Buoyed by years of robust economic growth and booming household consumption, the AsiaPacific (“APAC”) region has seen rapid growth in the consumer finance market, with total consumer finance loan volumes reaching USD 5.4 trillion in 2021. Despite strong demand, traditional consumer finance products – such as personal loans and credit cards – have faced heightened criticism from consumers and merchants alike, exhibiting problems such as high interest charges / fees and static conversion rates, respectively. Recognising these pain points, numerous alternative consumer finance solutions have emerged in recent years – the most notable one being Buy Now Pay Later (“BNPL”).
Unlike traditional consumer finance products that monetise consumers through fees and interest charges, BNPL firms primarily monetise merchant partners by charging them a merchant discount rate (“MDR”) to facilitate credit-enabled transactions. In doing so, consumers are given access to better financing and repayment terms without the need to pay interest. And regional demand for BNPL solutions is skyrocketing as a result, with total gross merchandise value (“GMV”) forecast to grow by a CAGR of over 39% from 2022-25, reaching USD 361 billion.
Nonetheless, BNPL firms currently face a plethora of challenges on several fronts, including unsustainable customer / merchant acquisition costs, NPLs, and funding costs, as well as low user retention rates. As such, most BNPLs are struggling to turn a profit, with even the largest players in developed markets (both in APAC and the West) making sizeable losses. In fact, we estimate that the largest BNPL firms are currently running average profit margins of -15% p.a., with more nascent players operating in emerging markets suffering from profit margins of -100% p.a. Investors are voting with their feet, with share prices of listed BNPL firms being battered in 2021.
We believe that the BNPL model, as it stands today, is in need of a fundamental rethink, and see three key routes that firms must explore to carve out a path to long-term profitability:
(1) optimisation (i.e. enhancing processes across the user journey and adopting alternative funding models);
(2) integration (i.e. expanding vertically across the consumer value chain to enhance user retention and drive profitability); and
(3) expansion (i.e. leveraging existing credit capabilities to tap into additional revenue streams, including alternative credit products and/or B2B technology solutions).
We see significant upside potential for BNPL firms that can successfully transform their strategies and operating models. For BNPLs operating in developed APAC markets, we see a 30% uplift in revenue and 20% reduction in costs as achievable targets within a three-year timeframe. For BNPLs operating in emerging Asia, we see a corresponding revenue uplift and cost reduction of 45% and 15% respectively, over the same period. Unless major changes are made, we anticipate that most BNPL providers in the region will continue wearing losses indefinitely and forecast combined market losses to reach USD 5.2 billion by the end of 2025, based on the industry’s current P&L trajectory.
While we envisage a more sanguine future ahead for BNPL firms that can rapidly adapt their business models, it is going to be a case of Buy Now, Pray Later, for those who fail to get it right.
