BNPL players could see share prices rise on end to peak rates

Major players in the Australian buy-now-pay-later (BNPL) market could see their share prices fare well in the near future, once the Reserve Bank of Australia (RBA) finally reverses its hawkish settings for interest rates.

Leading BNPL players such as Block Inc (AU) (ASX: SQ2) and Zip (ASX: ZIP) could be especially well-positioned to capitalise upon a change in Australia's monetary policy environment, given their recent strong performances.

BNPL weathers challenges post-Covid

The past few years have been a challenging period for the Australian BNPL market – generally considered to be the most successful and innovative sub-sector of the regional fintech scene.

The Covid pandemic ushered in a spate of breakneck inflation across many of the world's advanced economies – including Australia, as a result of either supply chain challenges that constricted supply, or fiscal stimulus and loose monetary policies that flooded the market with liquidity.

This forced central banks such as the RBA to abruptly reverse course on interest rates, after having previously slashed them to record lows in order to maintain the health of their respective economies.

The RBA responded hastily to the Covid pandemic by commencing cuts to its cash rate target on 4 March 2020, trimming it from the already low level of 0.75% to 0.5%. By November of the same year, it had reduced its target rate to the record-breaking low of just 0.1%.

Once inflation started to monster the Australian economy in early 2022, the RBA found itself forced to make an abrupt switch. It raised the cash rate target from 0.1% to 4.35% during the period from April 2022 to November 2023, for a cumulative increase of 4.25 percentage points.

While hawkish monetary policy helps to ease inflation, it by necessity always creates challenges for the economy, as it works by increasing the cost of borrowing to slow down spending.

This meant major challenges for BNPL platforms, whose business model is predicated upon consumers taking out credit to fund purchases. It also created cost challenges for platforms, who found it more expensive to source funds to lend to customers.

These challenges have been further compounded in Australia by the launch of stricter scrutiny by regulators, following concerns about the potential impact of BNPL services on certain consumer demographics.

Light at the end of the tunnel

Trying times for Australian BNPL companies could be close to over, given that the RBA is on the verge of ending its current cycle of rate hikes.

All four of Australia's big four banks now expect the RBA to once again reverse its monetary policy stance before the end of the year, commencing cuts to the target rate in the second half of 2024.

This could finally provide relief to major BNPL players, in particular those that have managed to successfully weather the challenges of the past few years.

Zip is one such BNPL company that may have emerged stronger after facing the rigours of hawkish rate hikes.

It just posted a 29% year-on-year (YoY) leap in revenues for H1 FY21 to $430.0 million on the back of 33.3% growth in transaction volumes for its Americas Consumer operations.

This strong performance has helped to drive a 106% rise in Zip's shares since the start of the year.

Zip CEO Cynthia Scott said to the AFR that efforts to overhaul the company during this recent trying period were vital to its success.

"We've been through quite a transformation over the last two years, and we have made huge progress strengthening the foundations," she said.

"We have been driving not just growth, but profitable growth."

Fintech giant Block is another ASX-listed BNPL company that could be one to watch as hawkish monetary policy starts to ease, both in Australia and abroad.

Chairman Jack Dorsey recently unveiled plans for major enhancements of its flagship Cash App, which has more than 50 million users in the US alone.

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