It seemed like a good idea at the time, but if you look at valuations for Aussie Buy Now, Pay Later (BNPL) stocks, you will find that you can buy one share of each remaining company for about the price of coffee at Starbucks. While the coffee might get your blood flowing with 180 milligrams of caffeine, the stocks may be worth even less tomorrow.
Back in 2019, we wrote about the emergence of Buy Now, Pay Later in Australia. It seemed like a good idea, but we questioned the model’s sustainability, and the unlikeliness BNPL could displace more than half a century of significant payment network technology at American Express, Discover, Mastercard, and Visa. So, stick to your knitting, we advised financial institutions. Hone your strategies, and do not let the fintechs scare you.
That is not to say that BNPL is a bad thing. On the contrary, we think it is a great concept. However, you cannot lend money without regard to credit quality, and you can’t build a business with promises of free interest and no interchange. In credit, interest pays for operations and the funding cost; interchange pays banks to bear the risk of transactions and invest in new customer acquisitions.
BNPL revitalizes an age-old concept of merchant-based credit. Synchrony provided the service back in the old days when General Electric Credit Corporation financed refrigerators and Household Finance loaned on Singer sewing machines. But with a Pay-in-Four model, BNPL lenders hit a chord. Bankers learned that some people prefer installment payments, that merchants are the key to success at the point of sale, and that it does make sense to rethink some credit standards to broaden the underwriting gate.
The BNPL movement was enough to spark Mastercard to develop Mastercard Installments and for Visa to launch Visa Installments. American Express dusted off its old extended payment plan used on the classic Green Card and modernized it with Plan It, and some major financial institutions built their versions. And, do not forget top payment processors, where you find solutions by FIS Global, Fiserv, and TSYS. If you ask Worldpay, you will find that their 2021 Global Payment Report estimates that “BNPL accounted for 2.1% of global e-commerce in 2021,” which will “double by 2024.” Mercator expects to see over $100 billion in U.S. sales by 2024.
So, back to where we came in on BNPL: The Aussie stocks.
We started with a field of 12 Australian BNPL Firms. The first on our list was Afterpay. However, we dropped them from our tracking since Square (Now, Block) finished its acquisition on January 31, 2022. And, what a deal that was at AUD 39 Billion. Startup Daily reported: “In its letter to shareholders, Block said they believe January’s acquisition of Afterpay will strengthen the company’s strategic priorities for Square and Cash App “by strengthening the connections between our ecosystems” for financial products and services for consumers and merchants.
The Zip/Sezzle merger remains an open item, so we keep them both in our tracking model since the deal is not expected to close until 3Q2022. With 11 remaining companies on our list, stocks totaling AUD 28.44 in late April 2021 are now at AUD 6.21. That is $4.53 in USD or about the price of a Starbucks coffee with a few frills.
Figure 1: Australian BNPL lender performance continues to slip.
Source: Australian Stock Exchange, Mercator Advisory Group
If you are looking for Klarna, they are not in our tracking. Remember, their base is in Stockholm, almost 10,000 miles from Sydney. But if you read the American Banker on March 1, 2022, you will find see: “Klarna revealed in its recent full-year report that its credit losses last year jumped about 500% to $737 million from $147 million in 2020. Klarna attributed the higher losses to risks from first-time buyers, noting that the company’s overall credit loss rate for returning customers has declined since 2019.”
Mercator Advisory Group does not offer advice on stocks, but I stick with the Grande for the coffee.