Buy Now Pay Later Can’t Grow Its Way Out of a Recession

The growth of BNPL may be impressive, but is it sustainable?

SUN VALLEY, IDAHO – JULY 05: Max Levchin, Founder & CEO of Affirm, Inc., arrives at the Sun Valley Resort for the Allen & Company Sun Valley Conference on July 05, 2022. (Photo by Kevin Dietsch/Getty Images) Getty Images

The Buy Now Pay Later (BNPL) sector had a busy week, showing a few more signs of life than it has for most of this year. Affirm’s July 14 announcement of a ho-hum sounding corporate partnership—with the ticket platform SeatGeek—appeared to give Affirm (AFRM) stock the best two-day boost it’s had in many months. (Other public fintech companies, including Upstart, Robinhood, and SoFi also had some good sessions, so there may have been other factors at work.)

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Affirm’s founder and CEO Max Levchin made a relatively rare live appearance on CNBC’s Closing Bell, saying:

Every time we have an opportunity to announce a really exciting partnership, it’s certainly a lot less about the stock price and just signaling to other retailers and consumers that Affirm is available, we are a more responsible, more intelligent way to buy things.

Levchin and many industry analysts continue to push the line that BNPL’s sustained growth make it a great sector to be in. He said, for example, that airplane tickets over the Fourth of July weekend purchased with BNPL were three times higher than last year, and concert tickets were ten times higher.

Those are big numbers. Consumers turn to BNPL for discretionary purchases (such as sports tickets) as they feel the pinch of inflation, but at some point as the economy worsens and discretionary income decreases either consumers buy fewer things, or BNPL turns into Buy Now Pay Never, which tends to be bad for the bottom line. There’s some reason to think that BNPL’s recent growth in the US has been less dramatic than is often assumed. This week, Morning Consult issued a research report on inflation and BNPL based on fresh survey data. Charlotte Principato, the Morning Consult financial services analyst who wrote the report, is broadly bullish on the BNPL sector. But the survey results show that a lot of American BNPL users are infrequent. Here is a breakdown of monthly BNPL users for various demographic groups:

Source: Morning Consult

Two things stand out: first, a huge part of BNPL growth in 2021 was related to holiday spending. Second, in almost all demographic groups, monthly BNPL usage is actually lower than it was a year ago. This appears to confirm that consumers try BNPL but they don’t necessarily stick with it.

Principato makes an intriguing argument about macroeconomic impact on BNPL: consumers expect things to cost more now, and are turning to BNPL to ease the burden of buying things;

The consistency with which U.S. consumers have used BNPL to fund their purchases throughout 2022 indicates that the payment form may be helping to keep their price sensitivity and substitutions at bay, and should be viewed as an indicator of the staying power of BNPL.

Similarly, Principato argues that continued interest rate hikes will make credit cards less attractive. These are plausible arguments, but rising interest rates affect other sides of the BNPL sector. First, it makes it more expensive for BNPL companies to borrow money, which puts pressure on already challenging margins. In May, when Affirm announced its most recent quarterly earnings, Levchin briefly acknowledged this pressure, only to wave it away by talking about the company’s “many different funding channels with staggered maturities and very different structures.”

But the broader issue about sustained interest rate hikes is that if they bring on a recession, then consumer spending is likely to shrink, which won’t be good for BNPL or a wide variety of financial companies. Indeed, if Affirm and other public BNPL players closed out the week with a healthy stock bump, it’s barely enough to make up for the brickbat they took from Goldman Sachs (GS) analyst Michael Ng, who began coverage of the stock with a neutral rating. In addition to citing increased funding costs and potential consumer softness, Ng also expressed concern about potential regulations that could slow adaptation of BNPL. Those issues aren’t going to disappear with the announcement of partnerships.

Buy Now Pay Later Can’t Grow Its Way Out of a Recession