Specialist
Former executive at Affirm Holdings Inc
Agenda
- Buy now, pay later operating environment update
- Competitive positioning of closed-loop providers such as Affirm (NASDAQ: AFRM) and Klarna vs open-loop offerings such as Visa (NYSE: V) and Mastercard (NYSE: MA)
- Product diversification strategy and viability of a pure-play buy now, pay later business model
- Regulatory environment and recent action from the CFPB (Consumer Financial Protection Bureau)
- Market growth outlook, including opportunities and threats
Questions
1.
There’s been a lot of news flow on buy now, pay later, as well as around the current macroeconomic environment and expectations of deteriorating economic conditions. How do you think investors should assess this broader environment as it relates to buy now, pay later providers’ performance over the next 1-3 years? From the consumer angle, where you would expect a pullback in discretionary purchases, increasing unemployment potential and strained consumer balance sheets? Operationally, how flexible can these businesses be in managing expenses such as personnel, marketing, R&D spend and cost of funding? How is that affected?
2.
You mentioned segment-by-segment disparity on the consumer side, so would any particular buy now, pay later segment be more vulnerable to deteriorating macroeconomic conditions, whether that’s product categories or particular offerings from whatever group?
3.
How might deteriorating macroeconomic conditions affect buy now, pay later companies operationally? How flexible can they be with OPEX, such as funding costs and personnel? Recent news flow on Klarna suggests it’s exploring personnel lay-offs to a fairly large degree, so do you think this is more of a canary-in-the-coal-mine situation?
4.
How important a competitive advantage are the financing tactics and cost of capital you mentioned? How would you rank those and how does that incentivise future product strategy? Is it safe to assume that as cost of capital rises for these businesses, they will increase the percentage of their portfolio that has interest-bearing buy now, pay later loans?
5.
How differentiated are the buy now, pay later products that are currently active in the broader market? How do some of the market dynamics, or some of the macroeconomic considerations we’ve discussed, change across geographies?
6.
Do you think a specific strategy is a clear winner? Is it too early to tell? Could investors point to any signs for more successful buy now, pay later distribution?
7.
How should we think about switching costs for merchant partners and the competition around merchant discount rates? Is it more of a race to the bottom or are you expecting any contrarian trends there?
8.
If merchant discount rates were trending around X% at an industry average level today, how do you see them trending over the next 1-3 years, to a certain Y%?
9.
How are the payment offering types you mentioned superior or reinventing aspects of traditional credit card payments? How should we assess the competitiveness of a pure-play buy now, pay later player to those integrated offerings within other platforms? How would you grade the viability of these pure-play players? Is the ultimate goal to be acquired and integrated into a different platform with an existing user base? I’m thinking about Afterpay with Block and having that merchant side but also the consumer side.
10.
Do you think big tech has any aspirations of getting involved in buy now, pay later? Would Apple Pay, for example, be interested in acquiring someone like Affirm to add that buy now, pay later offering through the digital wallet?
11.
How should we think about GMV growth for buy now, pay later? If its GMV was growing X% over the past two years, where might it trend in terms of Y% over the next 1-5 years? We’re already past the extreme adoption from the pandemic, so what are the strategy considerations for players to sustain some of that growth?
12.
How should we think about an industry-wide range for take rates, going forward? From what I’m understanding, there’s some take rate deterioration happening as the GMV grows over time. What might that mean for unit economics such as ARPU or lifetime values for some of the buy now, pay later users?
13.
You mentioned using credit cards as a basis, but would you use the same comparative points for things such as CAC [customer acquisition cost] and ARPU? What clarity can we get around unit economics? I understand it’s different across AOV tranches, but what unit economics trends should we expect over the next 1-3 years?
14.
Which areas of the buy now, pay later business model do you think are most vulnerable to regulatory risk? I know there’s been some recent attention from the CFPB [Consumer Financial Protection Bureau] with regard to buy now, pay later, so what’s the read-through from the business perspective of someone operating in the industry and then from an investor perspective?
15.
Does what you mentioned around regulation materially impact competitive dynamics or product portfolio composition? Should we assume perhaps a higher percentage contribution of interest-bearing products from some buy now, pay later offerings with heightened scrutiny?
16.
What’s your 3-5-year outlook for the buy now, pay later sector given the competitive dynamics and broader macroeconomic environment we’ve discussed? What are your expectations for players’ market share and what are some best- and worst-case scenarios? Where might things go wrong for buy now, pay later providers that experienced egregious amounts of growth over the past two years?
