Banyan - September 2023

Buy Now, Pay Later Thrives Despite Rising Interest Rates

Buy now, pay later (BNPL) company Affirm continues to see demand from investors, reportedly defying earlier concerns about rising interest rates affecting all BNPL lenders.

Unlike traditional banks, BNPL providers rely on the market to obtain funds for offering small loans and installment plans to shoppers, exposing them to the cost of increasing interest rates. However, Affirm is thriving and attracting more buyers of loans to its funding platform, the Wall Street Journal (WSJ) reported Thursday (Nov. 9).

Banks have faced challenges with their deposits, which have proven to be less steady and cheap than anticipated, according to the report. Additionally, increasing capital requirements have forced banks to curtail consumer lending.

On the other hand, Affirm has found a growing demand for its loans from investors seeking higher yields, the report said. Pension funds and alternative asset managers are attracted to the returns on credit that can rival those from stocks.

Affirm’s recent earnings report exceeded analysts’ expectations, with a gross merchandise volume (GMV) of $5.6 billion in the most recent quarter, surpassing estimates, per the report. The company also managed to monetize a larger percentage of that volume, resulting in increased revenue net of transaction costs. Total net revenue grew by 37% year over year to $497 million, showcasing Affirm’s ability to generate interest and merchant fees despite higher funding costs.

Looking ahead, Affirm management has forecast current quarter GMV of between $6.7 billion to $6.9 billion, PYMNTS reported Wednesday (Nov. 8).

BNPL credits offer several appeals to investors, including relatively short-term returns and higher lending rates, according to the WSJ report. Over 90% of Affirm’s interest-bearing volume in October offered annual percentage rates up to 36%. Additionally, Affirm has maintained steady credit performance, with a decline in the 30-plus-day delinquency rate from the previous year.

Despite the positive developments, Affirm is still working toward profitability, with a net loss of over $170 million in the quarter, the report said. However, the company’s recent performance indicates that it is on track to attract renewed interest from investors, per the report.

In another recent earnings report, Swedish payments company Klarna reported that rising BNPL use among Americans helped give it a profitable quarter. Klarna reported an operating profit of $12 million for its most recent quarter — its first quarterly profit since 2019.