(Reuters) – While browsing online during the lockdown, Jessica Friend spotted a pair of Ray-Ban sunglasses she liked, but the price made the 30-year-old Ohio resident think twice .
What persuaded her to click “ buy, ” Friend said, was the short-term credit offered by Afterpay. APT.AX, which divided the $ 260 payment into four interest-free installments.
Afterpay is one of a handful of alternative credit companies that offer small loans, mostly to online shoppers, and make their money by charging merchants a 4% -6% commission.
These BNPL (Buy-now-pay-later) companies have benefited from a shift to online shopping during the coronavirus crisis in countries like the United States, where state aid has also boosted retail sales.
“I’m more inclined to use them because they make it easier for me to make it possible for me to get the things I want at the same time … and when I want to splurge for something,” Friend said of loans. .
Some investors are now betting that shoppers will stay away from stores as coronavirus cases rise again in several countries around the world, boosting business for BNPL companies.
But increasing the number of subscribers can also increase bad debts, mainly among new users who are more likely to default.
And as job losses increase and government assistance declines, the economic model will face its first real test in a recession.
“Much still depends on any second wave of the virus and on government means to continue to stimulate demand,” said Andrew Mitchell of Ophir Asset Management, which owns shares in Melbourne-based Afterpay, whose market value has risen. to $ 12.55 billion from over $ 100 million four years ago.
While the shift to online shopping was underway before the pandemic, the shift accelerated under the lockdown and Afterpay recruited more than one million new active U.S. customers between March and early May, bringing its overall base to 9. millions.
Meanwhile, retailers desperate to haul goods have also become more receptive to partnerships with BNPL companies, which, unlike credit cards or mortgages, grant loans instantly.
Klarna, Europe’s largest fintech start-up, said since March inquiries from retailers wanting to partner with it have jumped 20% on average globally.
With 7.9 million subscribers in the United States, Swedish Klarna has since recruited outdoor equipment maker The North Face, Disney’s DIS.N streaming service and cosmetics retailer Sephora.
Most of the growth has been in higher margin discretionary spending categories such as fashion and fitness items, said Puneet Dikshit, a McKinsey partner in New York City, who expects the sector to expect. generates volumes of $ 7 billion to $ 8 billion this year in the United States. , growing by more than 150% per year.
(GRAPHIC: Lockdown Bump – Weekly US Ecommerce Sales Rise,)
(For an interactive version, click here)
Although fears of credit losses sparked a sector sell-off in March, the entry of large tech investors and rising subscribers have since supported a strong rally, with stocks now reaching record highs.
(GRAPHIC: Buy now, pay companies later on a tear,)
‘TURN OFF TAPS’
The pandemic has forced most businesses to tighten their risk parameters, which they believe could drive loan rejection rates up, although Afterpay, Klarna, Zip Z1P.AX and Sezzle SZL.AX declined to provide specific figures.
“BNPL operators can turn off the taps and slow growth quickly if repayment risks increase,” Mitchell said.
While Afterpay, with bad debts totaling 1% of its loan portfolio in March, changed its requirements so that customers must pay off a quarter of their loan in advance, co-founder Nick Molnar said rates of rejection were roughly in line with the start of the year.
Molnar said the overwhelming majority of Afterpay customers, with an average transaction value of A $ 150, repay on time, while loans on new purchases are denied to those who don’t.
While some brokerages expect Afterpay to make a profit by 2022, the rising costs of financing the expansion and the credit losses that eat away at receivables will likely mean that BNPLs, which operate with low margins, will remain unprofitable for some time.
Klarna saw its credit losses more than double in the first three months of the year to reach around 0.7% of underlying sales as it expanded in Europe and the United States, where regulation of the sector is almost non-existent.
Only California said BNPL companies needed a license and fined some of them for lending without a license.
In Australia, where the sector first took off thanks to easy funding, the corporate regulator is set to publish a follow-up report this year on one it released in 2018, raising concerns on user overrun and calls for BNPL to be regulated in line with other credit services.
Businesses, investors and analysts agree that young people with stimulus money in their wallets are boosting sales and that the BNPL buyers Reuters spoke to were all under 35 and buying household items, as well as skin care products and clothing.
“The vast majority of our clients have incomes below $ 75,000, so I would say the majority probably have a stimulus check,” said Charlie Youakim, CEO of Sezzle, one of the smaller companies.
Young people are harder to assess because they don’t have a credit history, which means most companies use algorithms to run real-time eligibility checks and assess default risk.
“Our internal engine assesses risk taking into account various parameters which will also include consumers’ payment history, what is purchased and is combined with various third party data sources and authentication solutions,” the spokesperson said. by Klarna, Aoife Houlihan.
Sydney-based Zip, with bad debts of just over 2% of receivables, said it assesses public information and buyers’ credit scores.
About one in 100 customers are late on their payments each month, spokesman Matthew Abbott said, adding that Zip recently tightened eligibility rules, resulting in higher rejection rates.