The explosive growth in the buy now pay later market, which has seen customers numbers and transaction volumes doubling year on year, will give way to industry consolidation that will cause “pain for all players”, according to new research.
In a review of the sector, Macquarie Securities has focused on BNPL downside risks, including increased competition from new entrants, competition from banks and other financial institutions, regulatory pressure and likely merchant drop-off from BNPL platforms.
Macquarie said that to some extent BNPL is a low interest rate play, giving providers access to cheap money. This won’t last forever.
Macquarie said: “We think an excessive number of participants has entered the industry in the near term, resulting in industry overcapacity. We expect a few years of industry consolidation before normalisation at a healthier supply/demand equilibrium.
“As interest rates rise, BNPL becomes more mature, investor appetite rotates out of tech and the low-base effect gets eroded away. We think that it will become increasingly difficult for BNPL companies to raise capital.”
The pain period could last one or two years, with another year or two of recovery before the sector returns to growth.
Macquarie expects to see downward pressure on merchant fees, which are currently averaging around 3.6 per cent, to be more in line with merchant fees charged by credit card issuers.
PayPal has recently entered the BNPL market and is charging a merchant fee of 2.5 per cent.
The Reserve Bank put the industry on notice that at some point it will require BNPL providers to remove their no-surcharge rules, and when it does merchant surcharging will put downward pressure on merchant fees.
Macquarie also expects to see merchants stop adding BNPL providers to their merchant platforms, as they get to know which providers are adding value at their checkout.
Macquarie says that to secure their future BNPL companies will need size. Currently Klarna, Afterpay and US company Affirm report the highest underlying transaction values, Afterpay Klarna and Zip the biggest customer numbers, and Klarna, Afterpay and Zip the largest number of active merchants.
Sezzle, Afterpay and Affirm have the best returns on their receivables book, largely because they recycle their receivables more than their competitors.
On the inevitable encroachment of regulation, Macquarie says: “On balance, we think Afterpay may be the most adversely affected by any potential regulatory changes for the BNPL sector. As its product design is purely BNPL, with none of the credit-like features offered by competitors, where credit checks are already conducted.
“There may be additional costs associated with increased regulation for Afterpay versus peers.”