Another month and another set of conflicting data and analyst sentiment as regards the future of BNPL.

At one stage in May, Afterpay’s share price had almost halved to A$85 ($66) from a peak of A$160 as recently as February. It has since inched up a tad to A$93 but in general, the share price movement of a number of the major BNPL players remains skittish.

In one corner are the market sceptics – I’d prefer to call them the realists who might just have been around the block a few times and have seen fads come and go and recognise a degree of overhype when they see it. Macquarrie, for example, is pretty astute on the state of the BNPL market, as is an old ally of this column, Grant Halverson, CEO at McLean Roche.

Macquarrie argued a few weeks back, in a note to clients, that BNPL cannot hope to maintain its current run of doubling customer numbers and transaction volumes year-on-year.

It added that market consolidation was likely and that this would result in a degree of pain for all the major BNPL players. And the reasons? Take your pick from an overcrowded market facing yet more competition from new platers, competition from incumbent banks, regulatory pressure and potential merchant drop-off from BNPL platforms.

All of these arguments seem pretty sound to this writer, especially the prospect of regulatory pressure if campaigning MPs such as Stella Creasy get their teeth into the BNPL sector. Anyone who witnessed the effect of political pressure on the payday lending sector will concur.

Macquarie also argues that BNPL is, at least in part, a low-interest-rate play, giving providers access to cheap money. Again, those of us with long memories of consumer finance would argue that this will not last forever.

To put it bluntly, as the BNPL players continue to lose money at a pretty consistent rate, they will need to keep returning to their backers to raise fresh capital. As interest rates rise, that will potentially become a bigger challenge.

But now Macquarie flags up another big hurdle for the BNPL sector to tackle: lack of consumer loyalty.

BNPL faces major loyalty challenge
Success in payments demands scale and ubiquity – BNPL has neither and now its claims of loyalty are shredded.

Macquarie commissioned consumer research in US and the results merit some discussion. Some 1.6% of consumers say BNPL is their primary method of instore payment. Meantime, only 3.1% say that BNPL is their primary payment method of online shopping.

Only 5% of active users see BNPL as primary in-store payment, while 9% use it as their primary online payment method.

Loyalty, the key driver of consumer payment behaviour is highly questionable according to Macquarie. US consumers say they will change payment types rather than change stores and will swap BNPL provides even quicker. As Grant Halverson tells EPI, this equals a total lack of loyalty.

"Some 63% of consumers will use a different payment type e.g. debit card while a whopping 70% say they switch BNPL providers. Macquarie’s verdict is brutal: the merchant owns the customer, not the BNPL. This applies consistently to all BNPL brands and is not good news," says Halverson.

The US research also notes that 97% of BNPL users also hold a credit card-so that debunks one myth, while 40% of BNPL users hold two or more credit cards.

But what of Generation Z, those aged between 21 and 55 and beloved of the BNPL players? Well 25% of such customers hold two or more credit cards while only 18% of millennials have made even BNPL purchase in the past two years.

Meantime, some 43% of all users have been late with a repayment over the past two years.

Wild west of lending?
Rather than viewing BNPL as the next big thing, Halverson suggests that it is in reality, a wild west of lending. He tells EPI: “The only difference with the real Wild West is most folks carried hand guns; however, in BNPL’s case they bring a pea shooter to any gun fight.

“BNPL is a small point of sale payment niche which is unregulated and is totally unprofitable,” concludes Halverson.

But the likely market consolidation and the respective M&A strategies of some of the players will be fascinating to observe.

Douglas Blakey,
Editor