Australian Buy-Now-Pay-Later (BNPL) companies capitalised on immense investment into this FinTech sub-sector in 2020 and 2021, reaching meteoric valuations, piggybacking off the craze and hype of a product set to disrupt the traditional credit-card market. Since their peaks, shares prices have nosedived more than 90% for once-promising unicorns such as Zip, Sezzle and Openpay. So what caused this crazy crash?

It turns out the answer lies within regulation fears through credit checks and the inability of
BNPL companies to turn out a profit.

No credit checks?

BNPL firms such as Afterpay offer everyday people like you and I with access of up to $2000 after simply getting your personal and banking details. From there, there still isn’t a credit check, Afterpay allows you to borrow more and more as you start paying your bills on time. This feature is great for us consumers as it is much simpler, more accessible and enables us to save on fees charged by credit cards. There are also generous cashback offers available for purchases made through BNPL platforms which rewards shoppers.

This behaviour of BNPL firms has been described as “predatory” by parts of the market as there simply isn’t much protection from financial over-commitment. As a result, investors have been speculating of increasing regulation from the Australian Securities Investment Commission (ASIC) in future. Just recently, a report from SmartCompany explored how an 18 year old on Youth Allowance payments accrued $8000 in debt repayments across various BNPL platforms.

With regular banks subject to regulation, they don’t simply throw credit at those incapable of repaying – ASIC enforces these laws on banks to put the customer first but this doesn’t seem to be the case with BNPL firms. Through a narrow loophole in Australia’s credit laws, BNPL firms bypass these essential protections in place for consumers which is what investors believe will be regulated by ASIC in future – the final nail in the coffin.

The competition

With a new BNPL service available every other day, there are fewer points of differentiation amongst the crowd. With Afterpay as the dominant player in the market, with Zip as an established second place, the other BNPL platforms have similar business models and product offerings to these two firms. As such, margins have shrunk as growth has slowed, creating rounds of redundancy for staff.

Typically, legacy credit institutions such as banks and other lenders charge interest to borrowers to make money. However, these BNPL firms have disrupted traditional credit card markets by not charging interest, but rather charging merchants a small fee and late payment fees from consumers.

In the height of the craze of BNPL in the 2020-21 financial year, only 2 ASX listed companies: Credit Intelligence and Humm Group made a profit, despite the aggressive expansion plans from the likes of Afterpay and Zip.

Outlook

By having an increasing reliance on customers having financial issues to generate revenue and use their product, BNPL firms have been under the spotlight, being accused for predatory intentions. Moving into 2022, with increasing interest rates forecast for the short term, it is clear that banks and credit card companies will raise their rates, making BNPL services more appealing. We will likely see a further consolidation in this sector, as those companies with a diversified revenue stream and solid margins will survive, and continue to disrupt an almost 50 year old industry.