Intense competition, rising regulation, challenging economic times and persistent losses led credit rating agency Moody’s Investors Service to paint a dire outlook for buy now, pay later companies in a report last week.

In addition, dwindling investor interest in the companies and more expensive funding for their lending services have helped sour prospects, according to the Nov. 8 report on the worldwide industry. To date, the difficulties have resulted in at least five years of industry losses, paid for by venture capitalists backing the businesses.

“If losses are not contained this year and new equity injections are not secured, many BNPL providers may deplete their equity over the next few years,” the report said.

Moody’s isn’t optimistic, predicting “few BNPL companies will remain independent.” “Some may be acquired, others may cease operations if their products cannot remain competitive in the market, or if they are unable to navigate the impending wave of regulation,” the report said, noting an Australian BNPL company, Openpay, shut down in February.

The biggest company globally, based on users, is the Swedish BNPL pioneer Klarna, with 150 million users, which dwarfs the Australian business Afterpay, now owned by San Francisco-based Block, with 16 million users, and Affirm, also based in San Francisco, with 14 million users, according to user data provided in the report.

BNPL benefited from a surge in online consumer demand for installment financing services during the pandemic, and more recently, some consumers are turning to it in the face of tough economic conditions. The general expansion of e-commerce will also help continue to lift BNPL, the report said.

Buy now, pay later is point-of-sale financing that lets consumers buy an item and take possession of it while paying for it over time, typically six weeks, in some cases without paying interest on the loan. To increase the potential for profits, some BNPL companies have started offering more interest-bearing loans and other services.

Still, the momentum of BNPL growth may not be sufficient to overcome a multitude of other challenges, the ratings agency said.

Specifically, competition in the BNPL arena is intense, with low barriers to entry allowing a slew of startups to enter the market — resulting in some 200 companies calling themselves BNPL providers last year, according to the Moody’s report.

Nonetheless, the bigger threat comes from large banks jumping into the ring. National Australia Bank, NatWest, Santander Bank, Citibank and JPMorgan Chase are among the banks offering BNPL-type services now, the Moody’s report said. Those financial institutions also have an advantage over BNPL companies in that their credit card networks have extensive reach and may offer services to merchants at lower rates, not to mention their more tested credit risk management, the report noted. 

In addition, tech giant Apple this year rolled out its Apple Pay Later service in another move that boosted competition. Apple’s offering, backed by bank Goldman Sachs and card network Mastercard, has immediate extensive reach through its dominant position in the digital wallet market, Moody’s said. 

Aside from competition, another obstacle for the industry is rising regulation worldwide. Moody’s enumerated regulatory moves to rein in BNPL in the U.S., the U.K., Sweden, Singapore and Australia as well as by the European Union. With regulators seeking to protect consumers and ensure all BNPL financing abides by the same standards, profits may shrink and compliance costs will likely rise, Moody’s predicted.

“To survive, BNPL firms must slash costs or increase revenues while maintaining volume growth and market shares,” Moody’s concluded. If they cannot, rising competition from incumbent banks and large tech companies will likely push many from the market.”


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