A butcher places a tray of meat in a display cabinet

Rising interest rates, putting bad debts buy now, pay later sector on the brink

Buy now, pay later Products like Afterpay and Zip have become a popular payment method, but the industry faces a perfect storm of rising interest rates, bad debt, a crowded market and looming regulation.

For businesses like Daniel McCarthy’s butcher shop in regional Victoria, offering customers the option to use a buy now, pay later (BNPL) service has led to revenue growth.

“It’s been critical to our online business,” said Mr. McCarthy.

The payment method is used for about 60 percent of online sales in his business, and customers also use it in-store.

Its customers who use it also spend more: $140 on average, compared to $30 with other in-store payment methods.

“People can buy a bulk pack and not really spend their money on it,” he said.

“They can put it on a payment plan and it just works with their budget.”

Daniel McCarthy says his customers like to use BNPL because they can split their refunds. ABC News: Simon Tucci

Buy Now, Pay Later Businesses essentially buy a customer’s debt in exchange for a merchant fee.

The customer pays in installments to the company BNPL and the service is interest-free.

Fees will apply if refunds are missed, and some companies charge other account fees as well.

While BNPL has been great for many retailers, especially during the COVID-19 pandemic, some say the industry’s glory days are over.

Startups — including Afterpay and Zip — once dominated the scenebut traditional banks like CBA, Suncorp and NAB, along with Apple, are making an effort.

“You’ve seen a land grab where these companies are spending a lot of money on sales and marketing to acquire new customers,” said UBS analyst Tom Beadle.

“Those customers are not necessarily good customers.

“In fact, you could almost argue that they select poor quality customers themselves. So what these companies need to do is kind of focus on keeping those good customers that pay back and of course remove them [who] do not.”

Zip Co’s bad debts and projected losses have quadrupled to $148.3 million in the six months to December 2021, compared to the corresponding period the previous year, according to the company’s latest half-year results.

Afterpay’s projected credit loss was up 50 percent in the six months to Dec. 31 to $151,112 million, according to the company’s latest update to the U.S. Securities and Exchange Commission.

Mr Beadle says bad debt is increasing as a result of pressure on household budgets.

“And with those bad debts increasing, there’s a circular effect because companies that buy now, pay later and then tighten their lending standards,” he said.

“So that then further slows revenue growth.”

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