Why BNPL won’t be killed by the cost of living crisis

The cost of living is rising around the globe at crisis levels, and analysts have the likelihood of a US recession at 30%. These are grim times to be a consumer. With these forces pressuring consumers’ wallets in the extreme, these would also seem to be grim times to be a BNPL.

Why? Because conventional wisdom says that rising interest rates and rising inflation will have a three-pronged effect on BNPL providers:

  1. Consumers will spend less on discretionary items – BNPL’s “traditional heartland”.
  2. The cost of servicing debt will go up.
  3. Cost-pressured consumers will find repayments more difficult, leading to higher bad debts.

Is this the oft-prophesied “end of Buy Now, Pay Later” that critics often rant and rave about? The short answer is no, but the longer answer is as follows:

It’s complicated. The economic pressures facing the BNPL sector are very real – the three factors above will be challenging, and the marketplace is fast becoming more crowded as banks across the world jump in on the craze. History will likely judge this as a “sink-or-swim” moment for BNPL.

That doesn’t mean that BNPL will sink, though. For one, Australian households have stashed away an enormous amount of wealth during the pandemic, and paid down plenty of debt. This means that many Australian consumers are better off than they were before, causing demand to remain strong. While cost of living pressures aren’t likely to go away soon, it may take a while longer for them to dent demand enough for BNPL providers to take a significant hit.

Secondly, let’s look at global interest rates. Interest rates are climbing around the world at the moment, which will increase BNPL players’ costs. There’s no question about it – the cost of maintaining large debt facilities (especially when you’re not passing on the interest) will be much larger. Interest costs will creep into the balance sheets of the smaller players, and are likely to cause some consolidation of the sector as costs become prohibitive. This won’t mark the end, though – just a realignment. It’ll also help established players by de-crowding the sector.

Lastly, bad debts. It’s a fact that in the coming months and years, Australian consumers will find it harder to make ends meet, and make their repayments. This will be a major headache for a few established BNPL providers. How much this comes to pass will depend on the broader economic outlook. The fact is that real wages have been going backwards for at least a year, so even with an extremely low jobless rate at 3.9%, the cost of living is still eating into Aussies’ ability to service debt. That being said, with the Australian job market as white hot as it is right now (over 400,000 vacancies currently), workers are upwardly mobile in terms of pay, which will help reduce the number of bad debts taken on by Australian BNPL providers. International players may not be so lucky.

So now let’s come to the elephant in the room. International players (especially those with a large US customer base) will have to face down the growing prospect of a recession in the States. At the moment, the US economy is searing – a tight labour market and significant wage rises have combined with COVID-induced supply chain issues to stoke inflation to a roaring flame. The US Federal Reserve’s miscalculation last year has left them late to the piece when it comes to raising interest rates.

US Fed chair Jerome Powell still believes a soft-ish landing can be achieved (that’s to say: A recession can be avoided), but pain for consumers is certainly on the way. If the US were to tip into recession, consumer confidence in BNPL’s biggest market would be shattered. All the points above would be cast into sharp relief.

So how does BNPL get through?

Well, there’s an argument to be made that tougher times for consumers will strengthen demand for BNPL services as consumers shift to using the service for their essential purchases – although whether this is a good thing or whether it will simply stoke more bad debts is up for debate. That being said, if BNPL providers can prove to consumers that BNPL is a money-management tool to budget through tough times – without taking on unserviceable debt – they are positioned to do well.

So the real question that will define whether BNPL sinks or swims is this: Are BNPL providers ready to be a responsible money-management solution that will aid people to deal with the rising cost of living? Or will consumers simply see BNPL as a cost that they want to avoid?

I sincerely hope for the former.