Shares of Zip have plunged 93% in the past year, while Afterpay’s owner, US fintech giant Block, has plunged more than 70%.
Competition from banks and tech giants is one of the reasons BNPL’s valuations have plunged.Credit:Matt Davidson
With such a drop in the stock price, it might be tempting to think that the very concept of buy now, pay later is in deep conflict.
But at this point, it is important to distinguish between the market values of these stocks and the usefulness of their proceeds.
There’s plenty of evidence to suggest that many people – especially younger shoppers – find it helpful to split their payments into four installments, rather than risk paying high interest on a credit card. This trend doesn’t seem to be changing any time soon.
The latest industry estimates suggest there are around 5.9 million active BNPL accounts in Australia, and on average they are used for small purchases of around $150.
Relative to the total value of loans or payments, it’s still a small industry. The latest Reserve Bank estimates, released last year, indicated that less than 1% of consumer transactions were paid with BNPL.
There is, however, a big caveat. If a bank can let you pay in four, does BNPL deserve to be its own multi-billion dollar industry?
Even so, the serious big players decided that the “four-way payment” was popular enough to move in: the Commonwealth Bank, National Bank of Australia, Town, Apple and PayPal have all launched or announced plans for their own BNPL product in the last year or so.
Likewise, regulators and politicians have decided that these products are now widespread enough to warrant some form of regulation.
None of this suggests to me that BNPL as a means of payment is about to go the way of the check – just that the industry is getting much more competitive.
There is, however, a big caveat. If a bank can let you pay in four, does BNPL deserve to be its own multi-billion dollar industry?
UBS analyst Tom Beadle, who stood out for the low valuations he attributed to BNPL shares during last year’s boom, said BNPL as a mode of payment should continue in some form. or another because people find it convenient. But he considers it as a simple financial product among others.
“It’s probably there to stay as part of a larger product offering or as part of a larger organization, rather than a standalone business,” Beadle says.
Payments analyst Grant Halverson, a longtime BNPL skeptic, believes the market valuations imposed on BNPL specialists were a “massive bubble”, but the product itself will survive. “It will be a feature, but it’s not a separate industry. It’s not an innovation, it’s just another loan product,” he says.
The most optimistic view is that BNPL companies box always add value because they do more than just lend money – they have networks that connect millions of customers to a large number of merchants.
By sifting through the vast amount of data they have on customer spending habits, BNPL companies can use this information to help retailers with their marketing, for example by targeting potential shoppers with special offers.
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This is something very different from what banks do, although CBA is giving it a boost through its own BNPL product, its investments in online retail and its broader attempts to keep customers in its digital “ecosystem”.
In a sense, CBA’s active involvement in BNPL shows how the sector has become a victim of its own popularity. Deep-pocketed giants are trying to emulate upstarts like Afterpay and win over younger customers.
For investors, this is a sign of the tug of war that Zip and Afterpay face, which explains the dramatic drop in the share price. But it is also a reason why consumers will be able to continue to pay in four, whatever happens to this dividing sector of the stock market.
Ross Gittins is on leave.
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