How Will Buy Now, Pay Later Service Providers Navigate the Recession?

Buy Now, Pay Later companies have experienced several golden years during the COVID-19 pandemic, marked by the rapidly increasing popularity of their services. However, the future of the BNPL market is currently a hot topic, as the soaring inflation and the potential recession make consumers more apprehensive when it comes to buying expensive items best suited for extended payments.

Is there a way for BNPL to survive a significant economic downturn? Read this overview to find out which actions service providers can undertake to still hold sway even as the recession looms on the horizon.

The Current State of BNPL

The vast majority of big BNPL players saw a significant reduction in their valuations and stock prices throughout Q2 2022.

One example is the most renowned Buy Now, Pay Later platform, Klarna, which lost 85% of its worth over the course of one year, plummeting from $45 billion to $6 billion¹. The industry giant also announced cutting down its staff by 10% due to a combination of increasing prices, changes in consumer sentiment, and other global events².

Similarly, Affirm, another key BNPL player, reports a net loss of $186.4 million in Q4 2022, compared to $123.4 million during the same period in 2021³. Another service, Afterpay, has seen a 55% growth in total income to $645 million, yet its losses worsened to $345 million, which became a worrying indicator for the company’s investors⁴.

Given this challenging landscape that continues to become more and more competitive and a high likelihood of a recession, BNPL players are urged to rethink their strategies.

How Can BNPL Players Handle the Potential Recession?

The economic downturn is sure to put the BNPL service providers’ resilience to a test, which is why there are plenty of discussions revolving around the way this situation can be handled.

Here are some of the approaches Buy Now, Pay Later companies are likely to adopt to survive the recession:

1. Introducing New Limitations

Bank cards have an open line of credit, which means that consumers can withdraw funds until they reach a designated limit and pay interest only on the sum they borrow. That’s why, during the financial crisis in 2008, banks had the option to close inactive credit cards to prevent record loan losses.

However, BNPL lenders work according to a different principle - they cover an array of one-time purchases and cannot reduce credit lines. Thus, to avoid significant losses, they are likely to:

• Be more selective with customers when approving partial payments
• Limit the size of loans

This tendency can already be spotted across multiple BNPL platforms, including Klarna, which has already started aiming to lend less sometimes, especially to new clients.

2. Improving the Reporting Process

Another area that needs to be addressed when it comes to BNPL is reporting. Nowadays, when a client starts using a service for partial or extended payments, the platform doesn’t receive some valuable pieces of information about the individual, such as:

• The debts that the consumer may potentially have at the moment the application is submitted
• The customer’s loan repayment history

Reporting that lacks transparency often leads to the stacking of multiple loans from different providers and higher chances of defaulting.

One way to tackle this reporting issue is by integrating open banking. Yet, this solution would require the users’ consent for data sharing and has the potential to discourage some potential customers from using the service.

3. Not Giving Up on Innovation

For instance, in August 2022, Klarna already began reinventing its brand into a one-stop-eCommerce-shop. The company now enables shoppers to conveniently track all their online purchases through a single platform, regardless of the store and payment method used.

What’s more, the likelihood of an approaching recession offers opportunities for service providers that are willing to extend their range of services and help consumers and small businesses to:

• Budget
• Save funds
• Invest

All in all, we are likely to see many BNPL companies incorporating a wide range of services related to cash flow management to continue being relevant in the changing landscape.

Final Thoughts: Will the BNPL Market Continue Growing?

Despite the unstable economic situation, BNPL remains one of the fastest-growing eCommerce markets. Its global size is forecast to reach $39 billion by 2030, which demonstrates a CAGR of 26% from 2022⁵.

Indeed, the Buy Now, Pay Later concept is far from being new and has too firm of a grip on both consumers and businesses to completely disappear due to a recession. However, managing to stay afloat or even thriving during such uncertain times will require BNPL players to develop a resilient long-term strategy and stay flexible.

¹ - Bloomberg - Klarna Discussing Valuation Cut to $6 Billion From $45.6 Billion
² - BBC - Klarna to cut 10% of staff as it warns of recession
³ - Affirm - Affirm Reports Fourth Quarter and Fiscal Year 2022 Results
⁴ - Financial Review - Block pays for Afterpay hopes as results disappoint
⁵ - GRC Outlook - Can “Buy Now Pay Later” survive the economic downturn?