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Affirm Has Company as BNPL Borrowers Fall Behind on Payments

By James Brumley – Oct 30, 2021 at 10:00AM

Key Points

  • Sezzle's newest loans are seeing more late repayments, with delinquencies doubling since last year.
  • Charge-offs and loan-loss provisions have also grown, even as the global economy recovers from 2020's slowdown.
  • Digital payment platforms like PayPal and Square are expanding in buy now, pay later, adding to competitive pressures.

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The buy now, pay later craze is starting to show an all-too-familiar downside of easy credit offered on unaffordable purchases.

A couple of weeks ago I pointed out that buy now, pay later (BNPL) lender Affirm Holdings (AFRM -6.92%) is seeing a rising number of its borrowers fall behind on their loans. Specifically, 96% of the company's loans were considered "current" as of the end of June, down from 97.6% as of the end of 2020. It's not a catastrophic deterioration of Affirm's loan portfolio, but it is a concern given that the economy is supposed to be on the mend and unemployment is falling.

As it turns out, however, it's not just Affirm where delinquencies are on the rise. Buy now, pay later player Sezzle (SZL -8.53%) is seeing the same headwind, as is Australia's Afterpay (AFTP.F) (APT).

The trend is obviously something shareholders of all three companies should keep close tabs on, hoping for improvement but on guard for any worsening. Beyond that, this troubling development has implications for payment middlemen PayPal (PYPL -4.22%) and Square (SQ -2.46%), the latter of which is set to acquire Afterpay early next year.

Buyers' remorse

The excitement surrounding the buy now, pay later revolution is understandable.

Fintech market research outfit Kaleido Intelligence estimates that BNPL spending will grow at an annualized pace of 27% between 2020 and 2025, when it will facilitate $258 billion worth of yearly commerce Consumers like being able to make purchases on terms friendlier than those typically offered by traditional credit cards. Merchants like it too, since the option is not only cheaper for them than accepting credit cards, but it makes it easier for consumers to buy as well. Credit Karma reports that electronics and home goods are the two biggest categories of BNPL purchases. In that these tend to be more expensive than other types of discretionary goods, they're also tougher for a retailer to sell; sometimes a lack of credit can prove to be a purchasing impasse.

A bill stamped "past due."

Image source: Getty Images.

Given this, it's far from surprising that the lure of this new type of credit is proving to be too much to handle for too many borrowers. Credit-score tracking and management company Credit Karma reports that as of August, a little more than a third of U.S. buy now, pay later borrowers have fallen at least a little behind on their BNPL payments. Nearly three-fourths of those consumers who reported that they missed at least one payment also reported that their credit scores fell as a result. A study done by Momentive about that same time indicates that one out of every six of these consumers regrets using a BNPL option.

This is, of course, taking a toll on lenders' bottom lines.

Late payments on the rise, along with charge-offs

As noted above, fewer of Affirm's borrowers are making their installment-loan payments on time. Not only has the number of loans considered current declined significantly in just a few months, the average internal credit score of its borrowers has also fallen as the company has expanded its own loan portfolio. One could easily argue the company is "buying" loan growth by lowering its credit standards.

The specifics: As of the end of fiscal 2021 in June, only 65.1% of its borrowers were considered to be in the upper-quality tier of borrowers, down from 82.4% a year earlier, despite the pandemic being in full swing at that time. A year before that, 78.2% of new loans were being made to this top tier of consumers.



It's not just Affirm, though. Sezzle is seeing the same trends with its own loans. A year ago a little more than 95% of Sezzle's borrowers were up-to-date on their payments. Now, less than 91% of its users are current on their loan agreement.

Sezzle's buy now, pay later customers are increasingly slow to pay back their loans.

Data source: Sezzle investor filings. Chart by author.

In a similar vein, Sezzle's set-aside for bad loans, or loan-loss provision, grew in the latter half of 2020 and then increased in a big way again during the first six months of this year. Again, it's not the trend one would expect to see when the economy is recovering from the setback it endured during the 2020 pandemic lockdowns.

Sezzle's loan-loss provisions and charge-offs are rising.

Data source: Sezzle investor filings. Chart by author.

And for the record, Afterpay is in a similar boat.

Take the hint

As I made clear in my mid-October commentary on Affirm's credit risks, maybe this is just a transient, temporary swell of delinquencies and deteriorating creditworthiness. The pandemic and its aftermath are unprecedented in any number of ways, after all.

Nevertheless, most big problems tend to start out as small ones. Take 2008's subprime mortgage meltdown as an example. It was rooted in consumers' ill-advised decision to take on loans they couldn't afford to repay, and inflamed by lenders' willingness to let them do it.  The problems didn't start in 2008 though. Delinquencies and outright missed payments began to subtly swell as early as 2006.  It's just that nobody cared to notice it then.

Any turbulence in buy now, pay later isn't apt to cause the same sort of catastrophic ripple effect that the subprime crisis caused back in 2008. But it could prove painful for the companies focused on the market. That includes Square as it moves forward with its planned acquisition of Afterpay. It also includes PayPal, which reported a 15% increase in transactions in markets where it offers BNPL service.

Bottom line? If a foray into the buy pay, now later arena is the crux of the reason you own a particular stock, it would be wise to make a point of keeping your finger on the pulse of these metrics.

James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Affirm Holdings, Inc., PayPal Holdings, and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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