Two years ago, a low-interest environment and pandemic-induced surge in eCommerce resulted in a buy now, pay later (BNPL) boom that saw the likes of Swedish provider Klarna rise to become globally recognized brands and giants of the digital payments space.
And as investors saw an opportunity to back the next PayPal, venture capital flowed into the sector thick and fast resulting in a BNPL goldrush.
Oh, how times have changed.
Last week, PYMNTS reported that Klarna was in talks to secure additional investment that would slash its valuation from $45.6 billion to about $6.5 billion — a staggering 86% drop in its value.
Although Klarna’s fall from grace has been especially spectacular, it is not the only BNPL lender to witness its valuation plummet. Between regulatory crackdowns the world over, an overcrowded marketplace and a global economic slowdown, many of the early success stories in the space are facing a similar predicament.
The first generation of Klarna-style BNPL solutions emerged on the scene in a very different world to the one they’re experiencing today. Low interest rates and what felt like a bottomless supply of investors’ cash encouraged risky lending to consumers who were living paycheck to paycheck.
Now, with inflation on the rise and many countries facing recession, those high-risk borrowers — typically low-income and younger — are starting to default.
But, as PYMNTS discusses in the latest BNPL tracker, older, more financially secure customers may offer a lifeline for the struggling sector. In fact, PYMNTS research found that older and higher-income demographics are some of the fastest-growing groups of BNPL users.
According to the report, 71% of BNPL users with annual incomes greater than $100,000 increased their usage of the service over the past year, a growth rate that is higher than that observed in all lower-income brackets.
When looking at BNPL growth by generation, the fastest-growing usage of the service was among bridge millennials, defined as those between the ages of 34 and 43. This group saw their usage of BNPL increase 77% last year, more than any other generation, per the report.
Change of Course
For companies like Klarna, which have traditionally marketed BNPL as a product that helps younger consumers afford relatively low-value purchases, the data suggest a change in course may be the best way to ride out the current economic downturn.
PYMNTS Intelligence: Exploring Varying Uses of BNPL Options Among Generations and Income Groups
As George Danforth, head of payment operations at Splitit, told PYMNTS, “the high-inflation, recessionary economy makes older, more creditworthy customers very attractive going forward.”
Danforth added: “The quick rise of BNPL with the younger demographics happened when historically low interest rates made access to low-cost credit accessible and subsidized with venture capital and investor money to build a critical mass of consumers.”
In the vocabulary of credit, what’s needed is a shift in focus from subprime borrowers, that is those with a FICO score between 580 and 660, to prime borrowers with a credit score of over 660.
For anyone familiar with the recent history of lending and borrowing, the high level of subprime debt and falling BNPL stock prices should set alarm bells ringing. It is no coincidence that the U.K., a country that is all too familiar with the economic consequences of unregulated lending, is in the process of passing legislation that will enforce BNPL firms to carry out more rigorous credit checks.
The BNPL sector is certainly entering a turbulent period. As investors realize the bubble is bursting, lenders will probably see further devaluations before things get better. But far from indicating an industry in decline, shifting demographics offer a ray of hope for BNPL.
In his concluding remarks to PYMNTS, Danforth was cautiously optimistic: “If we head toward a major recession, you can expect to see BNPL use with younger generations decline while use among older consumers increases.”
He added: “The good news is that BNPL plans that enable older and more financially secure consumers to use their issued but unutilized credit cards will become broadly available, enabling them to continue to spend and manage their money in ways that they prefer. We are not far off from this under-tapped source of broad purchasing power becoming the next wave of consumer installments in the marketplace.”
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