Buy now, pay later (BNPL) products were all the rage in 2021. With a potentially disruptive consumer lending model and fast-growing customer bases, some analysts even projected that these companies were poised to disrupt the dominant credit card networks like Visa, Mastercard, and American Express. Bold statements, that's for sure.
But in 2023, these dreams of a BNPL future -- like many other financial technology "disruptors" -- have fallen flat. BNPL provider Affirm (AFRM 5.31%) is down significantly from all-time highs, with shares of its stock off 87% from a 2021 peak. This means if you invested $100 in the stock just a few years ago, you would only have $13 left today. Not great.
Bears will argue that Affirm is no different than traditional lending and will amount to a flash in the pan versus the traditional finance players, which is why the stock is sinking. Are the skeptics right here? Or is now a great time to buy the dip on this pandemic favorite?
A new credit model, but is anything truly different?
Affirm claims its BNPL spending products are less predatory and more consumer-friendly than credit cards. It works like this. Shoppers who checkout from a store (typically online, but sometimes in person) using Affirm don't have to pay anything up front, but will "pay later" with four installments every two weeks for the purchase. If the shopper wants to extend its credit even further, Affirm will start charging interest on these balances, which is a way it generates revenue.
From my seat, this looks very similar to credit cards, just with a marketing twist. Both products allow you to pay for things upfront. Both charge zero interest for a time, allowing consumers to extend their credit. Both products start charging interest after this initial grace period.
Credit is credit at the end of the day. If you pull back the marketing claims, I think the bears are right that BNPL is just a commodity service.
Bulls argue market opportunity, but the data tells a different story
A lot of bulls for Affirm will argue that BNPL is just in its infancy. It only processed $5.5 billion in payment volume last quarter compared to trillions of dollars spent by consumers around the world. They believe the company is poised to grow this payment volume at a high rate for many years into the future as more and more people adopt BNPL for their spending.
The problem is, when you look at the data, Affirm is actually losing market share to the traditional providers. For example, last quarter, American Express grew its payment volume by $25.8 billion year over year to $420.2 billion. That growth is almost five times the size of Affirm's entire payment volume in the period.
Visa, Mastercard, and American Express retaining market share has nothing to do with a better business model but a distribution advantage for merchant acceptance. Visa is accepted by 100 million merchants around the world. Affirm is only accepted by 254,000. It will be a long, long time until Affirm closes this gap, if ever. This makes Visa cards and the Visa network more attractive for both merchants and shoppers because you know with certainty you can pay with a Visa card for virtually anything anywhere in the world.
At the end of the day, profits matter
Making matters worse, Affirm's business model seems to be broken. Last quarter, it generated $446 million in net revenue, up from $364 million a year ago. In order to grow its revenue by $80 million, Affirm generated an operating loss of $244 million. That is a $244 million operating loss just in one quarter.
Affirm spends a boatload of money on marketing, technology development, and general overhead costs. When you add this to the high fees, interest expenses on its loans taken out to extend consumer credit and loan losses, it is hard to see how the company has a path to profitability. Even if the company cut marketing, technology, and overhead costs in half, it would only save $212 million and still be operating in the red. Drastic cuts to these divisions would almost certainly affect Affirm's revenue growth, too. There are no good options here.
BNPL providers have no advantage over the traditional credit card networks and are losing market share. With a terribly unprofitable business, investors should stay far away from Affirm stock unless they make some major changes.
