The challenged buy now pay later sector has been on the ropes for all of 2022 and much of last year and the bad news keeps coming. Perm any two or three from a mix of rising interest rates, reduced consumer spending, inflationary pressure, soaring bad debts and worsening credit conditions and it is easy to see why BNPL sector share prices have nosedived.

Now one can add into the mix overdue regulatory headwinds. On this point at least, not even the most gullible of the BNPL evangelists can deny that regulatory action has not been forecast.

UK government acts, others will follow

According to the UK finance ministry, millions of people will be protected through strengthening regulation of interest-free buy-now pay-later credit agreements. Specifically, plans announced today include:

  • Lenders will be required to ensure loans are affordable and rules will be amended to ensure advertisements are fair, clear and not misleading, and
  • Government will expand rules to cover other forms of unsecured short-term credit that pose similar risks to consumers, such as those used for dentistry work, and
  • Lenders offering the product will need to be approved by the Financial Conduct Authority (FCA), and borrowers will also be able to take a complaint to the Financial Ombudsman Service (FOS).

UK finance minister John Glen says: “Buy-Now Pay-Later can be a helpful way to manage your finances but we need to ensure that people can embrace new products and services with the appropriate protections in place. By holding Buy-Now Pay-Later to the high standards we expect of other loans and forms of credit, we are protecting consumers and fostering the safe growth of this innovative market in the UK.”

The UK government will publish a consultation on draft legislation toward the end of this year. Following this, the government aims to lay secondary legislation by mid-2023, after which the FCA will consult on its rules for the sector.

New Zealand eyes up regulatory push

In New Zealand, there is evidence of a rise in BNPL bad debts, ramping up pressure on the government to incorporate BNPL under the county’s responsible lending legislation. Around 8% of BNPL loans in the country are in arrears. BNPL providers Afterpay, Humm, Laybuy and Zip are all active in New Zealand. Currently, there is no legal requirement in New Zealand for BNPL providers to ensure that their lending is suitable and affordable and there is no obligation to carry out credit checks. That is set to change and arguably is long overdue.

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New Australian government to bring BNPL under credit laws

In Australia, the newly elected Albanese government will press on with plans to regulate the BNPL sector. To date, the BNPL providers have argued that regulation was unnecessary, as the firms had put in place an industry code of conduct. The BNPL providers have not helped themselves by trying to argue that the BNPL product is not technically a form of credit. Quite why they believed that argument would stand the test of time, only they can say.

BNPL transaction volumes hit $120bn: GlobalData

Buy now pay later transaction volumes have been rising sharply, albeit from a low base. For example, transaction volumes hitting $120bn in 2021 up from $33bn in 2019, according to GlobalData. The BNPL sector has been boosted by the era of low interest rates and cheap money. Moreover, the pandemic provided BNPL with a major boost as e-commerce activity soared. At the same time, the market has become hopelessly congested. There are now around 100 BNPL providers around the world with few, if any, close to profitability. And market conditions are deteriorating and moving in the wrong direction.

Interest rate, credit challenges

As BNPL providers typically do not have access to deposits to fund lending, they are vulnerable to a rise in benchmark floating rates such as the London interbank offer rate (LIBOR). And so as floating borrowing rates rise in line with cash rates, so does the cost for BNPL providers to fund their loan books. Accordingly, the rise and rise in BNPL transaction activity has not resulted in a boost to BNPL profitability as margins are contracting due to a rise in fixed costs. One can then chick into the mix a tightening of credit and bond markets for corporate borrowers. The rise in BNPL bad debts as the economy worsens means that BNPL lenders will have to issue more bonds in the future to fund their growing loan books.

BNPL issuers share prices nosedive

In a word: carnage. Unlike the heady days of 2019-2020 when BNPL share prices soared to ridiculous and unjustifiable levels, the market is now a sea of red.

Take Laybuy for example. As recently as September 2020, Laybuy’s IPO raised A$80m ($55.60) in a transaction giving the New Zealand BNPL provider a market cap of A$246m. Fast forward to June 2022 and Laybuy is seeking fresh investment. Laybuy’s expenses are rising as sharply as its revenue as a result of a rise in impairment expenses. Specifically, expenses rose by 43% to over A$92m in the most recent fiscal while revenue rose by 45% to just over $47m.

Laybuy: share price collapses from peak of A$2.05 to A$0.05

At a current share price of A$0.05, down from a peak of a shade over A$2.00, Laybuy’s current market cap is only around A$12m.

Gary Rohloff, co-founder and MD of Laybuy responds positively to the UK government proposals. He says:

“We have always been in favour of a proportionate model of regulation, one that reflects the low risk of BNPL, supports small e-commerce businesses and sets high standards across the industry.

“Since we started Laybuy, we have always set out to be the most responsible BNPL lender. That means working with credit reference agencies and conducting creditworthiness checks on all our customers. It’s a real endorsement of our model that the Government agrees that this should be taken forward across the industry. Naturally, we need to have a look at the consultation response in full, but we’re supportive of the Government’s approach and we look forward to working closely with the FCA on the next steps.”

Given the firm’s most recent results, Laybuy has a number of challenges other than the new regulatory climate.

Laybuy’s challenges are mirrored at other players. Take Splitit for example. The Splitit model isn’t designed for smaller purchases and for younger shoppers with little to no credit history. Specifically, it targets a more established shopper with a stronger credit history and gives them a way to pay over time using the credit they already earned. It also appointed an industry heavyweight as CEO in the first quarter, Nandan Sheth, but its share price is also a car crash.

Splitit: share price of A$0.16 down by 91% since August 2020 peak

The current Splitit share price of A$0.16 is down a whopping 91% since it peaked at A$1.83 in late August 2020.

At the time of its December 2019 IPO, Openpay sought to differentiate itself from BNPL peers such as Afterpay and Zip by stressing its focus on higher value transactions. For example, Openpay targets transactions in the A$50 to A$20,000 range in instalment repayments ranging from two to 24 months. The Openpay IPO raised A$50m and at an opening share price of A$1.60; the share price peaked at A$4.70 in August 2020.

Openpay share price: -87% since December 2019 IPO

Since then, Openpay has exited the UK market and its share price of A$0.20 is down by 87% since its IPO. Indeed, across the Australian listed BNPL sector, Grant Halverson, MD of consultancy McLean Roche, tells RBI that total market capitalisation of the ASXlisted players has collapsed from about A$46bn in April 2021 to about A$6bn now.

Block: share price down by 75% since agreeing to buy Afterpay

The combination of increased regulation, a grossly saturated market, rising interest rates and inflation and a lack of profitability within the sector, all ought to combine to accelerate M&A activity and much needed consolidation. On the other hand, lessons need to be learned regarding valuations. The shareholders of Afterpay did well to persuade Square (Block) to pay as much as $29bn for the firm. Square made its intentions to acquire Afterpay known in August 2021. Since then, the Block share piece has declined by around 75% from $260 to around $60. Then there is the Zip acquisition of Sezzle. Around the time Zip announced the acquisition of Sezzle, its latest half-year financials to December 2021 were released, with the company reporting a loss of A$214.3m.

Zip: share price down by 95% since February 2021 peak

Between early September 2021 and early March 2022, Zip’s stock price on the ASX fell by over 75% from A$7.03 to around A$1.60. The current Zip share price of A$0.52 represents a fall of 95% since the share price peaked at A$12.35 in February 2021. The Zip/Sezzle deal was relatively straightforward however compared with the six months saga of the proposed Latitude/Humm deal.

In the end, Latitude may be regarded as having had a lucky escape. Back in January, Latitude agreed to acquire Humm’s consumer finance unit comprising credit cards and BNPL for A$35m in cash and Latitude shares worth around A$300m.

Humm’s consumer business in New Zealand and Australia comprises around 2.6 million customers, 60,000 merchant relationships and net receivables worth A$1.8bn. Cue the usual soundbites about the potential for significant synergies and enhanced shareholder value. Moreover, it was argued that Humm’s strength in big and small ticket BNPL and its merchant base would offer additional scale to Latitude at minimal marginal cost.

Latitude/Humm saga ends with no deal

Post-acquisition, the combined business would comprise A$8bn of gross receivables, A$9.5bn of transaction volume and more than five million customers. Latitude talked optimistically of a potential A$55m of annual synergies from funding benefits and technology rationalisation, Latitude even forecast A$90m of pre-tax cash earnings for the full year 2023.

By the time the deal was cancelled, the total value of the proposed transaction had dropped to A$250m. The Latitude share price is down by 34% for the year to date. On 17 June, the parties confirmed the deal was off-the Humm share price promptly dropped by over 10%. For the year to date, Humm’s share price is down by around 50% from A$0.92 to A$0.46.

NAB joins CBA and ANZ to target BNPL sector, Apple readies BNPL plans

The BNPL sector has two other serious challenges on its hands from the growing number of incumbent banks launching their own BNPL products. And then there is the threat posed by Apple.

In Australia, NAB is the third of the big four local banks, joining CBA and ANZ to launch BNPL products.

The NAB BNPL product launches in July and uses the existing Visa credit card system. That means that NAB does not incur the time and expense of signing up merchants. NAB will

not charge interest, late fees or an account fee. Moreover, NAB has deep pockets and can stomach the rise in funding costs that are impacting the smaller and unprofitable standalone BNPL outfits. As for deep pockets-they do not come much deeper than Apple.

Apple will launch its own BNPL offering with Apple taking risk management and credit assessments in-house. In March, Apple acquired UK start-up Credit Kudos, a deal that signalled its consumer finance ambitions.