Twelve BNPL lenders listed on the Australian Stock Exchange fell from $147.7 to $111.1 per share between April 28, 2021, and May 24, 2021. BNPL lenders lost $8.8 billion in market capitalization during the same period, falling from $37.6 billion to $28.8 billion. Mercator suspects this fall is due to rising BNPL uncollected debt and missed payments by consumers.

Mercator’s recent Buy Now Pay Later (BNPL) report illustrates some of the market weaknesses for BNPL, the new darling of financial services. Loose credit policies surrounding loan approvals, which seem to lack good judgment, create business losses beyond what regulated financial institutions should find acceptable. While once thought as a low cost loan alternative, the BNPL pricing model does not deliver a cheaper alternative for merchants or consumers.

However, BNPL has several takeaways for traditional lenders.

Do not forget the importance of servicing the merchant, which is how the BNPL gained scale.
Consider testing the lending function with less bank-grade customers. Do not open the flood gates, but as the economy recovers, there may be pockets of opportunities with previously rejected segments. But stand your ground on credit quality!
Protect the balance sheet. Some testing is appropriate, but remember banks remain safe in part because their lending policies are sound.
One more item: What goes up must come down.

As the financial industry scrambled to acquire BNPL fintech lenders and invest rapidly, Mercator’s position from day one has been to “Hone your strategies and Do Not Let the Fintechs Scare You.” In essence, do not approve every customer that wants a loan. Not every person is qualified to borrow, and it takes as much to administer a $100 debt as it does to manage a $5,000 loan (or, it should).

Now comes the piper:

Thirty days after our update on the market capitalization of 12 Australian BNPL lenders, we find that the market capitalization of the 12 firms was once $36.6 billion (as of April 28, 2021). As of May 24, 2021, the market capitalization slid $8.7 billion, or 23.7%.

Only one company in the field of 12 gained value. As shown in the table below, the Humm Group moved from AUD 0.93 to AUD 1.00, after a recently released income statement that showed a 30% increase in operating income. Keep in mind that with a conversion value of 1 AUD to .77 USD, that means USD 0.77 in value for the stock.

Source: Australian Stock Exchange, BNPL Sites, Mercator Advisory Group Research

Our original thought stands. Look at BNPL to see why it gained traction so quickly, with an exciting new option, but it is no more than a retail sales finance process, with looser lending standards.

Bankers, stick to your lending standards and maintain credit quality.