Buy now, pay when? Loan foreclosure for online purchases lifted


(Reuters) – While browsing online during the lockdown, Jessica Friend spotted a pair of Ray-Ban sunglasses she liked, but the price made the 30-year-old Ohio resident think twice.

FILE PHOTO: A smartphone displays a Klarna logo on top of the banknotes in this illustration taken on January 6, 2020. REUTERS / Dado Ruvic / Illustration / File Photo

What persuaded her to click “buy,” said Friend, was the short-term credit offered by Afterpay, which split the $ 260 payment into four interest-free installments.

Afterpay is one of a handful of alternative credit companies that offer small loans, primarily to online buyers, and make money by charging merchants a 4-6% commission.

These companies buying now and paying later (BNPL) benefited from a shift to online shopping during the coronavirus crisis in countries including the United States, where state aid has also boosted retail sales.

“I’m more inclined to use them because they make it easier to get the things I want at the same time … and when I want to splurge,” Friend said of the loans.

Some investors are now betting that buyers will stay away from stores as coronavirus cases increase again in several countries around the world, boosting activity for BNPL companies.

But increasing the number of subscribers can also increase bad debts, especially among new users who are more likely to default.

And as job losses increase and public aid decreases, the economic model will face its first real test in a recession.

“A lot still depends on the very second wave of viruses and the government’s means to continue to stimulate demand,” said Andrew Mitchell of Ophir Asset Management, which owns market-based shares in Afterpay, based in Melbourne. rose to over $ 100 million four years ago to $ 12.55 billion.

While the transition to online shopping was underway before the pandemic, the transition accelerated under lockdown and Afterpay signed more than a million new active American customers between March and early May, bringing its global base to 9 million.

Meanwhile, retailers wanting to move goods have also become more receptive to partnerships with BNPL companies, which, unlike credit cards or mortgages, instantly lend.

Klarna, the largest fintech start-up in Europe, said that since March, requests from retailers who wanted to partner with it had jumped 20% on average worldwide.

With 7.9 million subscribers in the U.S., Swedish Klarna has since signed outdoor equipment maker The North Face, Disney streaming service and cosmetics retailer Sephora.

Most of the growth was in higher margin discretionary spending categories such as fashion and fitness equipment, said Puneet Dikshit, a partner at McKinsey in New York, who expects the Sector generates volumes of $ 7-8 billion this year in the United States. , growing by more than 150% per year.

(GRAPHIC: Lockdown bump – Weekly increase in US e-commerce sales, here)

(For an interactive version, click here here)

Although fears of credit losses triggered industry-wide liquidation in March, the entry of large technology investors and increasing subscribers have since supported a strong recovery, with stocks now reaching record levels .

(GRAPHIC: Buy now, pay companies a tear later, here)


The pandemic has forced most companies to tighten their risk parameters, which they say could boost loan rejection rates, although Afterpay, Klarna, Zip and Sezzle have declined to provide specific figures.

“BNPL operators can turn off the taps and quickly slow growth if the risk of repayment increases,” said Mitchell.

While Afterpay, with bad debts totaling 1% of its loan portfolio in March, changed its requirements so that customers have to pay a quarter of their loan in advance, co-founder Nick Molnar said that rejection rates were roughly in line with the start of the year.

Molnar said that an overwhelming majority of Afterpay customers, whose average transaction value is A $ 150, repaid on time, while loans on new purchases were denied to those who did not.

Although some brokerage firms expect Afterpay to make a profit by 2022, rising costs to finance expansion and credit losses that affect receivables will likely mean that BNPLs, which operate on low margins, remain unprofitable for a while.

Klarna saw its credit losses more than double in the first three months of the year to reach around 0.7% of underlying sales as it expanded in Europe and the United States, where regulation of the sector is almost nonexistent.

Only California has stated that BNPL companies require a license and have fined it for lending without a license.

In Australia, where the industry took off for the first time with easy funding, the business regulator is expected to publish a follow-up report to the one it released in 2018 this year, raising concerns about overworked users and calling for the regulation of BNPL. line with other credit services.

Businesses, investors and analysts agree that youth with stimulus money in their wallets are driving sales and that BNPL buyers Reuters spoke to were all under 35 and bought items household goods, as well as skin care products and clothing.

“The vast majority of our customers have revenues of less than $ 75,000, so I would say the majority probably have a stimulus check,” said Charlie Youakim, CEO of Sezzle, one of the smallest companies.

The younger demographic is more difficult to assess because it has no credit history, which means that most companies use algorithms to perform real-time eligibility checks and assess the risk of default.

FILE PHOTO: A smartphone displays a Klarna logo in this illustration taken on January 6, 2020. REUTERS / Dado Ruvic / Illustration / File Photo

“Our internal engine assesses risk taking into account various parameters that will also include consumer payment history, what is purchased and is combined with different third-party data sources and authentication solutions,” said the spokesperson. speech by Klarna, Aoife Houlihan.

Zip, based in Sydney, with bad debts of just over 2% of debts, said it assesses public information and buyers’ credit scores.

About one in 100 customers is late with payments each month, spokesman Matthew Abbott said, adding that Zip recently tightened eligibility rules, resulting in higher rejection rates.

Nikhil Kurian Nainan reports in Bengaluru; Additional reporting by Sonya Dowsett in Madrid; Editing by Sayantani Ghosh and Alexander Smith

Our standards:Principles of the Thomson Reuters Trust.


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