Buy now, pay later will get more than one byte on Apple

Conversely, stocks of fintech companies that offer a “buy now, pay later” payment have underperformed the S&P 500 financially. which consists of

Confirm Holdings

AFRM -10.27%

and Australia-listed

zip Co.

zip -0.79%

But

block Inc.,

square -9.85%

which acquired Afterpay, and

paypal,

PYPL -5.06%

Which launched short-term installments during the pandemic. So far this quarter, all stocks have lost a third or more.

While there is no dearth of things to worry about in the market right now, there are certain concerns about “BNPL”. For one, that model may have unique credit risk, or at least it is untapped during a deep recession. And also, the industry will see further pressure on market share and pricing from new entrants—particularly

Apple,

AAPL -2.17%

who has announced Split-pay service for Apple Pay,

It’s important for investors to think about these things differently than with credit cards or traditional lenders. For one thing, unlike a credit card line-of-credit, which a consumer can attract or extend through minimum payments, even if they struggle, a BNPL user can be cut off from future purchases. If they miss payments or if their credit profile deteriorates, since each transaction is a new opportunity for the user to reevaluate. It is a short term form of loan. Apple, in particular, is funding its offering.

Yet even when cut off, users can still be valuable if they choose to pay in other ways or for peer-to-peer payments, deposits and other services like Apple Pay, PayPal’s Venmo or Block’s Cash app. continue to use the app. commissioning of bnpl services wide consumer purse Or merchant services make it something that can be dialed up or down depending on risk, as the end goal is to monetize the customer in multiple ways.

there can be competition somewhat less than a factorBecause consumers can often make a wallet split-pay decision after making a purchase decision.

Affirm, however, is only in the early stages of building the financial platform. Its bread-and-butter is connecting with merchants to offer customers financing before they buy. This includes short-term zero-interest split payments, but also long-term, interest-bearing purchase loans.

It really puts more weight on the underwriting a wide range of borrowers, because the alternative would be to slow growth or pass on to traders or consumers with higher funding and credit costs. But the opportunity is that if other providers dial back or narrow their BNPL offering because it isn’t worth dealing with the potential consumer credit risk, Affirm could prove its value to its merchant partners.

with Inflation and rising rates Squeezing consumers, merchants may be pushed even further to try to offset that pressure by offering more widely split payments. Affirm can potentially do this by accepting more buyers or larger quantities and thus converting more sales, charging merchants a premium rate and increasing its ability to better cover better credit or funding costs.

As of May, Affirm’s 30-day-plus latency rate on the bulk of its active US balance—excluding its shortest-term split payment installments—was higher than last year, when credit was historically strong. But at around 2% to 3%, it’s still in line with the rate in prependemic 2019. Gross trading volume grew more than 70% year-over-year in the first calendar quarter.

An important variable to watch will be whether Affirm’s revenue rate on those transactions keeps up with funding and credit costs. Affirm’s take rate was 4.7% on gross merchandise volume less credit, funding, processing and other transaction costs for the quarter ended March 31. The company has said that it could be profitable over the long term in a ratio of around 3% to 4%. Adding up other business costs, including technology, sales and marketing and general expenses, confirm overall that money was being reduced on a net-income basis in the quarter.

Inflation, interest rates and even a potential recession will certainly affect buy now, pay later providers—not always in the way investors might initially expect. The ultimate fate of players in this area depends on both the relationship with the merchants as well as credit performance.

write to tellis demos telis.demos@wsj.com