November 22nd, 2021

How NOT to play the buy-now-pay-later trend

Dear Rebel Investor,

It was just going to be a routine dental exam.

Or so I thought.

“You need to get these two caps replaced,” my dentist said as he poked around my mouth. “If you don’t, you may be looking at extractions.”

A wave of despair overcame me at this prognosis.

I now knew I’d have to deal with two sources of pain – physical and financial.

In this case, my dentist was urging me to replace two dental crowns that were done 20 years ago (work necessitated by a car accident… a story I’ll save for another time).

After the exam, I went to the front desk to get an estimate for the work.

I was told it would be $3,000.


“Do you take Care Credit?” I asked the receptionist.

“We do,” she said.

This was great news.

See, Care Credit is essentially a medical credit card that allows you to make payments on doctor and dental bills.

And as long as you take care of the entire bill within an agreed-upon period, you don’t pay any interest.

So how does Care Credit make money?

Simple – it charges people who don’t pay up within the contracted time frame a whopping 26.99% interest rate.

Care Credit is owned by Synchrony Financial (NYSE: SYF), which offers a wide range of consumer credit products.

And not just for medical and dental procedures.

Synchrony also offers financing for major purchases, including appliances, electronics and jewelry.

It also provides private label credit cards and an array of financing programs through its vast partnerships with retailers, manufacturers and medical professionals.

These products – not to mention outrageous interest rates – have been immensely profitable for Synchrony.

They’ve enabled the company to net $738 million in Q4, 2020

$1 billion in Q1, 2021

And $1.2 billion in Q2, 2021.

To say investors love the company would be an understatement – they’ve bid the stock up from about $16 in March 2020 to over $48 in November 2021.

Many analysts think it will continue to perform well.

They include Zacks Equity Research, Citigroup, JP Morgan, Morgan Stanley and Bank of America, all of whom have recently upgraded their ratings on the company.

It seems they expect Synchrony to continue profiting on the backs of people who can’t pay off their loans in time.

But there’s a problem with this assumption.

Enter upstart buy-now-pay-later companies

Financial service providers like Synchrony are under attack from a wave of companies offering buy-now-pay-later (BNPL) products.

They include Affirm (Nasdaq: AFRM), Afterpay (ASX: APT) and privately held Klarna, who bill their installment loans as easier-to-understand alternatives to credit cards.

Here’s how their BNPL platforms work:

  • They allow users to make big-box purchases without having to shell out the entire cost upfront
  • They typically let users pay in four installments over six weeks
  • They offer automated reminders when a scheduled payment is coming up
  • They link accounts to a debit card or bank account, where payments are taken out automatically
  • They allow spending limits to grow for users who continually make more on-time purchases

There’s one more thing they do that you should know about.

And it should make Synchrony and its ilk more than a little nervous…

Most BNPL companies don’t charge their customers interest

Instead, they make most of their money from retailer fees and some late fee charges.

Consumers love this recipe.

For example, an Adobe analysis says that Affirm grew 215% year-over-year within the first two months of 2021.

Shares of the company have exploded as a result – rocketing from about $56 in late June 2021 to over $164 in early November.

That gives it a market cap of $45.6 billion as of this writing.

While no figures are available for privately held Klarna, its value is estimated to be $46 billion.

Afterpay, which operates in Australia, has also done well.

It’s risen nearly 20% since late June.

That performance (and the desire to capture some of the Aussie market) induced Square (NYSE: SQ) to buy Afterpay for $29 billion in August 2021.

So why are all these BNPL companies doing so well?

Because millennials and zoomers love them.

The reasons are obvious – BNPL allows them to get what they want NOW… without having to pay high credit card interest rates.

Merchants who offer BNPL platforms also benefit, as studies show that when consumers pay through installments, they usually spend more.

The BNPL market is projected to continue its explosive growth

That’s why they’re getting in on the action.

For example, American Express, Visa and Mastercard have all announced partnerships with payment processors to create their own installment options.

Synchrony is getting in on the act as well.

It’s added a Pay in 4 option, which allows its merchant partners to let consumers make a purchase of $500 or less in four installments.

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How retail investors can play the boom in BNPL

The easiest (and safest) way is to buy a major BNPL player, like Affirm, Square, PayPal (Nasdaq: PYPL) or Shopify (NYSE: SHOP).

But these are all large-cap stocks.

I’d rather go with a small-cap BNPL outfit that holds a much larger profit potential.

There are a number to consider.

They include Splitit Payments (OTC: STTTF), which has a market cap of $123 million.

There’s also Sezzle, Inc. (OTC: SEZNL), with a market cap of $774 million.

And if you like a play on a foreign BNPL market, you could consider New Zealand-based Laybuy Group Holdings (ASX: LBY).

That company has a market cap of $117 million.

Of course, these are riskier plays than buying large-cap BNPL companies.

But if your chosen BNPL small cap emulates the success of Affirm or Afterpay, you could literally make a fortune.

That’s all I have for you today.

Doug Fogel
Contributing Editor, Dear Retail Investors

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