1 June 2022
By Roger Kennedy
MasterCard Installations, Apple Pay Later, Monzo Flex: these are just a few of the BNPL brands that will be operational in 2022, and as can be seen from their names, even the biggest corporations in the industry are now interested in this business model. BNPL is a model that can be used even in niche sectors such as online casino Canada real money, and its popularity is increasing. But while it is undisputed that the industry is growing, there are still doubts about whether this is a profitable business model. In this article, we will take a look at the BNPL model and evaluate whether it is indeed effective. But let’s start with the basics first.
What is BNPL?
This is the abbreviation of “buy now, pay later”. In its simplest form, it means online purchases that are paid in instalments. PayPal Credit, Klarna, FuturePay and Afterpay are the most common BNPL brands at the moment, but as we mentioned above, much bigger names are expected to enter the industry in the near future. When you buy something from a site that uses the BNPL payment model, you are given a choice: pay in weekly, bi-weekly or monthly instalments.
For example, let’s say you buy an item worth 100 CAD: You can pay 25 CAD immediately and the remaining amount in three instalments of 25 CAD within three weeks. Usually (depending on the BNPL provider you use) no interest is required, especially if the purchase price is low. However, if you are late in making one of the payments, you have to pay very heavy interest and late fees. BNPL payments do not require a credit check, and for the same reason, paying on time does not affect your credit score. However, late payments are sent to debt collectors, which can seriously damage your credit score.
Is This an Effective Business Model?
At first glance, the data is not very positive: BNPL business models have emerged predominantly in Australia, as there are 15 BNPL companies in this country alone. Between November 2020 and November 2021, these companies lost an average of 36% of their share value. Although some reports claim that this depreciation is 80%, this figure is only the difference between the peak values (maximum and minimum). According to ASIC (Australian Securities & Investments Commission) data:
- The number of BNPL transactions increased by 43% between 2019 and 2020.
- Only two BNPL companies managed to make a profit in the 2020-2021 financial year.
- Afterpay’s revenue rose 78%, but its losses amounted to $159.4 million (up from $22.9 million a year ago).
- Zip Co’s sales were more than doubled, but its losses amounted to $653 million (up from $19.94 million the previous year).
Some analysts are already describing the BNPL business model as a “bubble”. Almost everyone trying to get into this industry makes it seem like there is still a cake to share, but that may not be true – maybe, we’re looking at a big bubble.
Financial Services CEO Grant Halverson considers the BNPL business model unsustainable. The biggest reason for this is that BNPL providers make 4.56 CAD from every 100 CAD sale (including late fees). However, the same provider has to allocate 1 CAD for credit losses, 16 cents for funding, 34 cents for share purchases, and 3.25 CAD for marketing & operations, which makes a total of 4.75 CAD. This shows that BNPL companies actually lose 19 cents for every 100 CAD sale. This business model is already built on the high volume – low margin principle, and even very small differences between the revenues and expenses can result in the bankruptcy of the entire operation.
That’s not all: BNPL companies are not regulated almost anywhere in the world. As a general rule, every company that gives loans to people (whether a bank or not) must be audited by the official organization that regulates the financial institutions in the country in which it is located. (For example, for Australia, this organization is ASIC.) However, in almost every country, if the loan term is below a certain limit (i.e., the loan must be repaid in less than 60 days), the company giving the loan is exempted from an audition. In other words, it is not possible to say that BNPL companies are truly audited by the government.
Some reports estimate that BNPL companies could reach 20-30% profit rates in 2026-2027 at the earliest, but this assumption is entirely based on late fees. These companies have to rely on late fees to make a profit. So, for example, if everyone pays on time, they can’t make any profit. In reality, of course, there will always be late payments, but how much they can be collected will directly affect the profit of the company. Moreover, the fact that the entire profit model is built on late fee collection will inevitably lead to a negative reputation – such a reputation is the last thing some brands like Apple, for example, may want. Therefore, to tell the truth, the future of the BNPL business model does not look very bright, and even if it is, the fact that it works with very low-profit margins does not change.