Affirming company as BNPL borrowers fall behind on payments


A few weeks ago I pointed out that the lender buy now, pay later (BNPL) Affirm holdings (NASDAQ: AFRM) sees a growing number of its borrowers falling behind on their loans. Specifically, 96% of the company’s loans were considered “outstanding” at the end of June, up from 97.6% at the end of 2020. This is not a catastrophic deterioration of the company’s loan portfolio. ‘Affirm, but that’s a concern given that the economy is said to be on the mend and unemployment is falling.

It turns out, however, that it is not just a matter of asserting where delinquency is on the rise. Buy now, pay later player Sezzle (ASX: SZL) is experiencing the same headwind, just like Australia After payment (OTC: AFTP.F) (ASX: APT).

The trend is obviously something shareholders of all three companies should watch closely, hoping for an improvement, but watching for any worsening. Beyond that, this disturbing development has implications for payment intermediaries Pay Pal (NASDAQ: PYPL) and Square (NYSE: SQ), which the latter is expected to acquire Afterpay early next year.

Buyer’s remorse

The excitement surrounding the buy now, pay later revolution is understandable.

Fintech market research agency Kaleido Intelligence estimates that BNPL spending will grow at an annualized rate of 27% between 2020 and 2025, when it facilitates $ 258 billion in annual trade. credit card. Merchants like it too, as the option is not only cheaper for them than accepting credit cards, but it also makes it easier for consumers to shop. Credit Karma reports that electronics and housewares are BNPL’s two largest purchasing categories. As these tend to be more expensive than other types of discretionary goods, they are also more difficult for a retailer to sell; sometimes a lack of credit can turn out to be a buying stalemate.

Image source: Getty Images.

Under these conditions, it is hardly surprising that the attractiveness of this new type of credit is proving too difficult to manage for too many borrowers. Credit score monitoring and management firm Credit Karma reports that in August, just over a third of U.S. borrowers buy now and pay later were at least a little behind on their BNPL payments. Almost three-quarters of consumers who said they missed at least one payment also said their credit rating had declined as a result. A study carried out by Momentive at the same time indicates that one in six consumers regrets having used a BNPL option.

This is, of course, taking a toll on the bottom line of the lenders.

Increasing payment delays, accompanied by settlements

As noted above, fewer Affirm borrowers make their installment loan payments. Not only did the number of loans considered current drop dramatically in just a few months, but the average internal credit rating of its borrowers also plummeted as the company expanded its own loan portfolio. One could easily argue that the business is “buying” loan growth by lowering its credit standards.

The details: At the end of fiscal 2021 in June, only 65.1% of its borrowers were considered to be in the premium borrower category, up from 82.4% a year earlier, despite the fact that the pandemic was in full swing at that time. . A year earlier, 78.2% of new loans were granted to this first group of consumers.

It’s not just Affirming, however. Sezzle is seeing the same trends with its own loans. A year ago, just over 95% of Sezzle borrowers were up to date with their payments. Today, less than 91% of its users are up to date on their loan agreement.

Sezzle customers buy now, pay later are slower and slower to repay their loans.

Data source: Sezzle investor records. Chart by author.

On a related note, Sezzle’s bad debt set aside, or allowance for loan losses, increased in the second half of 2020, and then rose significantly again in the first six months of this year. Again, this is not the trend one would expect when the economy recovers from the setback it suffered during the pandemic lockdowns of 2020.

Sezzle's provisions for loan losses and write-offs are increasing.

Data source: Sezzle investor records. Chart by author.

And for the record, Afterpay is in a similar boat.

Take the clue

As I made clear in my mid-October commentary on Affirm’s credit risk, this may just be a transient and temporary wave of defaults and deterioration in creditworthiness. . The pandemic and its aftermath are unprecedented in many ways, after all.

However, most big problems tend to start off as small ones. Take the collapse of subprime mortgages in 2008 as an example. It was rooted in the misguided decision of consumers to take out loans they could not afford to pay off, and ignited by lenders’ willingness to let them. do it. The problems did not start in 2008 however. Outright delinquencies and missed payments started to increase subtly as early as 2006. It’s just nobody cared then.

Any turmoil in buy now, pay later is unlikely to have the same kind of catastrophic ripple effect that the subprime mortgage crisis caused in 2008. But it could prove painful for focused companies. the market. This includes Square as it moves forward with its planned acquisition of Afterpay. It also includes PayPal, which has reported a 15% increase in transactions in the markets where it offers the BNPL service.

At the end of the line ? If a foray into the buying arena, now later, is central to why you own a particular stock, it would be wise to make sure to keep your finger on the pulse of those metrics.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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