For years, it was the industry's favorite magic formula: Buy Now, Pay Later.

Translated, this means: Buy today, pay later - and is ultimately just a modern version of bill payment with a more attractive name.

But the paint has cracked, many companies specializing in this payment method have not had an easy time in recent months: In Europe, the rating of Klarna, once the largest European fintech, has fallen by 85 percent, and the company is also cutting 700 of its 7,000 jobs .

The share price of American competitor Afterpay has fallen by 90 percent since its November high.

Franz Nestler

Editor in Business.

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In order to understand what is currently going on in the market, you have to take a closer look at the business model.

Purchasing on account is an ancient hat - which has been meaningfully lifted into modern times by the Internet.

BNPL, as it is abbreviated, has a huge appeal for companies.

Already today, more than every third purchase in German online retail is paid for with a BNPL method.

And the local online trade turned over 73 billion euros in 2020.

Growth rates for BNPL have been 30 percent internationally and as much as 40 percent in the United States.

A strongly growing field and therefore interesting for many players.

The competition is getting stronger

The second point that makes BNPL so attractive is the income opportunities for companies: With BNPL, consumers basically get nothing more than small amounts of credit, some of which are interest-free.

Nevertheless, these are interesting for the companies: they have a higher turnover rate and are reflected differently in the balance sheets, since, for example, there are often no classic interest rates, but fees.

In addition, sales are a sure-fire success: You don't have to advertise via expensive comparison portals, you can simply use it in the payment process - and the companies even pay for it in some cases.

The risk costs are also very low - they are between 1 and 3 percent and thus roughly at the level of comparable installment loans.

The next advantage: BNPL opens up completely new target groups: 70 percent of customers are under 35 years old - a gold group for customer loyalty.

This is another reason why Deutsche Bank only recently entered the business model.

Because anyone who has been financed in this way may need financing again.

Speaking of competition: This is getting stronger: not only fintechs, but also old players are pushing into the market: PayPal now also offers in Germany to pay your bill 30 days later.

In addition, there are established banks such as Deutsche Bank - and even completely foreign groups.

The most prominent example of this is Apple, but Microsoft also offers this function in cooperation with a fintech.

Credit is their growth engine

And here you slowly get to the point why the engine is sputtering so much at the moment in the pure BNPL companies: The competition is getting bigger.

At the same time, online trade is no longer growing as strongly as it did during and before the pandemic - the reasons for this have been and are being sufficiently discussed.

So the pie isn't getting bigger fast enough for more and more people to eat - some companies will be forced to get a smaller piece.

In addition, the interest rate environment is very unfavorable.

Even if the default rates are still low, it is more expensive for Klarna & Co. to hedge the risks of the loans.

In addition, fintechs are generally very affected by rising interest rates: loans are their growth engine.

Your ratings are based on the future business, which needs to be funded today.

If interest rates rise, the cost of borrowing rises, and with it profits or expectations of future business, or in the worst case both, fall.

This entire environment means that BNPL is no longer the industry's biggest darling at the moment.

But that doesn't have to be the last word.