Buy now and pay whenever? Locking lift for online shopping loans

(Reuters) – Browsing online during the shutdown, Jessica Friend saw a pair of Ray-Ban sunglasses she liked, but the price made the 30-year-old Ohio resident think twice.

What convinced her to click “buy,” Friend said, was the short-term credit offered by Afterpay, which divided the $ 260 payment into four installments with no interest.

Afterpay is among a handful of alternative credit firms that offer small loans, primarily to online shoppers, and earn money by charging merchants a commission of 4% to 6%.

These Buy Now, Pay Later (BNPL) firms have benefited from a shift to online shopping during the coronavirus crisis in countries like the United States, where state aid has also boosted retail sales.

“I’m more inclined to use them because they make it easier to pay for the things I want all at once … and when I want to waste something,” Friend said of the loans.

Some investors are now betting that shoppers will stay away from stores as coronavirus cases rise again in various countries around the world, boosting business for BNPL companies.

But the growing number of subscribers can also increase bad loans, mainly among new users who are more likely to default.

And as job losses increase and government aid declines, the business model will face its first real test in a recession.

“Much depends on the second wave of viruses and government media to continue to drive demand,” said Andrew Mitchell of Ophir Asset Management, which owns shares in Melbourne-based Afterpay, whose market value has risen to more than $ 100.55 billion for more than $ 100 million four years ago.

While the transition to online shopping was underway before the pandemic, the change was accelerated with the blockade, and Afterpay registered over a million new active US customers between March and early May, bringing its general base there to 9 million.

Meanwhile, retailers desperate to move merchandise have also become more receptive to partnerships with BNPL companies, which, unlike credit cards or mortgages, make loans instantly.

Klarna, the largest fintech company in Europe, said that since March inquiries from retailers who want to partner with it have increased by 20% on average worldwide.

With 7.9 million subscribers in the US, Klarna of Sweden has since hired outdoor equipment maker The North Face, Disney’s streaming service and cosmetics retailer Sephora.

Puneet Dikshit, a partner at McKinsey in New York, which expects the sector to generate between $ 7 billion and $ 8 billion in volumes this year in the United States, said Puneet Dikshit, a partner at McKinsey in New York, who expects that the sector generates from $ 7 billion to $ 8 billion in volumes this year. , growing by more than 150% annually.

(GRAPH: Closing Shot: Weekly Jump in US E-Commerce Sales)

(For an interactive version, click here)

Although fears of credit losses sparked a sell-off across the sector in March, the influx of large tech investors and the growing number of subscribers have supported a strong recovery, with stocks now at record levels.

(GRAPHIC: Buy now, pay companies later with a tear, here)

‘TURN OFF THE TAP’

The pandemic forced most companies to adjust their risk settings, which they say may increase loan rejection rates, although Afterpay, Klarna, Zip and Sezzle declined to provide specific numbers.

“BNPL operators can turn off the taps and quickly accelerate growth if reimbursement risks increase,” Mitchell said.

While Afterpay, with bad loans totaling 1% of its loan portfolio as of March, changed its requirements so that clients had to pay a quarter of their loan in advance, co-founder Nick Molnar said that the rates of Rejection were more or less in line with the start of the year.

Molnar said an overwhelming majority of Afterpay customers, whose average transaction value is A $ 150, pay on time, while loans for new purchases are denied to those who don’t.

Although some brokerage houses expect Afterpay to make a profit by 2022, rising costs to finance the expansion and credit losses affecting accounts receivable are likely to mean that BNPLs, operating at low margins, are not profitable for some time .

Klarna saw credit losses more than double in the first three months of the year at approximately 0.7% of underlying sales as it expanded in Europe and the United States, where sector regulation is almost non-existent.

Only California has said that BNPL companies need a license and fined some for lending without it.

In Australia, where the industry first took off thanks to easy financing, the corporate regulator will publish a follow-up report this year to one it issued in 2018, raising concerns about users overstretching and calling for BNPLs to be regulated. . line with other credit services.

Businesses, investors, and analysts agree that young people with stimulus money in their wallets are driving sales, and the BNPL buyers Reuters spoke to were under 35 and bought household items, as well as products and clothing for skin care.

“The vast majority of our customers have income levels of less than $ 75,000, so I would say most of them probably have a stimulus check,” said Charlie Youakim, CEO of Sezzle, one of the smaller companies.

Younger demographics are more difficult to assess because they lack a credit history, which means that most companies use algorithms to perform eligibility checks in real time and assess the risk of default.

“Our internal engine assesses risk taking into account various parameters that will also include consumer payment history, what is being purchased and combined with various third party data sources and authentication solutions,” said Klarna spokeswoman Aoife. Houlihan.

Sydney-based Zip, with bad debts of just over 2% of accounts receivable, said it evaluates buyers’ public information and credit scores.

About one in 100 customers fall behind on payments each month, spokesman Matthew Abbott said, adding that Zip recently tightened eligibility rules, leading to higher rejection rates.