It’s earnings season again and the 8-K’s keep coming. And no less so for the marquee fintech names. To date the earnings releases have been light on surprises and heavy on reaffirmation of existing trends in payments and consumer preferences that took root almost a year ago during the onset of the pandemic. These include a shift from card-present to card-not-present, a shift from credit card to debit card usage, a downtrend in travel and hospitality spending, and a downtrend in overall spending (though now showing signs of recovery). This past week was capped off by Paypal’s earnings release after the market close on Wednesday. Paypal had yet another blowout quarter in revenue, earnings, and guidance. But drilling down into the details of the report, it was the growth in Paypal’s niche product segments that grabbed my attention, including Venmo, its Bitcoin trading product, and its new buy now pay later (“BNPL”) offering – which brings us to the subject of this article.
After market close this Thursday, February 11th, recently IPO’d, buy-now-pay-later company Affirm ($AFRM) will be hosting its first earnings call to discuss its 2nd quarter 2021 results. As a trader, the release doesn’t invoke much interest given that the current market environment precludes me from getting the “warm and fuzzies” about any company that goes parabolic on it’s first day of trading – especially with no profits to show for it. As a fintech advisor, however, I’ve been eagerly anticipating this release, and if you’re invested in this space, you ought to be as well.
BNPL has been a heaven-sent for consumers and the economy throughout the pandemic. At its core, it’s another way of extending credit to consumers without having to use credit cards. BNPL feeds particularly well into the aforementioned consumer shift from credit to debit, as consumers have been (rightfully so) reluctant to become too extended in an economic environment with so much uncertainty. Consumers choosing to use debit over credit indicates an unwillingness to be subjected to the pain of carrying high-interest balances; meaning consumers are spending money they have on hand. BNPL providers extend credit via lower interest (and sometimes no interest) micro-installment loans with the payment schedule and amounts provided in clear terms at the point of purchase. For consumers who pay as scheduled, it’s perceived as a better solution than high-interest credit card financing with convoluted interest rate calculations and murky, often incomprehensible, business terms.
To date, we haven’t, at least not in North America, been privy to the data points these types of companies internally track, except for, in the case of Affirm, the information disclosed in their S-1 filing. European BNPL powerhouse Klarna is still privately held, Paypal just recently introduced its offering, and AfterPay, which trades on the ASX ($APT), trades in the USA as an ADR. Because of this heretofore lack of visibility into the major BNPL firms, we are going to get, for the very first time, a trove of financial data and KPIs that will impact the way we think about the buy-now-pay-later model, its viability (not just in financial terms, but regulatory as well), and the implications the BNPL model will have for other members of the fintech and payments ecosystem. Here’s a short list of parties who, aside from myself, will be paying close attention to Affirm’s release, and some of the reasons why:
Card Issuers: Acutely aware of the fact that between changes in consumer spending preferences and BNPL availability, major issuers like CapitalOne and Citi will be keen to see just how much of their core credit card business has been affected. Card issuers are potentially facing permanent changes to their own business models that will materially impact their long-term assumptions on credit card usage, revenue and profitability.
Investors: Affirm’s shareholders will want to better understand revenue, loan losses, profitability, growth rate, and percent of TAM, as they are all key components of their investment thesis. Alternatively, shareholders of the card issuers above, and/or alt-payments providers like Paypal and Square, will want to see how these companies benchmark against Affirm, particularly as it relates to market share.
Regulators: Just this past Tuesday, the UK’s Financial Conduct Authority (“FCA”) announced new measures to regulate BNPL companies based on evidence that they encourage consumers to participate in riskier spending behavior leading to unsustainable indebtedness. Sound familiar? Though the FCA is not a UK government entity, our Consumer Financial Protection Bureau is. Loss rates and the average amounts thereof will be key metrics that federal regulators will be watching.
Here’s how I see the week playing out. For the respective constituencies of the two teams in today’s Super Bowl, the next seven days will be filled with celebrations and laments. For most traders, the next seven days will be another week of earnings, headlined by reporting from Twitter, Coca Cola, and Disney. For investors and advisors in fintech/ payments, the noteworthy events of the next seven days will in no uncertain terms include February 11th’s reporting of Affirm’s first earnings release as a publicly-traded entity. It would be wise to not make the mistake of not imputing relevance to Affirm’s results; they will be very important to the payments and fintech sector and consequential for regulators and ecosystem participants alike. And for the BNPL segment writ large, favorable results will offer affirmation of the business model, and the realization that, “doggone it, people like [us].”
– Adam T. Hark, Managing Director, Wellesley Hills Financial, LLC