One of my oldest friends would visit us when our sons were young and laugh at our style of parenting. Where other parents provided electronic devices and all manner of “educational toys,” Ed saw much hilarity in the fact that our kids made do as toddlers with a couple of small pinecones in a peanut butter jar that they would shake and make noise with. Despite his best efforts to lead them astray, they stayed fairly close to our early-childhood routine of nature and simple inputs.
This apparent neglect extended to us never having a television and hence there are a couple of decades worth of television series that we are oblivious to. Now that we’re empty-nesting, my wife and I are doing our best to catch up – binge-watching Downton Abbey and the like. We’ve been watching a few docudramas about epic business fails of late as well – in particular series detailing the falls from grace of both WeWork and Theranos.
I’ve been thinking about these two examples recently and was reminded about them when reading about Swedish Buy Now/Pay Later (BNPL) vendor Klarna. Those old enough to remember buying things on lay-by will understand the idea behind BNPL. As a child I remember yearning after some random toy or other. Most retailers would allow one to pay off a purchase over time – I’d go in with my weekly pocket money and after a period of weeks or months I would have paid off the purchase price and I could finally receive the item.
BNPL is a modern twist on this, in the same style of most modern technology plays – it does the same thing only it wraps it up in a bow and calls it disruption. It also does it in a way that increases risk, super-charges growth but fundamentally results in a risky and fragile model. Oh and in a last twist that is very in-keeping with the typical arrogance these technology companies display, no acknowledgement is made that they’re building on a long history of similar concepts.
The way Klarna (and a myriad of other vendors, including AfterPay, Zip, Affirm and Sezzle) works is to integrate into retailers and e-tailers technology systems – either Point of Sale or e-commerce engines. From there they allow the purchaser to “pay” via their solution and receive the goods immediately. The retailer gets paid (less a percentage fee) immediately and the BNPL vendor extracts payment from the customer over time.
Or that is the theory.
You see it doesn’t take a financial markets genius to work out that if the retailer gets paid and ships the goods to the customer, the tendency will be for the buyer to renege on their payment obligations. Modern society is, after all, wired for instant gratification and if that gratification has already been received, the minor detail of actually paying for it will be somewhat unpalatable.
And so it came to be. Banking stalwarts will find it easy to predict what comes next in a situation where massive amounts of unsecured lending is being offered, with the very lightest credit checks (or, often, none at all). Yes, you guessed it, default rates started shooting through the roof. Admittedly made worse by a globally growing economic crisis, but fundamentally because the impetus to actually pay was low.
Research in the UK found that almost a third of shoppers who use BNPL say repayments on the loans have become unmanageable. This at the same time as usage of BNPL is growing exponentially. Of those third of Britons who use BNPL, 31% say that usage has resulted in problem debt levels for them. It seems that the old adage about not buying things one can’t afford has gone out the window.
And so, those “sure bets” and “disruptors” are finding that they themselves are being disrupted. Klarna just raised some capital at a valuation some 85% lower than its previous round. Alongside this it has shed over 10% of its staff numbers and is admitting that its default rate (ie the number of customers who inconveniently decide not to pay for the goods they’ve purchased through Klarna) is blooming.
In another example, we have an Australian company AfterPay that does exactly the same stuff Klarna does. Less than a year ago, AfterPay was acquired by another fintech disruptor, Block (which, confusingly, is the new name for Square). The deal valued AfterPay at some USD29 billion. Perhaps unsurprisingly, the growth that Block was expecting didn’t materialize or, to be more accurate, the only growth it saw was in the cost of sales and bad debt areas.
The net result is that Block has had to write down its exciting acquisition significantly and our Australian friends across the ditch can gloat at what is potentially the biggest ever transfer of wealth from the US to Australia.
Now none of what I say should be taken as suggesting that technology can’t be applied to the financial sector to drive good outcomes. I’m involved in a number of FinTech companies myself and am excited about what modern approaches to customers and products can offer.
But I’m also mindful that things that seem too good to be true often are. The sort of growth that the BNPL vendors enjoyed was based on absorbing huge costs and massive financial risks and somehow suggesting that because this was the technology sector, the old rules didn’t apply. Time is showing that rules are rules for a reason.
My sons haven’t suffered long-term impacts of an old-fashioned approach to child rearing. Anyone looking to disrupt a traditional sector or approach should think deeply about whether that disruption is truly driving benefits.
Ben Kepes is a Canterbury-based entrepreneur and professional board member. He’s not a big fan of instant gratification.