03 June 2022 |

BNPL During A Recession



BNPL During A Recession

The dog days of summer might be starting early—I didn’t find much that was worth opining on. 

But I did notice a ton of articles on “The Death of BNPL,” like this Wall Street Journal piece or this Sifted.Eu piece this week

Long story short—because interest rates have gone up 0.75% (or 75 basis points), journalists think the entire economic model of BNPL will come crashing down. They’re predicting a sustained increases in delinquencies and losses, and that cost of capital will increase because interest rates have gone up. 

Look I’m not saying that BNPL companies have it easy going forward. What I’m saying is that a lot of them, especially the industry leaders like Affirm, are very cognizant of the fact that they’ve been running a consumer lending business during a very long and sustained bull run for the economy. Eventually, the music was going to stop and they’d have to figure it out. 

I think what’s happening is more of an adjustment than the beginning of the end. The economy is changing and lending is more of a balancing act than a full sprint—now that the economy’s turning, BNPL lenders should be adjusting their risk models and tightening their borrowing requirements, etc. Companies like Affirm have also been finding new ways to capture customers and increase their distribution cheaply—the latest Affirm deal with Stripe, which was announced earlier this week, to bake in BNPL services into Stripe is a great example. Instead of capturing a small sliver of those merchants over a long period of time, by partnering with their payments provider, those merchants can easily add BNPL products powered by Affirm. 

The bigger issue is the cost of capital for lending, which is a longer term issue for most BNPL companies. The end solution here is to become a chartered bank, which some BNPL players have explored in years past. 

Understanding JPM’s Digital-Only UK Strategy

JP Morgan’s investor day was late last month and some news came out about JPM’s UK digital bank: the digital bank has more than $10 billion in deposits and 500k users since it’s September launch. 30% of the users are “highly engaged” and JPM’s seen 20 million card or payment transactions through the platform. JPM also said it’s estimating on losing around $450 million this year and up to a $1 billion over the next 5 years getting this product to market and profitable.   

All this is way way better than I expected—my initial comparison to this was Finn, which had a similar strategy in the US but shut down after a year. 

Now, I normally don’t care what banks are up to unless their VC firms are marking up early stage fintech deals or they’re customers of fintech infrastructure services. But I found JPM’s strategy to expand internationally through digital channels fascinating. It’s pretty much the same play as Marcus, but just focused on international, which might make it work a bit better. 

JPM has two things going for it: a strong brand and a ton of cash. The UK digital bank is under the “Chase” banner, which doesn’t have a strong retail presence internationally, but is one of the strongest financial brands in the world. And, perhaps most importantly, JPM makes a ton of money—the bank made $125 billion in revenue (with a B) last year, so the expected “loss” over the next few years equates to a very small slice of revenue. It can afford to spend a *ton* on marketing, rewards, and other benefits to capture demand and establish consumer behavior through introductory promotions and still not have it be a dent on the balance sheet. A fintech startup just can’t do this—especially in this fundraising climate. And all of this is still cheaper than building and operating a bank branch network in a new region. 

Digital international expansion seems to be a big play for JPM in the near future—the company even dedicated an entire slide deck to it during its investor day. It gives a fascinating overview of how a bank looks at building digital products—there seems to be a huge upfront cost around building a robust digital banking platform, but those costs drop significantly over time. 

In the US, we’re seeing the beginning stages of “fintech fatigue”—just doing a general neobank or consumer fintech product isn’t that appealing for customers anymore. Internationally though, a lot of the benefits and financial products we’re used to, like a savings account with 1.5% interest like JPM has in the UK, aren’t that common. 

Next stop, Sao Paolo? Brazil was mentioned in the deck, and JPM owns a stake in Brazilian digital bank C6. A growing economy with a strong digital banking presence, an expansion to Brazil through a partnership, acquisition, or just outright building it themselves isn’t a crazy possibility.


(Sorry, I spent a lot of time not on Twitter this week. If you see an interesting thread on fintech or crypto, DM me or @fintechtoday_!)