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BNPL Suppliers Defy Skeptics: Shortage of Defaults

Buy now, pay later (BNPL) – and their customers – appear to be handling macro pressures well. Loss provisions are increasing, as are trading volumes, indicating that the relatively new business model is resilient.

Inflation is hot. Consumers live paycheck to paycheck, as readers of this space know well.

For many of the digital-only startups looking to disrupt financial services and lending…well, they’ve never been here before.

Conventional wisdom might say that for relatively nascent buy now, pay later (BNPL) companies operating in the US and Europe, defaults would be significant and perhaps alarming amid all the macroeconomic volatility.

Connect the data points a bit, here and there, that are an integral part of the earnings reports, and the predictions of the demise of BNPL’s business models, credit underwriting, seem greatly exaggerated.

Some accumulation of provisions

This does not mean that these companies do not constitute reserves and provisions in order to face expected losses. But as comments and documents from Affirm and Afterpay attest, the economy remains solid, as does overall growth.

In Affirm’s latest results, the company reported an increase in merchants added over the past year to 207,000 from just 12,000 in 2021. And at the same time, active customers have more than doubled to 12.7 million.

Additional documents published by Affirm show the provision for losses on loans held for investment purposes was 6.4% in the last quarter, compared to 5.2% a year ago (in the third fiscal quarter), but clearly down from compared to spring 2020, when the pandemic was raging, and the provision was 14.6%. Digging a little deeper, late payments extending beyond 30 days, as a percentage of active balances, amounted to just over 2%.

Affirm’s Chief Financial Officer, Michael Linford, said that “although the provision for credit losses increased year-on-year, as a reminder, last year’s provision was net negative, given the release of excess COVID-related lending”.

Separately, Zip’s own half-year results show that the group’s receivables portfolio grew by 25.6% to $2.5 billion at the end of last year, from just under $2 billion in mid-2021. In total, the provision for expected credit losses was 5.6% of the gross receivables portfolio at Dec. 2021, compared to the middle of the year. Klarna said in its year-end filing that credit loss rates have been reduced by more than 30% since 2019, where the latter, if 2021 credit loss rates are applied to 2019 merchandise volume – evidence of the effectiveness of underwriting .

It should be noted that the impact of the high inflation rate that characterized 2022 has yet to show through in these statements. But as evidenced by other companies’ comments on BNPL, such as Marqeta (where BNPL’s transactions have more than doubled), demand remains on the rise. If we see reversals – where, say, BNPL’s business slows significantly, or declines, and provisions continue to rise…that’s when real concerns can arise.



On: Shoppers who have store cards use them for 87% of all eligible purchases – but that doesn’t mean retailers should start buy now, pay later (BNPL) options at checkout. The Truth About BNPL and Store Cards, a collaboration between PYMNTS and PayPal, surveyed 2,161 consumers to find out why providing both BNPL and Store Cards is key to helping merchants maximize conversion.