BNPL Data Show Concerns Over ‘Massive’ Delinquencies May be Misguided

The buy now, pay later (BNPL) space is headed off a cliff.

Or maybe not.

A wave of late  payments, a rising tide of delinquencies will sink the sector.

Or maybe not.

Much has been made in recent weeks about the economics of BNPL, about a rapidly shifting landscape where missed payments are on the rise, where credit reporting agencies such as Equifax will be including data tied to those plans (and how/if they are being repaid).

Read also: Equifax to Include BNPL Plans in Credit Reports

And, as had been reported last month, the Consumer Financial Protection Bureau (CFPB) has opened a probe into BNPL to better understand the risks and benefits of that financial option. Companies including Affirm, Afterpay, Klarna, PayPal and Zip have until March of this year to submit information related to consumer shopping behavior, fees, loan performance, user demographics, data collection and other elements of their business models. The companies have until March 1, 2022 to send the information to the CFPB.

See: CFPB Probes Big Five Buy Now, Pay Later Providers Over Data Use, Debt Accumulation

CFPB Director Rohit Chopra said at the time the probe was announced that “Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too.”

As for the warning signs that at least some observers point to when cautioning that the economics of the sector are less than optimal:

Credit Karma, during the third quarter of last year, said that 44% of people surveyed have used BNPL; of that tally, 34% said they had fallen behind on at least one payment. Of that 34%, 72% said that they believed that, in tandem with the missed payments, their credit scores had taken a hit.

Those stats, and those headline numbers, seem to imply that a dual-edged sword looms: Consumers are taking on debt that they cannot afford. And on the other side of the equation, the BNPL companies are embracing business models that make little economic sense. On this latter point, indeed, extending credit where consumers promptly start missing payments — in a snowball effect that moves quickly from delinquency to default — seems suspect.

We’re just about to start earnings season, again, which will give us some glimpse into how BNPL firms fared over the holiday season. But looking at the most recent data reported, we see that that delinquencies thus far seem manageable. (We note that it also seems to stand contrary to reason that businesses would embrace a model where, say, 40% of customers simply stop paying — and where advanced risk/underwriting models simply don’t capture that pitfall.)

Afterpay, for example, in its most recent report, which covers the fiscal year that ended in June 2021, shows that through the year that ended in June 2021, receivables impairment expenses stood at $194 million, which represents a jump from the from $94 million that had been seen in the previous year. And digging a bit deeper, the company also noted that gross losses represented 0.9% of underlying sales. The company noted that during the most recent year, gross loss remained consistent with the prior period, “a strong result given increased underlying sales contribution from the newer Clearpay and North American regions which, due to their earlier growth phase, have initially higher losses relative to the more mature APAC region.”

The company noted in its report that its “proprietary risk management techniques and high proportion of returning customers (who are lower risk), has ensured gross loss as a percentage of underlying sales remained flat during a period in which 6 million new customers joined the platform and underlying sales increased by 90%.” Provisions for expected credit losses tied to consumer receivables stood at $99.6 million (on a total receivables portfolio of $1.4 billion), up from just under $34 million.

Separately, for Affirm, as detailed in its latest quarterly filing, for the period that ended in September, non-delinquent loans represent 94.7% of total receivables, versus about 96% in the June quarter. In the most recent period, each of the past due “segments” have increased, where loans that were four to 29 days past due have crept up from $43 million to $60 million quarter and quarter, and on the other end of the spectrum, loans that were 90 to 119 days past due rose to $13.8 million in September from $6.8 million in June.

These data points show that as loan books grow, and revenues surge, there’s a to-be-expected concurrent growth in consumers who may fall late on payments, or may be moving past the “term” of the loan schedule, with attendant fees.  But they do not show evidence — at least now — of a tsunami of unrecoverable losses, and a consumer drowning in debt. Time will tell, of course, whether things shift, and the next few weeks will shed light on BNPL’s fortunes.