Despite the sharemarket bloodbath, buy now, pay later is here to stay

Shares in Zip have plunged 93 per cent in the past year, while Afterpay’s owner, US fintech giant Block, has plunged more than 70 per cent.

With share price falls like that, it might be tempting to think the very concept of buy now, pay later is in deep strife.

But at this point, it’s important to distinguish between the market values of these stocks, and the usefulness of their product.

Plenty of evidence would suggest that lots of people – particularly younger shoppers – find it helpful to divide their payments up into four instalments, rather than risk paying high interest on a credit card. That trend doesn’t look like changing anytime soon.

Latest estimates from the industry suggest there are about 5.9 million active BNPL accounts in Australia, and on average, they’re used for small purchases of about $150.

Compared with the total value of lending or payments, it’s still a small industry. The Reserve Bank’s latest estimates, published last year, were that less than 1 per cent of consumer transactions were paid for with BNPL.

There is a big caveat, however. If a bank can allow you to “pay in four”, does BNPL deserve to be its own industry worth many billions of dollars?

Even so, seriously big players have decided “pay-in-four” is popular enough for them to move in: the Commonwealth Bank, National Australia Bank, Citi, 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 these products are now widespread enough to justify some form of regulation.

None of that suggests to me that BNPL as a way of paying for things is about to go the way of the cheque – just that the industry is getting a lot more competitive.

There is a big caveat, however. If a bank can allow you to “pay in four”, does BNPL deserve to be its own industry worth many billions of dollars?

UBS analyst Tom Beadle, who stood out for the low valuations he put on BNPL stocks during last year’s boom, says BNPL as a payment method is likely to continue in some form because people find it convenient. But he views it as just another financial product.

“It’s probably here to stay as part of a broader product offering or as part of a larger organisation, rather than a standalone business,” Beadle says.

Payments analyst Grant Halverson, a longtime BNPL sceptic, believes the sharemarket valuations put 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 lending product,” he says.

The more optimistic view is that BNPL firms can still add value because they do more than just lend money – they have networks that connect millions of customers with huge numbers of merchants.

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By sifting through the vast amount of data they have on customers’ spending habits, BNPL firms can use that information to help retailers with their marketing, such as by targeting potential buyers with special deals.

That is something quite different to what banks do, though CBA is giving it a shot through its own BNPL product, its investments in online retail, and its wider attempts keep customers in its digital “ecosystem.”

In a sense, CBA’s keen involvement in BNPL shows how the sector has become a victim of its own popularity. Deep-pocketed giants are trying to mimic upstarts such as Afterpay, and win over crucial younger customers.

For investors, that’s a sign of the tough fight facing the likes of Zip and Afterpay, which helps explain the dramatic share price falls. But it’s also a reason why consumers will be able to continue to “pay in four,” whatever happens to this divisive sector of the sharemarket.

Ross Gittins is on leave.

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