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Thrive or Die: What Every BNPL Should Know to Survive the Current Market

Buy now, pay later (BNPL) has redefined how consumers shop and has become increasingly popular over the past few years. 

By 20230, the global BNPL market is estimated to reach $3.98 trillion. In addition, experts have predicted that by 2026, “BNPL services will account for over 24% of global eCommerce transactions for physical goods by value, from just 9% in 2021”. 

Either way, recent headlines have brought some light to the hidden risks behind BNPL services:

  1. Klarna, the Swedish BNPL company, experienced a huge company value drop from $46 billion to $30 billion just in a year. 
  2. This results in its announcement of a 10% layoff in late May 2022. With its current 7000 employees, this means around 700 employees will be heavily affected. 
  3. The other BNPL giant, Affirm, also saw a massive 75% drop in its company shares

So, what are the potential hurdles that BNPL companies are overseeing? What is making the big BNPL players go for massive layoffs?

Why has BNPL grown so much in the past years?

Before we dive into the topic, let’s get some context.

The idea behind BNPL, “of splitting the cost of purchases into instalment payments spaced out over a predetermined period of time", is not a new concept. 

However, unlike traditional lending, which is often complicated and requires plenty of time, BNPL players have optimised and simplified the financing processes for customers. With many fintech players offering interest-free financing, customers no longer need to go through credit checks or worry about high-interest rates.

It is therefore not surprising that BNPL companies have acquired numerous customers across the world and many financial institutions start to provide the same offer. Kaleido Intelligence, a research firm, claims that "$680 billion will be spent by global consumers using Buy Now Pay Later over eCommerce channels in 2025", which represents "a 92% rise over the $353 billion spent in 2019."

BNPL adoption by generation
Source: Nets

Regulation, debt risk, and other potential hurdles for BNPLs

According to Kaleido Intelligence, "simple onboarding has helped rapidly grow the BNPL user base across all continents – some 30% of Americans have a BNPL account – this growth has not been without pitfalls. A lack of in-depth credit checking and opaque limits on spending allowances has led to a much higher default rate when compared to traditional credit cards", calling for stricter regulatory compliance in the coming years.

1. Rising inflation and a bearish stock market

Klarna is announcing its layoffs this May as a measure to cut costs. This is somehow ironic to earlier 2022 when Klarna boasted valuations between US$50 - 60 billion. And now, after a couple of months, they are struggling to hold onto a US$30 billion valuation.

The outlook isn’t much bright for the rest of the BNPL start-ups. Affirm, a BNPL pioneer in USA, saw its stock go from US$176.65 in 2021 to a low $13.24 a 92% decline. Australian BNPLs also suffer the same valuation drop with 8 listed BNPL players experiencing similar 92% declines since the 2021 peaks.

High interest rates, rising inflation, and a very bearish market are causing turmoil in an industry that has a lot of sub-prime loans waiting to be collected.

Source: Tami
Source: Tami

2. Return of the incumbents

Another issue, according to Crunchbase, that has emerged over the past year is that "traditional payments companies have also developed their own BNPL offerings. Last month, Visa announced the development of Visa Installments, its own BNPL offering. MasterCard also entered the BNPL space last year with MasterCard Installments".

Debt collections & recovery: a critical topic that BNPL companies often oversee

BNPL companies’ revenue depends a lot on customers’ ability to cure their debts. However, 

  • According to Sfgate’s report, around 43% of BNPL users miss at least one payment. 
  • Fox Business also states that about 30% of BNPL customers struggle to cure what they owe to the BNPL companies.
  • It is therefore not surprising that Klarna recorded a net loss of $730 million in 2021 due to collections not keeping up with the pace of accounts going into arrears.

With the conflict in Europe, global inflation, and the aftermath of the COVID pandemic, the situation will only become worse as customers are having trouble earning a living.

Therefore, how to recover the debts and collect the repayment as early as possible to ensure the cash flow will be a critical topic for every BNPL company.

How can BNPL companies recover their debt and increase their cash flow?

BNPL companies have three potential strategies to recover their debt and increase their cash flow. Let’s examine these options in detail.

1. Use a debt collection agency (DCA)

Rather than trying to collect their debts in-house, BNPL companies can outsource this tricky, awkward process to professionals—in other words, to DCAs. Except, this is far from optimal.

The possible result: a drop in company reputation

DCAs are generally renowned for using overly aggressive dunning strategies. Collections agents constantly call past-due customers and if they do get through, they often use threatening language. DCAs have even been known to target past-due customers’ family members when trying to persuade them to pay back their debts. If BNPL companies use DCAs, their brand’s reputation might quickly take a hit. 

2. Build your own collections solution

BNPL companies can always choose to build their own collections solution, taking their recovery processes in-house and dedicating a huge amount of IT resources to the project.

The possible result: time-consuming and energy-intensive

This is counterintuitive. BNPL companies need to increase their cash flow, and not spend huge sums of money on new projects. Plus, this new solution would also have to pass all the necessary compliance and regulatory checks. The entire process of developing, optimising, certifying, and rolling out this solution would be an unwelcome distraction and a massive headache. 

3. Implement modern collections software

Implementing modern collections software offers the best of both worlds. BNPL companies can handle collections in-house and avoid the reputational damage of working with aggressive DCAs. Moreover, they can immediately use a ready-made, easy-to-use, and incredibly customer-centric solution. 

The possible result: increased satisfaction among customers and employees

The best collections management software makes life as easy as possible for collections agents. With IT-free drag-and-drop template builders, self-service repayment enablement, multichannel communication strategies, and data-driven analytics dashboards, BNPL companies can spare a huge amount of time and effort, with full visibility of consumer payment behaviours reporting.

Your next step toward successful debt recovery 

Not all collections software providers are equal. BNPL companies must rigorously evaluate potential providers before picking a solution. Curious to know what you should know when evaluating the collections vendors? Discover more in this article: Top 5 Things to Consider When Choosing a Collections Software.

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