Buy Now, but Who Pays Later?

Buy Now, but Who Pays Later?

At Ethical Partners we view the many issues relating to sustainability as factors that contribute to risk in the investment case, and we are constantly looking for new risks in our portfolio and in our investable universe. Furthermore we are looking for how we can create positive outcomes for shareholders and the wider community from the recognition of these issues. In that vein we feel it useful to walk through one such example to bring you along on our analytical journey.

Does the prolific growth of Buy Now Pay Later operators represent a sustainability risk to retailers?

We are currently assessing the role of Buy Now Pay Later (BNPL) operators in the economy and how that may affect our portfolio (we don’town any BNPL operators but own several retailers). Simply put, the Buy Now Pay Later offering has some characteristics of a credit card and some of a traditional Lay-By product, but in short allows the consumer to purchase and take home a good or service immediately and pay for it in instalments over the subsequent weeks and months. The significant role they are now playing as a medium for which retailers are interacting with a growing consumer base cannot be ignored. This is the lens for which we will assess this topic. This week ASIC released a report with some damning statistics (albeit muted conclusions) into the BNPL industry which has heightened our concerns.

• 10% of the Australian adult population now has at least one BNPL account. ASIC found that a typical BNPL user is a lower income and younger demographic.
• The number of transactions are rising materially, on a monthly basis up from 51,000 in April 2016 to 1.9m in June 2018.
• One prominent BNPL operator, AfterPay (APT), flagged at their recent AGM that alone they account for well over 10% of all online sales in Australia (online in turn being a source of out sized growth for the retail sector).
• Only one out of 6 major providers of BNPL services assessed in the ASIC report actually examined the income and existing debts held by consumers prior to providing their services.
• A significant number of clients are charged late fees (typically in lieu of interest).

Specifically from the report we are concerned by the conclusion that a majority of customers acknowledged the offering meant they would spend more money (64%) on more spontaneous (81%) and expensive items. Furthermore, almost one quarter of users made some payments to the BNPL providers from their credit cards (translating to an increased interest burden).

Central to our investment process is meeting with management teams. It is now common place to hear from listed retailers that APT and other BNPL providers have been a significant positive factor in their online sales growth. Establishing that BNPL is of growing influence is Step 1. Unfortunately the report released last week by ASIC (referenced above) provided some distressing examples of customers where the provision of BNPL services was clearly not in their long term interest. Thus we reach Step 2 - an identified risk.

ASIC’s report noted that typically retailers were forced to distribute all advertising material provided by the BNPLs and actively promote the product in store and online, notably almost one in five BNPL users said that a sales assistant had encouraged them to use the BNPL offering.

Our Investment Process is about constantly challenging ideas and this is clearly an issue that needs to be addressed. BNPL is a fast growing and dynamic area which poses important questions for our process.

• ‍Does the emergence of Buy Now Pay Later create a risk for retailer sales if the BNPL industry was to become more regulated?
• Has there been pull forward of sales at listed retailers at an unsustainable rate due to this upsizing of purchases?
• Do the retailers challenge AfterPay and other BNPL players about their client base and how they screen and safeguard consumers?
• The case studies in the ASIC report highlight the possibility that some of the activity could be classified as predatory lending under our Investment Process and what are the implications for retailers who promote BNPL services in store and on their websites?

We are currently discussing these issues with the companies in our investable universe to understand the potential risks involved.Furthermore, we will be encouraging a more active dialogue between the companies we are invested in that operate in the retail space and the Buy Now Pay Later operators. We will endeavour to a) address our portfolio positioning in consumer discretionary stocks depending on the conclusions and b) encourage a more mindful and holistic approach to the provision of a product that shares some characteristics with unsecured credit, and we will keep you informed of our findings.

Finally, the Ethical Partners team continues to look out for other emerging issues and one is the role of data privacy and the provision of consumer data to 3rd parties. It is a wide ranging issue covering the health, finance, retail and technology sectors and we are currently undertaking research on this area.

Link to full ASIC Report: https://download.asic.gov.au/media/4947835/rep600-published-28-11-2018.pdf

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Andrew Wilson
Senior Analyst

Ethical Partners Funds Management