Buy now, pay later sector suffers a loss of confidence

Investor’s confidence in the buy now, pay later sector has taken a massive hit as Nasdaq-list Affirm halted an important bond sale last Friday. This was a result of an investor backing out due to the growing levels of credit rate volatility.

Affirm share prices have taken a hit in response to Bloomberg’s report but have steadily recovered throughout the week, however, they are still down nearly 80% since November 2021.

Australian-listed rivals and potential merger candidates, Zip Co and Sezzle, have also hit a multi-year low this week. Both dropped around 75% in value within the last 12 months.

The alarming total of bad debts accumulated by these companies is fueling the argument that the companies are more akin to sub-prime leaders rather than fintech platforms.

Data from the first half of Zip’s 2022 financial year shows net bad debts of $148.3 million USD has reached 2.6% of its total transaction volume. Which equates to 9.7% of its closing receivables owed by customers on an annualised basis.

Affirm’s public balance sheet shows its allowance for credit losses of $158.3 million USD grew to 6.5% of loans helped for investments at $2.4 billion USD as of December 31st. This is an increase compared to the 5.8% reported as of June 30 last year.

The level of bad debts is currently drawing parallels to the state prior to the Global Financial Crisis (GFC). During the GFC, sub-prime lenders started to bundle together portfolios of loans at mismatched credit ratings. Investors looking for greater yields would buy these debts believing that even if a few of the loans in the portfolio were to default, the broader economic conditions would prevent other loans from defaulting.

This would mean that the profits from the majority of loans would cover any losses from the few defaulted loans. However, as the GFC proved, this strategy only works when marco economic conditions are ideal and credit is cheap.

Affirm’s $400 million USD bond issue was halted after a major investor had decided to back out at the last minute. This caused a ripple effect as the investor’s loss of confidence was seen as a warning to others investors.

Zip’s merger with Sezzle had also been affected by the loss of confidence in the sector. In December, the US Consumer Financial Protection Bureau said it’s investigating the sector and concerned about borrowers accumulating debt.

Zip’s business model is currently in question as their potential customer pool seems to be restricted to those who are looking for alternative credit. Their bad debts ate up nearly 50% of their total revenue over the last half.

Sezzle had just recently laid off 20% of their staff whilst having a bigger bad debt problem than Zip. Questionable practices have also led to Sezzle borrowing from merchants to fund their receivable books at a cheaper rate than its warehouse funding. This resulted in Sezzle owing $96.5 million USD to merchants. This can be a potential risk as merchants can lose confidence and request all the cash back at the same time.

All in all, the buy now, pay later is currently suffering a major lack of confidence across the whole sector. Companies are working on ways to gain and build more confidence and these plans will take some time to flourish. Only time will tell how the sector will recover.

If you would like to take this opportunity to invest in Zip or Sezzle and don’t already have a trading account, you can register for a Shares or Shares CFD  account at GO Markets.

Source: GO Markets MT5, Bloomberg, Tradingview, AFR