- Payment experts are calling time on the hot and overcrowded buy now, pay later sector.
- With no regulation, a packed field of new entrants and little prospect of profitability for many, smaller platforms are unlikely to make it, consultant Brad Kelly told Business Insider Australia.
- A similar view has been echoed by incumbents themselves, with both Humm and Zip anticipating a period of consolidation.
- Visit Business Insider Australia’s homepage for more stories.
Australia’s hot buy now, pay later sector might be seeing a new entrant almost every other week but payment experts expect the overcrowded field is soon headed for a reckoning.
Priced collectively at more than $30 billion, with Afterpay and Zip making up the bulk of the valuation, the end is nigh for many of their smaller rivals, payment consultant Brad Kelly forecasts.
“Afterpay will survive, Zip will survive and the rest will end up in a Hunger Games-style race to the death,” Kelly told Business Insider Australia.
“Latitude and Humm operate primarily as standard consumer finance businesses and the rest of them will just disappear or devour each other.”
It’s a dire prediction for a payment niche that has exploded into ubiquity in recent years, attracting investment from two of Australia’s largest banks and countless Australians mesmerised by skyrocketing stock prices.
Few, from professional analysts to everyday punters, seem all too perturbed that both conditions make some of these buy now, pay later business among the most expensive loss-making companies on the market.
“The BNPL market is saturated and two things are happening. One, a higher level of risk appetite is entering the market – that is regulatory risk and customer risk, where the customers profile is becoming riskier,” Kelly said, noting credit checks aren’t part of the business model.
“The other is that at the bigger end of town, Afterpay and Zip are going on spending sprees buying up as many other BNPL companies as they can because they don’t have a road to profitability and they are instead just growing revenue.”
“The only two that make a profit are Humm and Lattitude.”
Curiously, similar doubts have come from within the sector.
At the very start of the pandemic, Zip co-founder Peter Gray told Business Insider Australia a recession would produce a period of consolidation, as ‘copycats’ either hit the dirt or were absorbed by bigger players. While a flood of cheap money and government support helped avoid that in 2020, it may have only kicked the can down the road.
More recently, Humm CEO Rebecca James revealed she anticipated a ‘day of reckoning’ given the economics simply aren’t there to support dozens of different upstarts.
“We are going to start to see – especially if these market conditions remain – the pointy end of this BNPL run,” James said.
Unsurprisingly, both James and Gray exempted their own respective operations from their dire predictions, Humm on the basis it was supported by “long term profitable, sustainable growth”, and Zip on the idea that it was sufficiently differentiated.
Australians left paying the price
While it is impossible to know what will happen, it does present an interesting scenario.
If these companies, many of which are listed on the ASX, do end up going under, they will take an enormous amount of shareholder value with them.
More to the point, they will have done so with the implicit backing of both the federal government, the regulator ASIC, and the Reserve Bank of Australia (RBA), all of which have either directly celebrated the sector or at least been content to sit on the sidelines.
Falling in a gap of the Credit Act, most aren’t beholden to existing regulation and have been allowed to ‘self-regulate’, leaving Australians vulnerable.
“The problem we have got is because there’s a regulatory hole, these people are driving trucks through it and they are entitled to do so because the rules haven’t changed,” Grant Halverson, managing director of financial services consultancy McLean and Roche, said.
Halverson said it has meant the space is attracting “dubious business models”, bad debts, and high interest rates, with most of Australia’s 22 BNPL platforms simply payday lenders under another guise.
“If you don’t get into financial trouble with them then some of them are possibly ok. But if you do, you pay rapacious late fees,” he said.
“At the same time, they are churning through young people, particularly young women, and my real concern is those that get stuck with bad debts and default are going to have their credit histories destroyed and aren’t going to be able to get credit anywhere for seven years.”
But with so many players competing over what is a tiny slice of the payments system, it’s also unsustainable.
“They’ve done a great job promoting these products but they are still less than 1% of all payments after more than seven years. In my experience, you need to achieve scale to be successful and 1% is not scale,”
“As a category you need to get over 10% otherwise you don’t last. People should be asking what happens when this bubble goes pop.”
But the longer that regulators wait, the larger that bubble potentially grows and the more politically inconvenient regulation becomes.
“What’s actually happening is they don’t want to see seem to be stifling competition, they don’t want to seen to be stifling technology,” Kelly said.
BNPL companies meanwhile have found themselves in a perfect storm, he adds.
“They’re riding high because they found a loophole, they have a great success story, and the timing was right.”