It's official: the S&P 500 index is in a bear market. It has fallen more than 20% since its peak in early january. Investors focus on inflation and rising interest rates, which have impacted the overall economy.
One area that is coming under increasing pressure is the "buy now, pay later" (BNPL) industry that used to be so trendy. After explosive growth in recent years, BNPL companies may now be facing a reckoning. Here are five industry trends you should keep an eye on.
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1. Inflation will weigh on consumers
The consumer price index (CPI), a measure of inflation, rose 8.6% year over year in may, faster than economists expected and the most since december 1981. One concern is that inflation is putting a strain on consumers, who may cut back on their spending on goods and services – reducing opportunities for businesses in the BNPL sector.
Another concern is that consumers are increasingly using BNPL loans to pay for things without knowing how much debt they are taking on. This could result in BNPL businesses taking greater losses.
One ratio to keep an eye on is the provision for loan losses, which indicates how much money is set aside in a given period to cover expected losses on loans that might default. The independent BNPL company affirm (WKN:A2QL1G 7.58%), for example, reported a return on equity of around EUR 1.5 billion in the nine months to 31 december. March, a provision for credit losses of 182.6 million. U.S. Dollars out, compared to 40.4 million. U.S. Dollar in previous year.
This is despite the fact that BNPL companies are already incurring losses. Affirm's net loss for the nine months ended 31. March to 520 million US dollars. Swedish fintech company klarna, which is privately held, posted operating losses last year of.US dollars, while australian company afterpay (now owned by block) earned 113 million in fiscal year 2021, which ended last june. US dollar loss made.
AFRM NET INCOME (TTM) DATA FROM YCHARTS
2. Higher interest rates will put pressure on BNPL companies
The federal reserve is determined to raise interest rates to combat inflationary pressures not seen since the 1980s. This year, the fed raised the prime rate from near zero to 1.75. Fed policymakers expect interest rates to reach 3.4% by end of this year.
TARGET FEDERAL FUNDS RATE UPPER LIMIT DATA FROM YCHARTS
BNPL companies did well when interest rates were low, resulting in cheaper financing costs and plenty of cash to lend to consumers.
However, rising interest rates and economic uncertainty have led to a significant increase in borrowing costs. At klarna, for example, the cost of credit rose to the highest level ever.
These higher interest rates will put more pressure on standalone BNPL companies like affirm, while companies with large cash balances or a banking license like block could do better.
3. Consumers use debt to pay BNPL loans
In a survey by lendingtree, 42% of BNP borrowers reported paying one of the loans late. In another survey by UK consultancy citizens advice, 42% of BNPL users borrowed money from friends and family, credit cards or personal loans to pay off their BNPL debt, including 51% of 18-34 year olds.
Industry watchers argue that BNPL is too easy to use and tempts consumers to take on more debt than they can handle. This leads us to the next problem.
4. Regulators are taking a closer look at the industry
In january, the U.S. Consumer financial protection bureau (CFPB) launched an investigation into BNPL lenders, citing concerns about increasing consumer debt and data collection. The CFPB wants BNPL loans to be reported to credit reporting agencies so that lenders can see how much a consumer owes, while consumers would find their payment history on these loans in credit histories.
European countries are also concerned, and in may the swedish data protection authority said it would launch an investigation into klarna's checkout service.
5. Apple's entry into the industry is creating more competition
As if they didn't already have enough headwinds, now they're getting new competition from one of the largest companies in the world. This month, apple (WKN:865985 0.83%) announced that it will launch its own BNPL installment loan option, apple pay later. Apple has $80 billion in cash that it can use for financing.
I'm curious to see how apple fares after launching its product, which could pose a threat to standalone affirm as well as paypal and block, which acquired BNPL companies last year.
Given the amount of pressure BNPL companies will face in the next year or two, I'm going to stand on the sidelines as an investor until the dust settles.
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This article was written in english by courtney carlsen and published on 23.06.2022 all on fool.Com published. It has been translated so that our german readers can participate in the discussion.
The motley fool owns and recommends affirm holdings, inc., apple, block, inc. And paypal holdings. The motley fool recommends the following options: long march 2023 $120 calls on apple and short march 2023 $130 calls on apple.
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