When we want to know what the BNPL industry thinks of an issue, the first source we think of is Affirm CEO Max Levchin. Or at least he is the go-to source that CNBC turns to when it has BNPL-related questions.
And one question hanging over the industry intersects with a bigger public policy question, at least in the United States.
And the issue is, what impact will the resumption of student loan repayments have on the health of the buy now pay later industry?
Ep. 30 Unlocks Savings Culture with Accrue CEO Michael Hershfield
A Big Pile of Debt
According to Lending Tree, there are $1.7 trillion in outstanding U.S. student loan debt obligations. The Biden Administration tried to cut that obligation by about $450 billion, but that effort was rebuffed by the U.S. Supreme Court.
BNPL is massively popular with millennials. And millennials are also among the demos gasping the loudest under the weight of student loan obligations. GenX is actually the most impacted generation.
Back to Max. He describes the resumption of student loan repayments, set to begin in October, as a “modest headwind.”
The question Levchin and his direct competitors face is whether the student loan headwind is indeed “modest”, or perhaps something more ominous.
The logic behind the concern is that younger consumers have become increasingly reliant on instruments like BNPL, which are attractive because they have generally been easy to apply for and offer low or zero-interest terms, to pay for ordinary expenses.
From Luxury to Everyday Purchases
And while BNPL came onto the scene as an attractive way for consumers, particularly younger ones, to acquire higher-end goods, over time it has become a tool for making day-to-day purchases. This has helped fuel the growing chorus of voices who increasingly see BNPL as an emblem of financial irresponsibility.
For example, in July, the Washington Post reported that consumers are increasingly using BNPL apps like Klarna and others to buy groceries and other necessities. The Post report cited data from Adobo Analytics that shows that BNPL growth was driven by grocery and home furnishing purchases.
As student loan repayments resume, the concern is that BNPL default rates will spike as consumers decide that defaulting on a BNPL loan as the lesser evil vs. defaulting on a student loan obligation.
And a recent report quantifies the potential damage to BNPL platforms like Affirm, Klarna, Afterpay and others.
According to a report in Payments Dive, Mizuho Securities estimated the student loan payments resumption to be about a 2% headwind to the BNPL industry’s volume growth.
The same article quoted Levchin downplaying this estimate, calling the headwinds modest. Even if 2% is modest, it may still be material for the leading BNPL players.
Back in July, we interviewed Michael Hershfield for our This Week in Local podcast. Michael runs Accrue Savings, which offers a savings-based alternative to BNPL called save now, buy later. He put the looming specter of student loan payment resumption in starker terms than Levchin.
“In the next few months, as the student loan crisis comes back, and rising delinquencies are on credit cards, we’re going to see what pain the American sewer might be feeling because of that significant credit usage over the last couple of years,” Hershfield said in the interview.
