Block pays for Afterpay hopes as results disappoint

Much is being made in the media at the moment about the so-called ‘death of BNPL’, with stories being pushed to make it look like the sector is in trouble. One pervasive story is that losses are ‘ballooning’, and there is little growth to come in the sector.

The notion that BNPL is overvalued and overhyped is not new. Detractors consistently malign the sector, shooting a constant barrage of “bad debts”, “loss generators” and other terms designed to malign the industry.

The fact is, it’s BNPL’s rapid growth that’s driving these large losses. The more customers BNPL providers have, the more debt they must take on. However, the percentage of this debt that is “bad” isn’t rapidly increasing – in fact, the volume of debts actually written off by Afterpay is down $4 million in this reporting period compared to last.

Some of what the detractors claim may be true. The reduction in pandemic economic stimulus and increasing cost of living leaves customers with less disposable income to spend using BNPL services, and may well contribute to rising bad debts in future. These factors may well dent BNPL’s explosive growth, but they won’t sink the sector like many claim.

The real test for BNPL will come as global interest rates rise, but Block is confident that the sector will weather the storm. A key reason for this is that consumer spending in the US is holding strong despite rate rises, which is the key market for many BNPL operators. It’s early days yet, but so far the rises haven’t affected repayments either, with 95% of Afterpay’s repayments coming in on time.

So what do you think? Is this ‘the end times for BNPL’? Or are we simply seeing an adjustment to major changes in macroeconomic conditions? As Jun Bei Lu (portfolio manager at Tribeca) wrote in a recent AFR column, “interest rates are what they are, but good quality companies are forever.”