV. But the cost of funding that is going to be at least ~4.0%. So they’re looking at say 2.7% NTR. Just to cover the quarterly cash burn of $2.5M, at 2.7% NTR they need to be doing TTV per quarter of $92.5M! In other words, they need to do more than double the entire TTV they’ve done since inception, every single quarter just to break even, never mind make a profit.

Putting aside everything else, that is the problem with IOU’s BNPL foray. They, like a few others, essentially entered the lending market right at the end of the most benign lending conditions ever (as opposed to Zip and Afterpay who started years earlier). They are now facing the steepest interest rate curve seen in decades. That’s why players like LBY, OPY, ZBT hit the wall. Now you know why IOU keep pushing their ‘debt warehouse’ funding milestone further and further into the future.