Regulators announce plans to crack down on BNPL giants, threatening their path to profits

Monday, September 19, 2022 by Robinhood Snacks |
A case of the BNPL blues (Daniel Harvey Gonzalez/Getty Images)

A case of the BNPL blues (Daniel Harvey Gonzalez/Getty Images)

“Buy now” is the easy part… It’s the “pay later” that gets tricky. Buy now, pay later companies help you sport that $400 Aritzia coat now and pay for it later in monthly installments. BNPLs gained popularity by positioning themselves as trendier credit-card alternatives for Gen Z — with fewer strings attached (think: no interest, just late fees). Now they’re facing serious heat, and they can’t deal with it later:

  • Regulated: Last week the Consumer Financial Protection Bureau outlined plans to regulate BNPL businesses like Klarna, Affirm, PayPal, and Block-owned Afterpay.
  • Risky business: Regulators said BNPLs pose risks to consumers because they lack protections, harvest data, and encourage over-borrowing.
  • Credit rules: Officials plan to regulate BNPLs like credit-card companies, which means BNPLs may have to add pricey safeguards and do more credit checks.

Boom earlier, crash later… BNPL giants thrived during the pandemic when interest rates were low and stimmy cash was flowing. BNPL loans jumped from $2B in 2019 to $24B last year (a 12X increase). But as the economy soured and IOUs increased, so did BNPL’s blues:

  • Gucci to grapes: Mid-pandemic, stimmy-flushed shoppers used BNPL for luxuries like Balenciaga bags. Now 15% of BNPL users are “buying now, paying later” for gas and groceries.
  • Missed payments: ’Flation-stressed folks are increasingly struggling to pay for necessities up front, and more BNPL users are racking up late fees — and failing to repay their loans.

Pain now can mean gains later… BNPL’s looser-than-credit rules helped attract users. But now its lax policies are hurting the bottom line: despite soaring revenues, Affirm’s still unprofitable and Klarna’s losses tripled in the first half as bad debts mounted. Affirm shares are down 75% this year, while Klarna’s valuation dropped 85% in July. Now that BNPL staples face stricter rules (read: higher costs), it may be even more difficult for them to reach profitability short term. But regulation could help them reduce bad debt long term.