Buy Now, Pay Later firms' credit losses on the rise

The largest BNPL providers have doubled their delinquency rates over the past few quarters.

Credit losses in consumer lenders are expected to impact buy now, pay later (BNPL) providers, adding to the storm of headwinds likely to challenge the alternative lenders, according to Fitch Ratings.

BNPL customers tend to be the near prime and subprime cohorts–the segments most likely to be most impacted by multi-decade high inflation, the ratings agency noted in a report.

“Some of the largest BNPL providers have seen delinquency rates more than double over the past few quarters, whilst credit card delinquency rates are relatively flat, underscoring the BNPL’s lower asset quality,” Fitch warned, adding that credit loss comparability is difficult due to differing accounting and reporting conventions.

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BNPL products could become loss leaders as funding costs and credit losses normalize, leaving BNPL platforms that are heavily reliant on pay in four products more vulnerable to profit pressure and capital erosion, the ratings agency further warned.

Furthermore, benefits from pandemic-related government stimulus are expected to wane and unemployment sighted to rise as the US Fed tightens monetary policy in attempts to tame inflation. 

The BNPL sector will also face increased challenges from growing competition and higher funding costs.

Competition has intensified as incumbent credit card seekers moved to the defense and are now actively seeking to protect their market share. Other fintechs are also entering the market, attracted by the strong consumer and merchant adoption of BNPL, Fitch noted.

“As costs rise and competition increases, we expect a rationalization of the BNPL economic model that could lead to further industry consolidation,” it concluded.