Fintech interest rate sensitivity

From Australian BNPL woes to Klarna’s massive down round, the BNPL sector has been in the news lately mainly for the massive challenges the sector is facing.

The viability of the business model is also being increasingly questioned, particularly in a rising interest rate environment, but this doesn’t mean that the BNPL story is over. Adjustments to business operations will likely be needed as companies try to strike the optimum balance between growth and effective risk management, but the best-run firms should be able to successfully navigate these new challenges.

Middle East BNPL Tabby’s recent mega debt funding round (US$150mn) will allow it to service the growing demand for its services while increased scale should boost its path to profitability.


Global BNPL sector is facing unprecedented challenges

After gaining strong traction in the past few years, the BNPL sector has been severely punished by investors this year; share prices of listed Australian BNPL providers are down c80% yoy, and the situation is not very different in private markets, with Klarna closing its latest funding round at an 85% lower valuation. The major concern for investors is spiralling bad debts, which have grown to unsustainable levels in many cases. Rising interest rates have also added to the concerns; for BNPL providers this can squeeze margins, worsen asset quality and depress demand for discretionary product purchases with which the product is traditionally associated.

But the BNPL story is not completely derailed

The recent slump has raised doubts over the viability of the BNPL sector. However, fundamentally we think BNPL has strong potential, particularly in emerging markets. With appropriate adjustments to the business model, the sector should be able to navigate through the current challenges. The companies with the best risk management capabilities will likely come out as winners.Formal credit penetration - emerging versus developed markets

Five key trends in the BNPL sector

  1. Regulatory tightening. Aggressive BNPL growth is putting both consumers and companies at risk, and therefore regulators in different markets are increasingly hatching plans to regulate the sector. These regulations aim to increase transparency, protect consumers and improve risk management. This may impact the near-term growth of the sector but should be good for its long-term sustainability. We have discussed this issue in more detail here.

  2. Enhanced risk management. The experience of Australian BNPL companies highlights the importance of credit risk management for BNPL sector. In addition, macroeconomic issues such as rising rates and declining consumer purchasing power are hitting the sector hard. Therefore, BNPL operators need to find the right balance between growth and risk management to build a sustainable business model.

  3. Intensifying competition. Global tech giants such as Apple, PayPal and Amazon are ratcheting up their efforts in the BNPL segment. This is increasing competition for pureplay BNPL operators as tech giants have access to deep pockets and large customer bases.

  4. BNPL product portfolio to increase. In the pastBNPL, has been used more often for discretionary spending (eg. fashion, electronics). However, as per Tabby’s recent experience after the spike in global inflation, consumers are also turning to BNPL providers for their non-discretionary spending, such as groceries. In addition, BNPL providers are also being innovative and bringing in new products such as travel.

  5. Consolidation and M&A activity to pick up. With rising competition and macro challenges, we think consolidation activities could increase in the sector. This could allow BNPL operators to better manage credit risk due to greater availability of data and may also result in operating cost synergies.

Tabby’s huge debt funding round

Tabby’s recent US$150mn debt funding round is reportedly one of the biggest for startups in MENA. One of the main reasons for relying on debt funding compared to equity is due to relative costs; fintech valuations are currently depressed. In addition, locking in debt funding now makes sense as rates are rising and credit conditions are tightening. Particularly in emerging markets, the availability of debt funding for startups is limited, but Tabby’s loan portfolio is a viable source of collateral. The firm’s loan quality to date has been good (single digit % delinquency rate, according to media reports) but could drift higher if economic conditions deteriorate further. Another source of comfort for Tabby’s lenders is that the firm is reportedly close to breaking even.

Tabby profile

Tabby was founded as recently as 2019, but in a short span of time has become one of the leading BNPL providers in Saudi Arabia and the UAE, with operations also in Egypt and Kuwait. It has 2mn active users and 4,000 merchant partners. Tabby allows customers to pay for their purchases in four interest-free payments, billed monthly. The company generates revenues from merchants on its platforms, and through late payment fees.

Tabby has so far raised US$275mn in debt and equity, with the latest being US$150mn debt funding from Atalya Capital. The firm was valued at US$300mn in August 2021. The company is growing strongly; its revenues are up 10x yoy; active users have grown 8x and the merchant base 3x in H1 2022. In terms of profitability, the company expects to break even by the end of this year. Shareholders include Sequoia Capital India, STV, Arbor Ventures, Mubadala Investment Capital and Global Founders Capital (GFC).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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