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Said of Afterpay on the company’s most recent earnings call. “We believe that what we’re building will be resilient and a sustainable strategy over the long term for both sides of the ecosystem, merchants and consumers,” Block Chief Financial Officer Afterpay said it plans to rely more on its cash to fund receivables, reducing the need to tap its warehouse line. Rate increases could prove more painful for companies such as Afterpay that derive most of their revenue from deals with merchants and late fees. The company said most of its funding is from fixed-rate debt, and the impact of rising rates would be minimal through the next year.
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Much of the debt carries floating interest rates, meaning it gets more expensive when the Federal Reserve raises its benchmark rate.Īffirm has the ability to pass along some of the higher funding costs to merchants in the form of higher fees or to its borrowers because it charges interest.
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Rising interest rates mean some buy-now-pay-later companies are already paying more for funding. What is your approach to ‘buy now, pay later’ companies? Join the conversation below. Affirm’s most recent securitization in April priced at a weighted average yield of 4.61%, roughly 3.3 percentage points more than its February 2021 securitization, according to Finsight.Ī spike in bad debt could increase the risk that banks and other lenders cut off the buy-now-pay-later companies, or demand much higher interest rates, said a former industry executive. Rising delinquencies have prompted investors to demand higher yields on the packaged-up debt they purchase from buy-now-pay-later companies. “And we are now going to have to dig our way out of that.” Said at a shareholder conference in Australia last week.
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“The industry as a whole, which has seen bad debts spike, really missed that moment,” Zip Chairwoman Zip said its “bad debts and expected credit losses” surged 403% in the last six months of 2021 compared with the same period a year prior. Zip said the increase was in part due to companies it acquired in 2021.
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adult population.Īfterpay’s losses equaled 1.17% of total payment dollars processed during its latest quarter, compared with 0.9% for its latest full year ended June 2021. Though they only made up about 15% of the U.S. Subprime consumers accounted for about 43% of shoppers who applied for payment plans or loans at retailers’ checkout between the fourth quarter of 20, according to credit-reporting firm That makes them appealing to people with limited savings and low credit scores. They rely less on-and in some cases bypass altogether-traditional credit scores and reports. The buy-now-pay-later business took off in a post-financial-crisis world of cheap funding and low delinquencies. “It is our mission to improve people’s lives, and we will be prepared to meet this demand-but again-our approach is only to extend credit that we believe can and will be repaid,” he said. Buy-now-pay-later plans like Affirm that don’t charge late fees will be in greater demand during a downturn, he said on an earnings call in May.
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It also has tightened lending standards “to reflect this evolving market context,” a spokeswoman said.Īffirm Chief Executive Max Levchin has sounded a more upbeat note. Klarna last week said it plans to lay off about 10% of its staff.