If there is one market sector that encapsulates the rapid change in share market sentiment this year, it is the buy now pay later (BNPL) sector.
It was one of the few “technology’’ areas that Australia dominated in the long bull market but the sector is now littered with broken deals and extreme share price movements.
ZIP (ASX: ZIP) is the best example, with the company that once enjoying a market capitalisation above $6 billion. It is now worth just $320 million after its shares fell from $12.35 on 19 February to a low of $0.44 last week.
Expansion to contraction
That’s a big fall and there is now pressure on the company to stop expanding into the UK and the US, drop its planned purchase of Sezzle (ASX: SZL), and concentrate on its profitable Australian interests.
Even that response has risks though, with the new Albanese Government indicating it would like BNPL players to be covered by the same credit laws as financial institutions and credit card players.
Sezzle’s share price has also collapsed, down more than 96%, wiping out much of the $800 million wealth of US founder Charlie Youakim.
He was riding a high when Sezzle’s shares were worth $9.20, but several days ago they crashed by 96% – plunging to just $0.27 at the time of writing.
The great Afterpay escape
Of course, the “great escape” story of the BNPL sector is Afterpay, which underwent a $39 billion merger last year with US-based Block Inc (ASX: SQ2), which is run by Twitter Founder Jack Dorsey.
Not so fortunate was consumer lender Humm (ASX: HUM) which was going to sell its buy now, pay later arm to Ahmed Fahour’s Latitude Financial (ASX: LFS) before the deal eventually collapsed, and led to a mass departure of Humm directors John Wylie, Alistair Muir, chair Christine Christian, Carole Campbell and Rajeev Dhawan.
The failure of the sell-off came after Humm founder Andrew Abercrombie urged shareholders to vote against the deal, which he claimed undervalued the consumer business because the price of Latitude shares had fallen since the agreement was struck.
Credit market turns bad
A turn in share market sentiment is not the only drag on the performance of the BNPL sector.
The other really big issue is credit quality, which has been plummeting as inflation strikes around the world and poorer credit risks come knocking at the BNPL door to keep up their spending power.
As I explained last year, in doing an experiment in how far you can push BNPL, there are some real positives with the concept of splitting up payments (usually into four).
However, there are some real dangers as well, the most potent one being letting BNPL repayments balloon so high that they soak up a significant slice of your future cash flow before you have even earned it.
The problem now is that the credit cycle has belatedly turned after being lengthened by COVID-19 stimulus payments that puffed up Australian’s bank accounts. BNPL operators are now in trouble in two ways.
Firstly, households are battening down the hatches as interest rates rise and the cost of essentials like home repayments, food and petrol all fly much higher.
That means that people with good credit histories are no longer shopping around for indulgent purchases that they can split up using BNPL.
Secondly, those using BNPL now are more likely to be really struggling to meet the rising cost of living and are finding BNPL an easy way to keep up their standard of living even if they really shouldn’t do that.
Bad debts – very low for the BNPL players in the easy money era – are now starting to pile up and get very stinky indeed.
So business is shrinking, and the quality of the remaining customers is falling at the same time as costly regulation arrives.
Inflation can make some purchases logical
Ironically, inflation is one of the best things for canny customers to use as a tool to use BNPL to their own advantage.
If you can buy an item now and pay it back over four payments and the value or cost of that item is rising fast, that is a really good idea for the customer.
The only problem is that it is a little difficult to use BNPL for buying the essentials of life – gift cards anyone? – with essentials having been the things rising in price, rather than consumer goods which BNPL is designed around.
It is not all doom and gloom though, even in the roosters to feather dusters BNPL space.
Eventually, the strongest BNPL players will consolidate, survive and live to fight another day but it will be a long time before BNPL is once again a “hot sector” in the market.