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As Interest Rates Climb and the Tide Goes Out, BNPL’s Resiliency Will be Tested

FP | Bianca Bharti | Sep 30, 2022

Jack Dorseys Block - As Interest Rates Climb and the Tide Goes Out, BNPL's Resiliency Will be TestedHigher borrowing costs will test the resiliency of BNPL

  • The Bank of Canada has increased its benchmark interest rate three percentage points since March and governor Tiff Macklem has been clear he isn’t finished, as inflation is running at an annual rate of about seven per cent, too fast for a central bank that targets two per cent.
  • So, higher borrowing costs will test the resiliency of BNPL, a type of credit popularized in recent years by digital upstarts that typically allows shoppers to pay four instalments at zero interest over a period of six to eight weeks.
  • BNPL companies took off in the pandemic thanks in part to central banks in the United States and Europe dropping interest rates to zero, generous government stimulus that induced spending and the e-commerce boom, said Michael Taiano, senior director at Fitch Ratings Inc.

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Block Completes Purchase of BNPL pioneer Afterpay

  • Jack Dorsey’s Block Inc. finally brought its buy now, pay later (BNPL) service to Canada last week, eight months after buying BNPL pioneer Afterpay Ltd. for US$29 billion in January.
  • Block is betting that the new interest-rate backdrop will separate the strong from the weak, as financial technology companies that are overly reliant on BNPL become prey for companies that offer a wider array of financial services.
  • Canada’s major entries, PayBright and Flexiti Financial Inc., were purchased by Affirm and Wichita, Kan.-based Curo Group Holdings Corp., respectively, between December 2020 and February 2021.

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“We think we’re going to see consolidation,” said Alyssa Henry, who runs Square. “But I think we’re also going to see the rise of ecosystems like the ecosystem we have.”

“What gives me confidence is if you look at gen Z, they’re responding very strongly to buy now, pay later,” Lieu said.

“A lot of these BNPL providers just kind of popped up in the last couple of years when it was an attractive environment, but maybe they don’t have the business model to withstand some of the challenges that are currently present,” Taiano said.

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NCFA Jan 2018 resize - As Interest Rates Climb and the Tide Goes Out, BNPL's Resiliency Will be TestedThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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