Here is a BNPL model that is not scam: Firstly, you do not borrow 1 billion via bonds. You have a line of credit and only borrow the amount to cover each purchase as they are made.
I will use an example of an end-customer buying $200 running shoes.
The line of credit may operate at X% pa interest rate, so you charge the merchant Y% upfront on the $200. Y% must be higher than X% for the BNPL company to be viable. For a $200 item, the merchant fee may be 30c plus 6%: $12.30 (NB: this happens to be APT's fees)
Effectively, the BNPL company borrows $200 to pay the merchant for the shoes, which for the sake of an example figure is borrowed at 5% pa (still lower than the 6% charged to the merchant). The BNPL company therefore receives the interest which they would pay in a year in one immediate payment, however it is not labelled an interest charge, rather, it is considered a fee.
If the BNPL company held the debt for a year, it would cost them $10 minimum according to the line of credit rate discussed. The $12.30 merchant fee could potentially cover the loan for a year.
However, the customer is expected to pay within 28 days (4 weekly payments), and if it is paid, then the BNPL company keeps the difference between the interest they were charged by the lender and the merchant fee they charged the merchant.
There are times that a customer will not pay, but that is not new to any business, whether its electricity retailers, stationary suppliers or even professional services. Even a company like Amex still suffers losses due to non-payment equivalent to 2.7% of their loans (based on their 2019 annual report).
In these cases, a BNPL company could sell some of the bad debts to debt recovery agencies and cut their losses. Keeping delinquency rates low is where the real work is. There are many strategies than can be used, such as more stringent customer on-boarding or requiring a back-up payment method.
As long as the income easily covers bad debt expenses, then the company remains viable. If BNPL companies can maintain losses in line with credit card companies then they are doing fine.
APT Price at posting:
$67.06 Sentiment: Hold Disclosure: Held
