Buy Now, Pay Later Will Get More Than One Bite at the Apple

Investors like the idea of buying now. It is paying later that has them stressed out.

With consumer borrowing and spending on the rise in recent months, shares of several card network providers and credit-card lenders have outperformed financials overall so far this quarter.

By contrast, shares of fintech companies that provide “buy now, pay later” payments have sharply underperformed S&P 500 financials. That includes

Affirm Holdings

AFRM -11.50%

and Australia-listed

Zip Co.

ZIP -0.79%

, but also

Block Inc.,

SQ -10.87%

which acquired Afterpay, and


PYPL -5.90%

which launched short-term installments during the pandemic. Those stocks are all down by a third or more so far this quarter.

Though there is no shortage of things to worry about in the market right now, there seem to be some specific concerns about “BNPL.” For one, that the model may have unique credit risk, or at least that it is untested during a deep downturn. And also, that the industry will see further squeezes on market share and pricing from new entrants—especially


AAPL -2.63%

which has announced a split-pay service for Apple Pay.

It is important for investors to think about these things differently than they might for credit cards or traditional lenders. For one thing, unlike a credit card line-of-credit that a consumer can keep drawing on or extending via minimum payments even as they struggle, a BNPL user can be cut off from future purchases if they miss payments or if their credit profile deteriorates, since each transaction is a new opportunity to reassess a user. It is a short-duration form of credit. Apple, notably, is funding its own offering.

Yet even if cut off, users can still be valuable if they continue using apps such as Apple Pay, PayPal’s Venmo or Block’s Cash App to pay in other ways, or for peer-to-peer payments, deposits and other services. The rolling up of BNPL services into broader consumer wallets or merchant services makes it something that can be dialed up or down depending on risk, because the ultimate goal is to monetize the customer in several ways.

Competition may be somewhat less of a factor too, since consumers might often be making the split-pay decision in a wallet after they have already decided to purchase.

Affirm, though, is only in the early stages of building a financial platform. Its bread-and-butter has been joining with merchants to offer financing to customers before they buy. That includes short-term zero-interest split payments, but also longer-term, interest-bearing purchase loans.

That puts more of an onus on truly underwriting a wide range of borrowers, because the alternative would be to slow growth or pass along higher funding and credit costs to merchants or consumers. But the opportunity is that if other providers dial back or narrow their BNPL offering because it isn’t worth dealing with the potential consumer credit risk, Affirm can prove its value to its merchant partners.

With inflation and rising rates squeezing consumers, merchants might be even more motivated to try to offset that pressure by offering split payments more widely. Affirm could potentially do this by approving more buyers or bigger amounts and thus converting more sales, in turn bolstering its ability to charge merchants a premium rate and better cover higher credit or funding costs.

As of May, Affirm’s 30-day-plus delinquency rate on the bulk of its active U.S. balances—excluding its shortest-term split payment installments—was higher than this time last year, when credit was historically strong. But at around 2% to 3%, it is still in-line with the rate in prepandemic 2019. Gross merchandise volume rose more than 70% year-over-year in the first calendar quarter.

Where in Americans’ household budgets is inflation hitting the hardest? WSJ’s Jon Hilsenrath traces the roots of the rising prices to learn why some sectors have risen so much more than others. Photo Illustration: Laura Kammermann/WSJ

A key variable to watch will be whether Affirm’s revenue take rate on those transactions keeps up with funding and credit costs. Affirm’s take rate on gross merchandise volume less credit, funding, processing and other transaction costs, was 4.7% in the quarter ended March 31. The company has said it can be profitable long term at a ratio of around 3% to 4%. Adding in other business costs, including technology, sales and marketing and general expenses, Affirm overall was losing money on a net-income basis in the quarter.

Inflation, interest rates and even a potential recession will certainly impact buy now, pay later providers—just not always in the way that investors might initially expect. The ultimate fate of players in the sector rests both on relationships with merchants as well as credit performance.

Write to Telis Demos at

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