The buy now pay later juggernaut has come to a shuddering halt.
Share prices and valuations for the consumer credit companies have come crashing back to Earth as interest rates rise, consumer spending slows and the Government threatens new regulation.
Last week we heard Stockholm-headquartered Klarna has taken cash from investors in a capital raising that values the business at just US$6.7 billion ($10.8b) – just 12 months after it was valued at US$34.6 billion.
And on Tuesday, local BNPL company Zip announced it would terminate its planned merger with ASX-listed rival Sezzle. Shares in Sezzle had fallen 78 per cent since the merger was announced.
Zip and Sezzle's merger was pitched as a way to combine the companies' customer and merchant bases. The end result would be a much larger player that could compete with major global players such as Afterpay, Klarna and US market leader Affirm, investors were told.
But a bigger customer base isn't much help if a target company isn't making money – it just means more losses.
For a long time, BNPL companies had everything going in their favour.
Record low interest rates enabled them to borrow cash very cheaply to pay retailers for shoppers' purchases and then collect the money from shoppers over the next six weeks. Rapidly rising interest rates are now challenging this model.
Likewise, stimulus payments and economic growth bouncing back after Covid lockdowns kept consumers shopping – either in person or online. But slowing economies around the world will crimp consumer spending and increase the number of bad debts.
BNPL companies around the world have also been able to prosper because they argued they weren't lending money and therefore weren't regulated as credit providers. They aren't required to conduct consumer affordability checks or meet customer identity requirements. Customer acquisition is a lot cheaper as a result (although it arguably makes them more susceptible to bad debts as well).
But regulation is coming.
In Australia, Assistant Treasurer Stephen Jones said last week we should, "have an end to the silly argument about whether BNPL is credit".
"If it walks like a duck and quacks like a duck, it's a duck."
In Britain BNPL lenders will soon be required to carry out affordability checks on customers under changes to be legislated by the UK Government.
Even market conditions were in their favour, BNPL lenders struggled to make a profit. For instance, Australia's Afterpay – held up as the exemplar of the sector's supposed success – had never turned a profit before it was taken over by US payment giant Square (now Block) last year.
The true test of a business model isn't when things are working in its favour, it is when the tide turns.
There's an argument that BNPL companies can profit by providing targeted marketing leads to their merchants. After all, they know a lot about their customers – their age and gender, where they live and, importantly, what they buy. But providing marketing leads is already a very crowded space. It's hard to see how revenue from this could justify the cost of BNPL's entire lending ecosystem.
BNPL will probably survive as an industry, because young consumers are wary of credit card debt and love shopping this way.
Even so, there will be a shakeout and we have to ask how many BNPL companies will survive. There's probably only room for four or five global players, which suggests many of the smaller players might not be around for much longer. Afterpay, Klarna and Affirm are probably the most likely to survive as they have scale, and Apple and PayPal are also potential players.
Afterpay founders Anthony Eisen and Nick Molnar arguably picked the peak of the BNPL bubble when they sold their company earlier this year.
Between them, the pair took home A$264 million in executive pay last financial year, according to a survey of executive pay by Australian Council of Superannuation Investors.
It's important to note this pay was for employment by the company as executives. They each have several billion dollars' worth of shares as Afterpay's founders and largest shareholders before it was taken over by Square.
The quarter of a billion-dollar windfall came after the pair sold shares for A$90 each when Square bought the company after receiving them as $1 options several years earlier as part of their executive pay.
Molnar and Eisen were not the only executives to receive huge remuneration packages. In all, 17 chief executives from Australia's top 100 listed companies earned more than$10 million in the last financial year.
The average bonus awarded to ASX100 chiefs has also hit a record A$2.31m, just exceeding 2017's record.
These sorts of bonuses will come under increasing scrutiny in the coming months as share prices slide and profits drop, reducing dividends paid to shareholders.
Shareholders will rightly ask: if I'm taking a pay cut, why is the CEO getting a great big bonus?