We’ve written on and off about the buy now, pay later phenomenon. And if last week’s news from BNPL bellwether Affirm is any indication, the bloom may be coming off the BNPL rose. The latter point is nothing we haven’t said before. BNPL has long been beset with controversies involving the degree to which it is encouraging irresponsible consumer spending.

However, we always figured that as long as demand kept growing, BNPL would find a way to persevere as the tip of the spear in alternative payments.

So what, exactly, happened at Affirm last week to change this narrative?

Mixed Bag

For starters, the company issues its FY23 Q2 earnings, which included a mixed bag of results, but a decidedly negative response from investors.

The message that seemed to break through, and not in a good way for Affirm, was that the current economic environment (inflation+rising interest rates) is presenting Afrim (and no doubt other BNPL players) with a stiff headwind. One of the problems with BNPL is that it kind of relies on cheap capital to survive. BNPL works by essentially buying goods for consumers and then collecting repayment from consumers over time. Some BNPLs promise zero interest. Affirm does charge consumers interest. More on this later. The merchants who partner with BNPL get paid in full at the point of sale. De-risking BNPL for merchants in this manner was key to getting the model off the ground.

So when U.S. Federal Reserve led by Jay Powell started wielding interest rates like a hatchet against the inflation villain, the cost of borrowing for buy now, pay later platforms like Affirm started to rise. And this presents an existential threat to the survival of BNPL.

Inflation a Double-Edged Sword for Buy Now Pay Later Players

‘A Significant Headwind’

Here is what Affirm’s CFO  Michael Linford said about the impact the current environment is having on Affirm, in the latest investor letter. And we read this as a proxy for what is happening to BNPL in general.

“On a year-over-year basis, higher benchmark interest rates and spreads remain a significant headwind to RLTC as a percentage of GMV, and we expect this to continue through the remainder of FY’23. However, we expect these headwinds to attenuate as we exit FY’23, in part due to more favorable comparables, but also due to the impact of our pricing initiatives.”

In case you were wondering, RLTC stands for ‘revenue less transaction costs’. And GMV means ‘gross merchandise value’. The latter acronym represents the total value of the goods that pass through Affirm’s platform.

By “pricing infinitives” Linford is referring to plans to hike the interest rates that Affirm plans to impose on consumers to offset rising borrowing costs.

This Tweet seems to encapsulate how investors, tech journalists, and other fintech observers view the relationship between BNPL and rising interest rates.

BNPL providers in a rising rate environment. pic.twitter.com/UptTp9hzlg

— Alex Johnson (@AlexH_Johnson) February 17, 2023

Double-Edged Sword

The role of inflation is interesting. We’ve previously written that inflation is a double-edged sword for BNPL. The current thinking seems to be that inflation is tamping down demand. Not a good thing for a service like BNPL that thrives on free-spending consumers.

Given the challenging outlook, we shouldn’t really be terribly surprised that Affirm also announced that it was laying off 19% of its workforce in the wake of the latest earnings results.

Affirm’s Founder and CEO Max Levchin said the following about the layoffs in his investor letter. He said the buy now, pay later firm will likely keep its headcount flat for the foreseeable future.

“Today, we are reducing the size of our team by 19%. This was the single most difficult decision I have had to make since Affirm’s founding, but I believe it is the right one. I take full responsibility for it and the actions that led us to this point.”

Kicked Around on TWIL

Quick spoiler alert, my Localogy colleague and I Mike Boland kick buy now, pay later around, including a tangent on the true meaning of all the tech layoffs, in the next episode of This Week in Local, of which Mike and I are co-hosts. The episode comes out on Monday.

Please check out the podcast and subscribe/follow wherever you get your podcasts so you won’t miss an episode.