Strategy Note /

What Australia's BNPL woes mean for EM fintech

  • Australian BNPL stocks are down median 65% YTD and 87% in the past 12 months; spiralling bad debt is the major concern

  • Among EM fintechs, we see particular challenges for digital lenders: valuation markdowns and consolidation will follow

  • The BNPL story has not completely derailed, but companies must find the right balance between growth and risk management

What Australia's BNPL woes mean for EM fintech
Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Tellimer Research
10 May 2022
Published byTellimer Research

Australia is one of the global leaders in buy now pay later (BNPL), but the sector has been severely punished by investors recently. Soaring impairment costs are the major concern, but competition and monetary tightening have also contributed to investor discomfort.

As we have highlighted in the past, BNPL is a promising sector, but is not without its risks. In this report, we examine why Australian BNPL stocks have come under pressure, including credit risk cost trends. We also provide the key takeaways for emerging markets fintech and discuss what to expect.

Australian BNPL companies share price performance

Why have Australian BNPL stocks been hammered?

Shares of BNPL companies listed on the Australian Securities Exchange (ASX) have been severely punished by investors recently. These stocks have lost a median 65% of market value this year (and 87% since May 2021) compared with 22% decline for MSCI World IT and 8% for the Australian market. There are various reasons behind this massive underperformance, which include:

  • Spiralling bad debts. The credit risk costs of most of the BNPL companies have increased significantly. Based on our sample of 7 BNPL companies, annual credit risk costs now account for over 40% of revenues and 15% of outstanding receivables. These costs have jumped by median 145% yoy in 6 months ended December 2021.

Credit risk cost trends for Australian BNPL companies
  • Rising competition. Australia has one of the most advanced BNPL sectors, with more than 20 operators, several of which are listed on the ASX. PayPal launched its BNPL product in Australia in July 2021. Although revenue growth of BNPL companies has kept up well so far (55% yoy in the six months ending December 2021), rising competition at a time of major macroeconomic challenges raises concerns about the sustainability of overall volume growth.

  • Aggressive valuations early on. BNPL companies were trading at a median P/S of 8.0x at the start of the year compared with 6.7x for the global IT sector and 2.7x for the Australian market. Although the sector's revenue growth rate is strong, increasing concerns about asset quality and moderating growth could warrant more normalised valuation multiples.

4 takeaways for EM fintechs

  1. Lending fintechs are most vulnerable to macro challenges. Lending fintechs have one of the most profitable fintech business models, but they are also highly vulnerable to macro challenges. Hence, the key success driver for fintechs operating in this sector is their ability to manage delinquencies. 

  2. Expect more consolidation within the sector. As competition is rising and VC funding moderating, many fintechs, including BNPL companies, are finding it difficult to sail through the tough macro conditions. We expect more M&A in the sector, which could bring operating cost synergies and help companies better manage credit risk. Recent examples of consolidation in the BNPL industry include Square-Afterpay, PayPal-Paidy and Zip-Sezzle.

  3. Funding and valuations could suffer in the near term. Fintech funding moderated in Q1 22, but was still much higher than in 2020. In addition, valuations of private companies have been able to hold their ground, in contrast to the sell-off in public markets. The experience in Australia suggests that both funding and valuations could suffer (Australia fintech funding was down c40% yoy in Q1 22), particularly for the companies that are most vulnerable to slow global growth and those trading at aggressive valuations.

  4. The EM BNPL story has not been derailed but companies do need to find the right balance between growth and risk management. BNPL volumes continue to grow in many emerging markets and the industry has great potential, as we have previously highlighted. That said, investors should be cautious; we believe companies with superior credit risk management are the ones that will sail through these challenges and build sustainable and profitable businesses.