BNPL headwinds paint Afterpay-Block merger in positive light

The bears are on the run at Wall st.

It’s no secret that times are getting tough for BNPL. As the US continues to tip toward recession and global interest rates rise, it’s not unlikely that a spate of BNPLs will have to shut up shop, or seek safety in M&A activities.

Add to that the threat of Apple’s super-sized entrance into the market, and it’s not hard to be bearish. In no uncertain terms – a BNPL reckoning may be on its way. Here’s a short list of headwinds facing the sector:

  1. Apple – Apple’s foray into the BNPL sector (now confirmed) was the worst-kept-secret in the world of tech.
  2. Interest rates – global interest rates are rising sharply, with the Fed widely tipped to raise rates by 0.75% next cycle.
  3. The ‘I word’ – it’s the talk of the town, but inflation and rising costs are currently shattering consumer confidence – particularly in the US.
  4. Recession – whether it’s global or constrained to the US, a recession would be damaging for consumer spending, and put pressure on BNPL through rising bad debts.

With all this out in the open, it’s easy to see why Afterpay’s move to partner with Block was a smart play. By achieving that kind of scale, and securing their addition to Block’s Cash App, Afterpay is positioned well to ride out the coming headwinds – and continue to offer its customers the services they’re looking for in tough economic times.

Why? There’s 2 key reasons.

The first is that seeking scale is currently in the interest of all BNPL providers. By having Block’s sheer size to call upon in the event of a loss, Afterpay is able to insulate itself from a lot of the threats facing BNPL right now. Having this scale on side will allow Afterpay to not only weather the storm better than a lot of standalone providers, but will also allow them to keep their lending criteria wider than a lot of smaller operators (who may have to tighten up as bad debts mount) – which will be good for cash-strapped consumers.

Second, Apple Pay Later. While many providers will be scrambling to figure out how to fight the supersized new entrant, Afterpay can be comfortable with Block. 

The reasons are twofold: First, Block’s Cash App is expected to hit 47.8 million users in 2022 – all these users will be given access to Afterpay soon. Sure, some of them may also be given access to Apple Pay Later, but according to PYMNTS data, out of the three most popular US shopping apps  – only one allows users to pay with Apple. Another big retailer, Amazon, also has a BNPL exclusivity agreement with Affirm. All of these offer Afterpay, and every Block-enabled merchant will too.

Secondly, Apple Pay Later won’t make the big splash in physical stores that it’s hoped to. Here’s an anecdote for you: “Ninety-four percent of Apple Pay users who could use Apple Pay to make a purchase – meaning they have an iPhone and are in a store that accepts it – don’t.” So why is this a big deal? Because it’s 5% of Apple Pay users who make purchases in store with a debit card. Debit cards are vastly more popular than BNPL as a payment method, so if this carries through, it’s unlikely that this same 5% will use Apple Pay Later.

With Block’s expanding legion of customers and merchants, and Apple Pay not only late to the party, but unable to motivate its current base to transact – let alone new customers – it’s not hard to see why the deal was shrewd on this front.
Whether BNPL can survive the headwinds facing the sector is up for debate (which I’ve waded into here), but whichever way you look at it, you’d have to say Afterpay is among the best placed to succeed.