Buy now, pay later on the brink as bad debts and interest rates rise

Buy now, pay later on the brink as bad debts and interest rates rise

Buy now, pay later products such as Afterpay and Zip have become a popular payment method, but the sector is facing a perfect storm of rising interest rates, bad debts, a crowded marketplace and looming regulation.

For businesses such as Daniel McCarthy’s butcher shop in regional Victoria, offering customers the option to use a buy now, pay later (BNPL) service has resulted in sales growth.

“It has been pivotal for our online business,” Mr McCarthy said.

The payment method is used for about 60 per cent of online sales at his business, and customers are also using it at the shop.

His customers who use it also spend more — an average of $140, compared to $30 using other payment types in store.

“People can buy a bulk pack and not actually shell out their money for it,” he said.

“They can put it on a payment plan, and it just works with their budgets.”

A tattooed man wearing a black shirt and badged cap stands inside a butcher's shop
Daniel McCarthy says his customers like using BNPL because they can split their repayments. (ABC News: Simon Tucci )

Buy now, pay later companies effectively buy a customer’s debt in exchange for a merchant fee.

The customer makes repayments to the BNPL company in facilities and the service is interest-free.

Fees apply if repayments are missed and some companies also charge other account fees.

However, while BNPL has been great for many retailers, particularly during the COVID-19 pandemic, some say the glory days are over for the sector.

Start-ups — including Afterpay and Zip — once dominated the scene, but traditional banks such as CBA, Suncorp and NAB, along with Apple, are muscling in.

“You’ve seen a land grab where these businesses are spending a lot of money on sales and marketing to acquire new customers,” UBS analyst Tom Beadle said.

“Those customers aren’t necessarily good customers.

“In fact, you could almost argue that they self-select poor-quality customers. So what these businesses need to do is sort of focus on keeping those good customers that repay and obviously weeding out those [who] whose.”

Zip Co’s bad debt and expected losses quadrupled to $148.3 million in the six months to December, 2021, compared to the corresponding period for the previous year, according to the company’s latest half-year results.

Afterpay’s expected credit loss was up 50 per cent, to $151.112 million, in the six months to December 31, according to the company’s latest update to the United States Securities and Exchange Commission.

Mr Beadle said bad debts were rising because of pressure on household budgets.

“And with those bad debts rising, it then creates a circular effect because the buy, now pay later companies then tighten their lending standards,” he said.

“So that then slows top-line growth further.”


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