BNPL is not new, exactly, but has been thrown into the spotlight by Square’s acquisition of Afterpay in Australia – for a staggering $29 billion.
While all eyes are on Afterpay, there is more to ponder than just that purchase.
Everyone is getting into BNPL. It has reached a point where if a big player is not in the game, questions are asked, CEOs blush during earnings calls, and stock prices could be affected.
BNPL is not new. Most people will have staggered their payments on credit cards at some point in their life, and with interest rates still low, it is an attractive option.
Citi in the US is the latest to launch a BNPL product in Australia, in partnership with Diner’s Club. Called Spot, the card manages the repayments over equal payments in a bi-weekly cycle, interest-free. The headline for that story was that Citi has ‘blurred the lines’ between a credit card and a BNPL solution.
To be honest, it does not seem that blurry. After all, what is BNPL if it is not a staggered payment scheme?
The downside of BNPL should not be underestimated. As we said some months ago, the risks are serious.
Our worry has been confirmed by Fitch, the credit ratings firm, who shares the concern about the dark side of BNPL.
BNPL is debt, but it is not accountable in the same way as an overdraft or a loan. Credit checking, according to Fitch, is ‘soft’, and the debt is not necessarily added to a person’s credit score. The people who find BNPL attractive are exactly the people who are not the best credit risks – those who face uncertain times, uncertain futures and uncertain career paths.
The knock-on effect of BNPL in other areas of finance is, to us at least, is frightening.
Imagine if someone who had a decent amount they had paid for on a BNPL scheme applied for an overdraft or a mortgage. Imagine if the bank did the credit checks and did not see the BNPL amount in the affordability process. Imagine they loaned the customer the money, and then things went seriously wrong, interest rates went up, and the customer defaulted. And instead of one customer, there were several million of them.
BNPL reminds us of another time when banks made piles of money on sub-prime mortgages, spread the risk for big rewards. And the whole soggy pile came tumbling down.
It took the financial markets almost a decade (at the cost of some big banking names and many customers) to recover.
Let us hope, particularly now that markets are bubbling over, that the BNPL craze does not trigger another global financial disaster.