Bad debt blowout fuels massive Afterpay loss

Afterpay, Australia’s largest buy now, pay later company now owned by US firm Block, has reported a massive pre-tax loss of A$501.9 million as more and more of its instant-loan clients failed to pay their debts. 

The company’s operating expenses – in particular its bad debts – ballooned out from $72.1 million a year ago to $176.8 million at the end of the first half, December 31. Other rising expenses included a higher commitment to marketing the brand.

That’s a significantly faster growth rate than the company’s revenue which grew just over 50 per cent from $417 million to $645 million year on year. 

The company’s net loss was $345.5 million, up from $79.2 million for the December 2020 half. 

Block paid US$39 billion to buy Afterpay, now widely considered a major miscalculation. 

“They’ve paid $US23 billion too much for it,” McLean Roche Consulting founder Grant Halverson told the Australian Financial Review. “These results are horrendous.”

The buy now, pay later concept allows retailers to offer instant free credit to consumers who don’t have the cash to buy items, usually repayable in three monthly payments. The risk is then passed on to the BNPL company, which makes its money from a commission on transactions – and late payment fees.

Afterpay’s late payment fees – a key metric of what proportion of the company’s advances are being repaid on time – soared by 124 per cent to $79 million in the December half. 

The Consumer Action Legal Centre’s Gerard Brody told the AFR that if late fees are increasing that is “a further, really worrying indicator about the harms of this business model”. 

“Any business making a significant proportion of revenue from late fees, it really indicates to me that they succeed when their customer loses. That’s a really unethical way to run a business.”

Block had already warned the market to expect bad news before releasing Afterpay’s latest results. The US company conceded that growth previously forecast at 70 per cent would be less than half that – around 25 to 30 per cent. 

Rival buy now, pay later company Zip is in an even worse position. Its share price has tumbled from $12.46 in February last year to just $1.32 today. After losing 80 per cent of its value in six months, the company is now considering a merger with rival Sezzle.

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