Buy Now Pay Later business model faces test as interest rates increase

The BNPL business model emerged out of a very low-interest rate environment, which allows the firms to raise funds at a relatively low cost. These firms have created one of the fastest-growing segments in consumer finance, with transaction volume reaching $120 billion USD in 2021. 

The business model is especially popular among young consumers during the COVID-19 pandemic, and throughout 2021 every $100 USD spent in e-commerce consists of $2 BNPL transactions. However, due to rapid interest rate surges and a decrease in consumer spending, the BNPL firms are facing higher funding costs which squeeze their profitability margins. 

In addition, during the second quarter of this year, BNPL shares have sharply underperformed the S&P 500 financials, including fintech firms such as Affirm Holdings (AFRM), Zip Co. (ZIP), Block Inc. (SQ) and Paypal (PYPL); these stocks are down by more than one-third so far during the quarter.

The following sources were used for the article:

  • Buy Now, Pay Later Will Get More Than One Bite at the Apple, The Wall Street Journal
  • Buy Now Pay Later business model faces test as interest rates rise, Financial Post

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