Should investors buy into BNPL?
Over the past few years, Australians have flocked to buy now pay later services (BNPL), due to an explosion in companies offering this service such as Afterpay, Zip.co, Sezzle and Splitit to name a few.
The attraction of these BNPL services has also seen share prices skyrocket, as retail investors speculate on these Fintech companies.
Afterpay (APT) has performed the best up 261 per cent between 2 January and 20 October this year while Zip.co (Z1P) was up 200 per cent between 2 Jan and 27 August.
But has the sun set on these stocks or is there more to come?
The Information Technology sector has been the best performer this year up over 40 per cent while Energy has been the worst: despite a 33 per cent gain so far this month, it is still down over 20 per cent for the year.
In my opinion, these BNPL stocks have had their day and like all stocks in new and exciting areas that have spectacular rises over short periods of time, they eventually come back down to earth.
The challenge for companies in the BNPL space is that the big players in the short-term finance and payment gateway system have sat back and let these new fintechs develop the market and appetite for BNPL.
In essence, they let the new players take all the risk and now the big players are beginning to enter this space.
Mastercard, Visa and in the last few weeks Pay Pal, have now entered this space in the US market capturing over 25 per cent of the market, which has sent shock waves among the other BNPL players. These big players also have their sights set on the Australian market.
While it is possible that companies like Afterpay and Z1P will survive and grow despite these big players, the success or failure of these new Fintech companies will be determined by how flexible and responsive the big companies are to their clients, rather than how innovative they are.
Matercard, Visa and PayPal are well established in the payments industry, as each has a significant number of clients to market their BNPL service to and if they get it right the new fintechs will struggle to grow.
Right now it is too early to tell how much effect these big players will have on this industry, but in my mind young BNPL stocks have had their day in the sun and investors would be wise to think about exiting this space and to come back after the dust settles on this battle.