Buy now, pay later Providers like Afterpay and Zip are facing enormous pressure in the current economic climate and are facing becoming completely unprofitable, according to leading experts.
In fact, operators in the sector are at risk of becoming loss leaders and that scenario could already be happening, according to the credit rating agency and Fitch Ratings and the financial services firm McLean Roche Consulting.
News.com.au has previously revealed how experts have predicted potential “carnage” for the BNPL sector this year as providers burn through cash, bad debt mounts and customers withdraw from using the service – a pattern they say it is not sustainable.
The Buy Now Pay Later (BNPL) sector is valued at over $30 billion combined, but the Australian market is currently saturated.
There are 12 BNPL providers listed on the Australian Stock Exchange, the most anywhere in the world.
Michael Taianoa, senior director of North American banking at Fitch Ratings, said increased competition made it harder for providers to pass on higher costs to retailers.
“I see payment in four products as a kind of Trojan horse that attracts customers who could then monetize with other products/services,” he said. the australian.
“I think as a standalone product the profitability of quad pay is challenged and to be profitable it will need to scale through repeat customer usage and have low operating expenses, especially customer acquisition costs, and have exclusivity with the merchants”.
‘Perfect storm’
The sector was facing a “perfect storm” as funding costs rose sharply, wiping out any profitability at a time when the economy has slowed and consumer defaults are expected to rise, said Grant Halverson, chief executive. by McLean Roche.
But an Afterpay spokesman said its financing model was “unique” and, unlike traditional loans, its exposure to customer delinquencies was low.
Providers are also facing tightening regulations as the Treasury prepares to review the sector and decide whether to classify the product as credit.
Consumer groups have raised red flags over the lack of BNPL regulation arguing that there aren’t enough safeguards in place to ensure people can afford payments, exacerbating financial hardship and money problems.
Zip, which saw a deal to merge with US-based BNPL supplier Sezzle collapse by forcing the Australian team to pay $11m (A$16m), has accelerated its path to profitability , including reducing its workforce, increasing monthly fees, and raising retailer fees.
But Halverson said that while Zip noted that the measures will result in $30 million in cost savings, the funding is expected to double, meaning the savings “will just go away.”
Zip shares have plunged an extraordinary 76 percent this year, but the supplier said it is well positioned to adapt to changing economic conditions.
More expensive than credit cards
Meanwhile, recent research from Curtin University found that late fees and account charges from BNPL providers can make them more expensive than a credit card.
It showed that if someone has difficulty making BNPL payments, just like a credit card, they will rack up charges that can add up to the same or more than credit card interest rates, particularly for small purchases.
Last month, the BNPL industry group, the Australian Financial Industry Association, published research that showed the average BNPL purchase was $151.
For a customer who incurred late fees or account maintenance fees for a $151 fee, that would mean an effective interest rate of 28.25 percent for Afterpay and a whopping 49 percent for Humm-Little Things.
This is significantly higher than the 22 percent average annual rate for a credit card, the research found.
“The Buy Now Pay Later industry advertises itself as ‘interest free,’ however your late payment fee and monthly account fee can add up to an amount that effectively equates to an extremely high near-interest charge,” said the report’s author, Dr. Lien Duong, a senior lecturer at Curtin University’s College of Accounting, Economics and Finance.
In the report’s most extreme example, BNPL’s missing payment fees would equate to an effective interest rate of 276.12 percent based on a $30 purchase and the maximum fees charged.
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