‘Buy Now, Pay Later’ Is the Victim of its Own Success

Last Tuesday was a rough day for Goldman Sachs. The share price fell 6 percent after the Wall Street giant reported its worst earnings miss in a decade. On a call that morning, analysts peppered David Solomon, the bank’s C.E.O., with questions about its consumer banking strategy, and about one unit in particular, GreenSky.

Goldman closed its $2.2 billion acquisition of GreenSky, a pioneer in the “buy now, pay later” (B.N.P.L.) lending sector, in March, calling it a key piece in its strategy to build “the consumer banking platform of the future.” It flew under the radar until last quarter, the first in which Goldman broke out earnings for its “platform solutions” business unit, which includes GreenSky. The picture wasn’t pretty. Revenues were up, but the division lost $1.66 billion in 2022.

Goldman’s troubles with GreenSky are indicative of a cloud hanging over the sector. B.N.P.L. was one of the fastest-growing areas in financial technology for years, spawning Europe’s most valuable start-up, Klarna, and promising to revolutionize how we consume and how banks could reach tech-savvy new market segments. The growth should continue; according to Worldpay, B.N.P.L. accounted for 3.8 percent of North American e-commerce transactions in 2021 and is projected to grow to 8.5 percent by 2025.

But what once seemed like attractive economics have been upended. B.N.P.L. providers rely on loans for the money that they lend to customers for free, and with rising interest rates, those loans have become more expensive. Passing higher costs onto customers may be difficult: Those who like the idea of paying for a jacket or a dishwasher in installments may not be willing to pay extra for the privilege.

The industry is now facing an existential crisis, as profits remain elusive, valuations plummet, competition increases and regulators ask tough questions about the lending practices behind B.N.P.L.

A victim of its own success

Klarna, the SoftBank-backed B.N.P.L. company, until recently was the largest start-up in Europe, with a valuation of $45.6 billion despite never making a profit. The Swedish company, started in 2005, hit the U.S. market with a splash. It lined up Maya Rudolph, the former “Saturday Night Live” actress, for a 2021 Super Bowl ad (average cost: $5.5 million for a 30-second spot). That may have helped it make inroads into the United States, but it has since fallen on harder times. The company has slashed jobs, and its valuation has plummeted to $6.5 billion, according to The Wall Street Journal.

“Candidly, ‘buy now, pay later’ is just a feature,” David Sykes, Klarna’s chief commercial officer, told DealBook. “If all you’re doing is offering the ability to break a purchase up into installments, we don’t think, long term, that’s dynamic enough.” Two of the other big global B.N.P.L. players, Affirm and Afterpay, have never turned an annual profit, either.

What happened? Initially, the heaviest B.N.P.L. users were young women buying clothes and beauty products, and the option then grew among consumers of all ages, for any imaginable purpose or product. In the early days of the lockdown, Peloton exercise bikes were a popular purchase for B.N.P.L. customers. Ahead of its initial public offering in 2021, Affirm flagged its reliance on Peloton as a business risk, noting its biggest merchant partner accounted for more than a quarter of its revenue.

As B.N.P.L. has become more popular, however, more and more companies — from American Express to Citibank to PayPal — have muscled in. In June, Apple announced a plan to enter the market, although its rollout has been delayed until later this year. Increased competition is expected to drive down margins even further, as merchants drive harder bargains with the army of providers.

Regulators are ratcheting up scrutiny, too

At the same time, regulators are beginning to act on concerns about how B.N.P.L. providers handle late fees, customer privacy and disputes. Plans are underway to strengthen B.N.P.L. regulation this year in Britain, where some consumer rights campaigners complain the service is marketed as a benign payment option but is actually debt. And a September report by the Consumer Finance Protection Bureau concluded that B.N.P.L. companies “are not providing the same rights and protections … that credit card companies provide,” according to a statement by the agency’s director, Rohit Chopra.

For these and other reasons, public and private markets have punished B.N.P.L. companies. Affirm shares, for example, have fallen more than 90 percent from their November 2021 peak, in line with other unprofitable growth stocks, including Peloton.

Low valuations make B.N.P.L. companies acquisition targets for big banks, financial services companies, or an outside player such as Amazon or Apple. (Affirm has enjoyed its status as the exclusive B.N.P.L. provider to Amazon, but that agreement expires at the end of this month.) In 2021, Square (now Block) bought Australia’s Afterpay for a hefty $30 billion; today a leading B.N.P.L. company could be purchased at half that price or less.

B.N.P.L. executives point out that markets often fluctuate wildly, and that as long as a business can control its unit economics, it has the basis to make a profit eventually. Still, they’re building other types of businesses.

Mr. Sykes said Klarna was at least as focused on improving the overall shopping experience as it was on helping consumers pay for products. This means offering comparison shopping within the Klarna app, and providing discounts.

“We spend as much time now talking to the C.M.O.s of businesses as we do the C.F.O.s and the people who own the payments part,” he said.

In Goldman’s case, GreenSky targets customers with high credit scores who are paying for home improvement projects rather than small-ticket items, a spokesperson said.

Affirm offers other types of loans, such as monthly installments at 10 percent interest. A spokesperson for the company said B.N.P.L. was “the beginning of a whole new domain of products and even companies.”

Jason Kupferberg, managing director in U.S. equity research at Bank of America, said that in the 2021 fiscal year, 43 percent of Affirm’s loans were at zero interest. In the latest quarter, he said, only 36 percent were. Last month, he downgraded his rating on Affirm stock to a “hold.”

B.N.P.L. is hardly a new financing option for the consumer. During the Great Depression, department stores began layaway programs, which allow customers to pay in installments. They were designed to keep people shopping rather than to generate profit directly. More than 80 years later, the fintech version may wind up with similar aims.

Goldman says it’s committed to GreenSky, but, as it disclosed last week, the losses are piling up. It hopes B.N.P.L. will draw in new customers, but so far it’s not driving profits that so many banks and tech firms are hunting these days.

James Ledbetter is executive editor of The Observer.

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