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The AFRM stock price is soaring. Why do people like "buy now, pay later"?
The demand for the US holiday shopping season is booming this year, accompanied by a surge in consumer sentiment. Some payment-related companies, such as Affirm (NASDAQ: AFRM), have also experienced a surge in stock prices due to the popularity of their BNPL (Buy Now Pay Later) business. As of December 8th, the stock price has skyrocketed by 138.9% since November.
"Buy now, pay later" (BNPL) is a popular payment model worldwide in recent years. In late October, Apple launched its BNPL service called "Apple Pay Later" in the US, coinciding with the holiday shopping season. The market speculates that Apple Pay Later may have gained great success.
According to Adobe Analytics statistics, BNPL has contributed $10.1 billion in online spending since early November, with a year-on-year growth of 17%. During the recent shopping frenzy of "Black Friday", BNPL generated sales of $79 million, a 47% increase compared to last year.
How does BNPL work? What are the differences compared to credit cards? Why have stock prices recently soared? Today, let's uncover the mystery of BNPL services!
What is the operating mechanism of BNPL and how does it impact the market?
"Buy now, pay later" is a service that provides short-term installment loans, allowing consumers to finance their purchases without interest within a specified period. In other words, consumers can purchase goods immediately and then make smaller installment payments. It is because of this flexibility that BNPL platforms have become very popular in recent years.
Although BNPL can be used in some physical stores, it is mainly used for online websites. When we shop on websites that offer BNPL, we may see the option during checkout. We will see the total amount of the purchase divided into several payments, along with the due dates for each payment.
For example, if a consumer's order total is $100 and they choose a four-installment plan, they only need to pay $25 on the day of the purchase to receive the goods, and the remaining three payments will usually be automatically deducted every two weeks.
What are the advantages and disadvantages of BNPL compared to credit cards?
In terms of customer experience, BNPL has three advantages.
Independent choice of repayment pace: Consumers can choose to pay in installments. Breaking the payment into affordable installments not only helps manage one's credit limit, but also provides consumers with a certain degree of financial flexibility.
Simple application process: In terms of demographics, BNPL consumers are usually from Generation Z (those born between 1996 and 2010) or millennials. These individuals are often enthusiastic about technology and innovative products. Compared to credit cards, which have complex application processes and strict credit score requirements, BNPL is relatively simple and does not require excessive personal information or credit records.
No transaction fees: BNPL typically does not have installment fees, management fees, or even late payment fees for some institutions. Consumers can make purchases without worries.
As of May 2023, about 16% of US consumers have used BNPL as a payment method. Nearly half of the respondents stated that if a merchant does not offer a buy now, pay later option, they would postpone or even cancel their purchase or choose a cheaper alternative. Just based on this, it is crucial for merchants to provide the option of buy now, pay later.
According to a recent survey conducted by Affirm last month, 54% of consumers hope that retailers will offer the BNPL option at checkout during the 2023 holiday shopping season. As more and more consumers use BNPL, to keep up with the trend and prevent consumers from abandoning their shopping carts without making a purchase, most merchants are willing to offer this payment service.
What are the disadvantages of using BNPL?
Late payment fee: Repaying BNPL loans usually does not help consumers build good credit, but forgetting or delaying repayments may result in additional late payment fees and potential damage to credit scores.
Accumulated debt: A report from the CFPB found that using BNPL services may lead to debts exceeding consumers' ability to bear. This is because consumers are often easily swayed by the initial small payments, inadvertently exhausting their budgets, but still have installment payments to be repaid in the BNPL plan.
Delayed refunds: Due to BNPL being a relatively new payment method, the refund process after returning goods may be more complicated. In some cases, even if consumers return the goods, there may still be a situation where they need to pay the full purchase cost.
What BNPL companies are currently in the market?
BNPL service providers are generally offered by fintech companies. We will focus on introducing the following mainstream BNPL companies in the market:
Affirm: Benefiting from these evolving consumer trends, active consumers of Affirm increased from 3.6 million to over 16.4 million during the three-year period ending in June 2023, with revenue growth of 212%. Over 250,000 retailers use Affirm's services, making it one of the most influential installment payment platforms in the market today. No annual fees or late payment fees are charged. Four installment loans do not have a maximum credit limit, and the credit limit consumers receive depends on their credit.
PayPal allows four interest-free installment payments, with payments made every two weeks and the option for automatic payments. Late fees are waived. Consumers can get financing from $30 to $1,500. As of mid-2023, PayPal has issued over 0.2 billion loans to over 30 million customers in eight global markets. In 2022, the volume of BNPL transactions processed exceeded $20 billion, a 160% year-on-year increase. PayPal is undoubtedly a leader in the BNPL industry.
Klarna offers four interest-free payments, with purchasing power determined by the consumer's credit. It can be used online and offline. Klarna's app also includes a price comparison tool that helps consumers save money and earn rewards for every dollar spent.
Afterpay can be used online and in designated stores. It allows four interest-free installment payments to be completed within six weeks. Additionally, Afterpay's app provides access to discounts and benefits at stores. The only downside is that Afterpay charges up to 25% of the purchase price as a late fee.
Zip is used by over 94,000 merchants worldwide. It offers four interest-free installment payments to be repaid within six weeks. Using Zip at specific retailers provides rewards and discounts. However, Zip charges a $6 installment fee and a $5 late fee.
According to a report from Adobe Analytics, the transaction volume of BNPL in online spending was approximately $7.3 billion from November 1 to 26, a 14% year-on-year increase. The momentum seems to be accelerating after Black Friday.
Taking Affirm as an example, the stock price of the company doubled from $17.61 on October 31 to $42.07 on December 8, a 138.9% increase in just one month.
Not only the stock price, but Affirm's performance is also riding the wave of the industry. The company announced its forecast for the first quarter of the 2024 fiscal year on November 8, surpassing analysts' expectations in all indicators. At the same time, the company raised its annual outlook. Analysts from The Motley Fool stated that Affirm's consistent strong performance and optimistic forecasts from management have attracted investors to buy the stock.
Looking ahead, what potential opportunities and risks does the BNPL industry have?
1. In the short term, consumer resilience will be reduced.
In the past two years, due to the impact of high inflation, the cost of living has become very high. In order to cope with the pressure of high prices and decreasing savings levels, a large number of consumers have turned to BNPL loans. Compared to credit cards, BNPL is cost-effective and can be a substitute for credit cards and other types of loans during periods of rising interest rates, meeting the needs of young users and merchants.
While providing BNPL loans is a profitable and growing source of revenue for fintech companies, they also face the risk of borrowers being unable to repay their loans on time. During an economic recession, when more people become unemployed and unable to make payments, the default risk will increase.
In 2023, consumer resilience in the United States is extremely high, and consumers continue to play a significant role in stimulating US economic growth, with a majority of expenditures requiring financing. However, economists indicate that this trend is not sustainable. Current US consumers still face significant economic pressures, and strong personal consumption expenditures in the coming months may weaken. This means that as US consumption gradually slows down, the BNPL market may be affected to a certain extent.
2. Record levels of household debt also pose certain risks.
A 2023 academic study showed that consumers spend 20% more on BNPL than in other situations. A CFPB survey in March found that 88% of BNPL users still have open credit cards.
On average, BNPL borrowers are more likely to be heavily in debt - relying only on credit card turnover, defaulting on traditional credit products, and using high-interest financial services.
In addition, thanks to the recent surge in consumer spending, the United States has also seen record levels of household debt. In the second quarter of 2023, total household debt reached $17.06 trillion, with credit card debt surpassing $1 trillion for the first time. In the third quarter, it rose to $17.29 trillion, reaching a new high, with credit card debt increasing by 16.7% compared to last year. The record levels of household debt pose a higher risk of delinquency for BNPL companies.
3. Installment interest may become a trend.
In addition, the cost for future consumers may increase further as BNPL companies start offering installment interest payments. According to the research organization "Consumer Reports," many BNPL companies have switched from zero-interest payment models to installment loans with interest. Data published by one of the leading BNPL companies, Affirm, shows that 74% of its recent quarter's total volume of goods consists of interest-bearing loans, with over 90% of loans having a maximum annual interest rate of 36%.
4. In the long run, the BNPL industry is expected to continue developing.
Over the past two decades, the payment industry has developed rapidly. The adoption of online payment methods by developing countries has accelerated the growth of the BNPL market.
According to Allied Market Research, the global buy now pay later market was valued at $90.69 billion in 2020 and is projected to reach $3.98 trillion by 2030. The compound annual growth rate from 2021 to 2030 is forecasted to be 45.7%, with significant growth expected in the Asia-Pacific region.
In addition to the current BNPL providers, some traditional payment institutions such as Visa, MasterCard, UnionPay, Citigroup, and Chase are also rapidly expanding their business in the buy now pay later sector. These new entrants, combined with their traditional strengths, may gradually have a significant impact on the BNPL industry.
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