Former ASX-listed Australian fintech Afterpay raised concerns this week after its December half-year (1H FY2022) results were unveiled – showing an after-tax loss of $345.5 million.
The 1H FY2022 loss was the first financial result to be released since US-based Block (ASX: SQ2) completed its acquisition of the buy now pay later (BNPL) fintech Afterpay earlier this year for $39 billion.
It compares to an operating loss of $79.2 million in the previous corresponding period – indicating the company’s continual downward slide.
McLean Roche Consulting founder and chief executive officer Grant Halverson told media outlets the American company had forked out far too much for Afterpay.
“They’ve paid US$23 billion too much for it,” he said.
This was not the intended result for the new owners which anticipated a $60 million profit for the period.
In acquiring Afterpay, Block (formerly Square) had pinned its hopes on bringing together two of the fastest growing global fintech companies.
Record income figures come at a cost
During 1H FY2022, Afterpay’s poor performance included $176.7 million in bad debts, which were much higher than the $72.1 million a year ago.
Another contributor to the woeful result was rising operating expenses – up nearly 287% from $63 million to $212.3 million.
The half year result came despite Afterpay’s income increasing by 55% to $645 million.
The company was brought to life in 2014 when co-founders Nick Molnar and Anthony Eisen came up with the idea that millennials prefer cashless and credit-free lifestyles.
The future looked bright in August 2021, when the co-founders announced a deal with US digital payments company Square, becoming the biggest merger in Australia’s history.
At the time of the purchase, Block’s projected growth was 70%, but this was then pared back to 25-30%.
Afterpay emphasis on struggling customers
Experts have been saying Afterpay’s business model is no longer sustainable, with bad debts ballooning and customers beginning to stray away from the service in a saturated BNPL market.
Australia’s BNPL market has a worldwide high of 12 providers listed on the ASX.
Consumer Action Legal Centre spokesperson Gerard Brody says mounting revenue from late payment fees was “unethical” and showed deeper signs of a broken business model.
“Any business making a significant proportion of revenue from late fees, it really indicates to me that they succeed when their customer loses,” he said.
“That’s a really unethical way to run a business.”
The news isn’t just bad for Afterpay, with its biggest competitor Zip (ASX: Z1P) seeing its value disintegrate 80% in just six months.
Why customers aren’t able to pay up
Australians have resorted to BNPL in recent times to relieve stress on their struggling bank accounts.
According to the consumer advocacy group’s data, one in five people have used a BNPL service to pay for household items like groceries and rent in the past year.
The downside is that BNPL services are largely unregulated, with providers having no legal obligation to check borrowers can repay the loans.
Senior policy adviser for consumer group Choice Patrick Veyret told media outlets the trap is in the fees.
“Most providers charge people late fees and research we’ve seen has found that sometimes these late fees actually mean that buy now, pay later is more expensive than a credit card.”
“There is some view that buy now, pay later is the golden child, when in actual fact they are an unregulated credit service and we’re seeing payday lenders try and cash in on this,” he said.
With endless physical and online stores encouraging and accommodating the vast range of BNPL methods, customers are continuously being drawn to these options, some, of which, are outside of their financial means.