Missed Payments, Rising Interest Rates Put 'Buy Now, Pay Later' To the Test

'Buy now, pay later' companies promised a credit revolution that would change the way people pay for things. Rising delinquencies and a slowing economy are clouding that outlook. From a report: Payment plans that allow shoppers to split up the cost of things such as clothing, makeup and home appliances were all the rage last year. The companies behind the plans saw their valuations surge. Scores of retailers rushed to add them at checkout. Block in August announced a roughly $29 billion all-stock deal for Afterpay, one of the biggest companies in the business. But late payments or related losses are piling up for the industry's biggest players -- Affirm, Afterpay and Zip. Their borrowing costs, meanwhile, are rising. Buy-now-pay-later companies sometimes rely on credit lines whose rates rise and fall along with the Federal Reserve's benchmark rate, which has risen 0.75 percentage point so far this year and is poised to go up even more.

Investors, once enamored with the business, are backing away. Affirm went public in January 2021 at $49 a share and rose to more than $170 by November. The stock closed at $28.50 Tuesday. SoftBank-backed Klarna Bank is looking to raise as much as $1 billion in a deal that could value it in the low $30 billion range, far below the roughly $46 billion valuation it achieved last year. The young industry finds itself in a tricky spot at a time when the economy is slowing and, some fear, headed for a recession. Buy-now-pay-later companies boomed when consumers were flush with cash and buying goods at a feverish pace. How they fare in a downturn, when savings evaporate, spending slows and bad debts mount, is untested. To weather the storm, Afterpay and Zip are slowing their new originations.

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