For BNPL investors, it’s a case of ‘buy now, pray later’
James EyersSenior ReporterFeb 27, 2022 – 11.13amZip Co’s delayed interim results on Monday will put a spotlight on its higher bad debts, tighter margins and deeper losses, forcing the struggling buy now, pay later provider to shift strategy to find profitable rather than unbridled growth.
The unexplained delay to half-year results originally due out last Thursday created speculation Zip had been finalising a capital raising to fund a potential acquisition of Sezzle, after it said late last week acquisition talks were ongoing.
Zip’s stock is down by 80 per cent in the past 12 months, while Sezzle is down 85 per cent. Louie Douvis
Buy now, pay later operators are scrambling to find partners to create necessary scale, after Afterpay sold itself to Block and Humm was bought by Latitude.
Zip’s results will highlight the many struggles of the BNPL sector, one of the hottest on the sharemarket in 2020 but a disappointment over the past 12 months. Sentiment turned on the prospect of higher funding costs, deteriorating credit quality, expensive customer acquisition costs and fierce competition, including from incumbent banks that already have big networks of customers and merchants.
A comprehensive report on the economics of the buy now, pay later sector by consulting firm Quinlan & Associates explains the deteriorating unit economics and predicts the losses among players in Asia will exceed $US5 billion ($6.91 billion) in three years.
RELATED QUOTES
Z1PZip Co
$2.210 6.25%View Z1P related articlesMar 21Sep 21Feb 220.0006.00012.000Updated: Feb 28, 2022 – 9.36am. Data is 20 mins delayed.AdvertisementOn the retailer side, the report highlights ongoing pressure on merchant fees. Unlike banks, which can control net interest margins by changing interest rates, BNPL operators are unable to easily jack up fees when funding costs rise. Merchant fee pressure and higher bad debts will squeeze “net transaction margins” as players are forced to keep spending to acquire new customers and build brands.
“It is going to be a case of ‘buy now, pray later’ for those who fail to get it right.”
— Ben Quinlan, Quinlan & Associates
“Unless major changes are made, we anticipate that most BNPL providers in the [Asian] region will continue wearing losses indefinitely and forecast combined market losses to reach $US5.2 billion by the end of 2025, based on the industry’s current profit and loss trajectory,” said Benjamin Quinlan, chief executive of Quinlan & Associates.
“While we envisage a more sanguine future ahead for BNPL firms that can rapidly adapt their business models, it is going to be a case of ‘buy now, pray later’ for those who fail to get it right.”
The BNPL sector has never existed in a rising rate cycle, and now that it is coming, market sentiment has turned ugly with Zip’s share price almost halving this calendar year. Other ASX listed BNPL players have also been savaged: Laybuy is down 62 per cent since the start of January and 94 per cent in the past year; Openpay is down 48 per cent this year and 87 per cent in the past 12 months; Splitit and Payright are both down 84 per cent over the past 12 months. Most of the other ASX players are also expected to drop interim results in the next few days.
The bloodbath has extended to the US: Affirm, which listed on the Nasdaq just over a year ago, is down 57 per cent in the past 12 months. However, there was some reprieve for the sector late last week – Block surged 32 per cent on Friday after strong results from Afterpay, triggering a relief rally.
“After the carnage in the Block share price over the last 6 months – down 65 per cent from all-time highs, giving up almost all its COVID gains – the market is discounting an awful lot of bad news in the Block share price,” said John Lockton, head of investment strategy at Wilsons. “The reality is somewhat different.”
Still, the market will stay focused on credit quality. Block on Friday said Afterpay’s bad debts had risen 8 basis points to 1.17 per cent of sales.
Rising bad debts
Zip, whose shares lifted 6 per cent on Friday, will say on Monday its net bad debts for the half have risen to 2.6 per cent of transaction values – an increase of 132 basis points on the same time last year, because of expansion into markets where some new customers are not paying it back.
Zip will also confirm on Monday higher than expected bad debts had squeezed the “cash transaction margin” to 2.1 per cent, down from 3 per cent in the second half of last year. It will report a cash EBITDA loss for the first-half of $108 million, much deeper than analysts had expected until last week, when it pre-released the numbers.
The Quinlan & Associates report explains the impact of rising bad debts. A credit loss of 1.5 per cent of sales translates to 30 per cent of revenue being lost to cover for credit loss. It says losses could be exacerbated by competition, encouraging BNPL players to move down the credit curve to expand their user base.
Mr Quinlan said the largest BNPL players in developed Asia-Pacific markets suffered from an average credit loss of 1.5 per cent of sales and higher than average credit card delinquency rates of between 0.7 per cent and 1.2 per cent.
“Fintech BNPL apps are unregulated and totally unprofitable, operating in a small payment niche with massive credit losses and very susceptible to interest rate increases,” said Grant Halverson, managing director of McLean Roche.
The prospect of higher funding costs is forcing the biggest buy now, pay later companies to become banks. Klarna became a bank in Sweden in 2017 and Block received a banking licence in the US last year, which could help reduce funding costs by allowing them to hold deposits.
Quinlan & Associates calls for a fundamental rethink of the sector and predicts big profits for those that can optimise, integrate and expand, given BNPL products – which do not charge interest to consumers – will remain popular.
“We see significant upside potential for BNPL firms that can successfully transform their strategies and operating models.”
It predicts that in Asia alone, sales processed by BNPL firms will grow by a CAGR of more than 39 per cent from 2022 to 2025 to reach $US361 billion, as e-commerce sales continue to rise in an increasingly digitised world.
For the winners, it predicts a 30 per cent uplift in revenue and 20 per cent reduction in costs as achievable targets within a three-year timeframe, and $US3.7 billion in profit opportunity by 2025.
However, the pure buy now, pay later operators will be fighting for this growth against large banks and payment firms.
Commonwealth Bank has been one of the first global banks to respond directly through a 5 per cent holding in Klarna worth $2.6 billion. PayPal has also adopted the “pay in four” construct, and other payment companies and banks are set to follow.
“Given the relatively low barriers to entry and ease of replicating the BNPL model, we have seen a growing number of incumbents entering the space,” Mr Quinlan said. “In particular, we see a huge opportunity for banks, non-bank financial institutions and payments companies to capitalise on their low funding costs and/or large captive customer bases to win market share.”
James Eyers writes on banking, fintech and technology. Based in our Sydney newsroom, James is a former Legal Affairs and Capital editor for the Financial Review Connect with James on Twitter. Email James at jeyers@copyright link.au
- Forums
- ASX - By Stock
- Ann: Trading Halt
For BNPL investors, it’s a case of ‘buy now, pray later’James...
-
- There are more pages in this discussion • 75 more messages in this thread...
You’re viewing a single post only. To view the entire thread just sign in or Join Now (FREE)
Featured News
Add ZIP (ASX) to my watchlist
|
|||||
Last
$2.11 |
Change
-0.130(5.80%) |
Mkt cap ! $2.809B |
Open | High | Low | Value | Volume |
$2.26 | $2.27 | $2.11 | $13.62M | 6.220M |
Buyers (Bids)
No. | Vol. | Price($) |
---|---|---|
13 | 50930 | $2.11 |
Sellers (Offers)
Price($) | Vol. | No. |
---|---|---|
$2.12 | 88007 | 26 |
View Market Depth
No. | Vol. | Price($) |
---|---|---|
7 | 55907 | 2.120 |
19 | 199355 | 2.110 |
23 | 120616 | 2.100 |
13 | 321158 | 2.090 |
7 | 263769 | 2.080 |
Price($) | Vol. | No. |
---|---|---|
2.130 | 125872 | 32 |
2.140 | 197118 | 19 |
2.150 | 102877 | 16 |
2.160 | 189160 | 24 |
2.170 | 162073 | 11 |
Last trade - 12.36pm 20/08/2024 (20 minute delay) ? |
Featured News
ZIP (ASX) Chart |