Australia's buy-now, pay-later players face battles after pandemic highs

Australia's short-term financing sector is fighting battles on multiple fronts as it tries to regain the popularity highs seen during the COVID-19 pandemic.

Several buy-now, pay-later (BNPL) companies that thrived during record-low interest rates in the pandemic years have failed or taken steps backwards, and investors have dumped shares of listed players. The total stock returns of Zip Co Ltd. and Sezzle Inc. have stayed in the negative since the start of 2022 as their market capitalization plunged, S&P Global Market Intelligence data shows.

Interest still remains in the product, which allows customers to split payments into interest-free installments at the point of purchase, although usage is no longer growing as before.

"I think there is certainly a clear preference for this [product] for some consumers, especially younger consumers," Andrew Grant, senior lecturer of finance at the University of Sydney Business School, told Market Intelligence in an interview. BNPL "has a place in the credit spectrum."

Slick apps

As customers like the convenient and slick mobile apps, as well as the ease of access to these types of products, BNPL products will remain in the market, Grant said. "It might just sort of change in its operations or how the customer views it, but for the large majority of consumers, they can continue to use BNPL," Grant added.

The BNPL industry boomed in Australia from 2020 as consumers switched to online purchases during the COVID-19 pandemic, driving transactions up threefold, according to data extracted by Canstar from the Reserve Bank of Australia. The number of transactions rose to 33.3 million with a value of A$3.8 billion in the three months ended December 2021, from 11.5 million transactions with a value of A$1.9 billion in the quarter ended March 2020, the data showed. A decline followed, with 30.8 million transactions with a value of A$4.2 billion recorded in the three months ended June 2022, which is the latest Canstar available data.

"The industry developed during a low interest rate era. With rates now more normalized, the cost of funding outstandings becomes challenging," said Stephen Mickenbecker, group executive, financial services and chief commentator at Canstar, Australia's biggest financial comparison site.

"It may be that the imbalance of revenue and financing cost under the existing model ceases to be viable or at least requires merchant pricing that hits a point of retailer resistance," Mickenbecker said.

Interest rates

Australia's central bank dropped its benchmark cash rate to a record low of 0.10% in November 2020 to pull the economy out of a pandemic slowdown. That benefitted BNPL players, which typically do not charge customers for the credit and earn their income from charging a commission from merchants.

The Reserve Bank of Australia has since raised rates to the current 4.10%, though several economists expect rates to level off.

Higher inflation and monetary policy normalization ultimately led to a challenging environment for BNPL players.

Elusive profits

Afterpay Ltd., which became a unit of Square parent Block, posted losses of A$159 million in company's fiscal year 2021, ended in June. Zip Co Ltd., Afterpay's biggest competitor in Australia, saw losses of A$171 million in the half-year ended June 30. It posted losses for the five previous reporting periods.

"None of the BNPL apps make any profits. Credit losses are also massive, with excessive risk now hurting BNPL apps," said Grant Halverson, CEO of McLean Roche, a consulting and payments expert.

A Zip spokesperson said the company is focused on driving group profitability, telling Market Intelligence that it is a digital services company that has never been a pure-play BNPL provider.

"Zip's Australia business has been cash EBTDA [earnings before tax, depreciation and amortization] positive for five years. Zip is on track to achieve group positive cash EBTDA during 1H'24 and also expects to deliver a positive group cash EBTDA result for the second half of FY'24," the spokesperson said.

The company is focused on product innovation, including new products to broaden Zip’s financial services offering, the spokesperson added.

Afterpay and Sezzle did not respond to a request for comment.

Separately, established banks introduced their own BNPL products. Commonwealth Bank of Australia, the largest bank in Australia by assets, introduced a product called StepPay in 2021, while Apple and PayPal also have BNPL products that draw users from smaller providers.

The added competition, along with the other challenges, has caused more BNPL providers to exit the market. Zebit was delisted in 2022. Payright applied to the ASX to delist back in May, while Splitit is planning to delist after securing private funding.

Openpay, IOUPay and INKPAY have shut down, and Latitude Financial Group Ltd. exited all BNPL in February. Humm Group Ltd. subsidiary Humm BNPL Pty. Ltd. had a stop order placed on it by the Australian Securities and Investments Commission after it identified deficiencies in Humm's BNPL product. The order was revoked in June. The total stock returns of BNPL providers have fallen since reaching heights in 2021, according to data compiled by Market Intelligence.

Deep-pocketed rivals

"PayPal and big bank entry brings muscled-up competitors into the mix," Canstar's Mickenbecker said. These providers could also argue for a credit process where approval is based on customer history, either through a record with credit or, they would hope, transactional behavior, Mickenbecker said, adding the stand-alone BNPL providers "aren't as well equipped for this."

Meanwhile, the Australian government said in May that it plans to regulate BNPL products as credit products. BNPL providers will be required to hold Australian credit licenses and comply with responsible lending obligations.

"BNPL looks like credit, it acts like credit, it carries the risks of credit," said Stephen Jones, minister for financial services, during a May 22 speech. Jones said that there were "unacceptable levels of unaffordable lending occurring," with BNPL customers more than likely to end up in financial trouble.