The buy now, pay later (BNPL) bubble is bursting.
Back in the halcyon days of 2021, when markets were bullish and NFTs were valuable, BNPL was the darling of nontraditional finance. Klarna, one of the ringleaders of the 4-payment BNPL model, raised equity at a $45.6 billion valuation. But as inflation has hit 40-year highs and the Fed has taken extreme measures to slow economic growth, Klarna has seen its revenues drop and its valuation shrink an astonishing 85% to $6.7 billion.
Before the burst, investors asked me to justify why patient financing was like BNPL.
Now, everyone wants to know why it’s not like BNPL. And I’m more than happy to explain.
My company, PatientFi, helps patients fund out-of-pocket medical procedures through point-of-sale (POS) lending. Unlike BNPL, POS lending in healthcare has existed since 1987 and has a level of rigor that insulates it from the downfall of BNPL we’re seeing right now.
Here are 4 differences between patient financing and BNPL:
1. Brick & mortar lending. It’s a simple difference, but an important one: We only lend to people that our medical practice partners meet face to face. We have pre-operation appointments, patient consultations, the day of surgery, and then a follow-up meeting. That’s four (at least) high-depth points of contact with all of our patients. We know who they are, how credible they are, and what they can afford.
On the other hand, BNPL companies do a lot of lending over the internet, across dozens of industries, without giving much weight to credit (more on credit in a moment). When you lend to people who you never meet, you end up with a much higher potential for fraud. Juniper Research estimates that, between 2021 and 2025, online payment fraud losses will exceed $206 billion.
2. Credit emphasis. One of the major selling points for BNPL is that it’s credit-agnostic. Most BNPL companies don’t care whether you have good or bad credit, their business model is the same either way: Break your payment into four equal, interest-free installments (assuming you pay on time).
The problem there is that people with bad credit shouldn’t be getting the same provisions as people with good credit. The universal 4-payment model doesn’t appropriately account for credit risk, so when the economy undergoes natural volatility and people suddenly can’t pay, the whole business model breaks.
PatientFi performs comprehensive credit checks, including scoring and alternative data. We apply reasonable annual percentage rates (APRs) so our business model is based on interest in addition to the merchant fee that BNPL relies on solely.
3. Regulation. Because BNPL uses 4-month terms, it falls shy of having to comply with Reg. Z, TILA, and a host of other consumer lending laws. But because of its potential to cause consumers to rack up more debt than they can really afford, BNPL has fallen under a good deal of regulatory scrutiny. How regulators choose to handle BNPL may force the companies to make significant changes to their business models and practices.
PatientFi administers multi-year loans, so we’ve always had to abide by strict regulatory guidelines. Our lending models are tested, scrutinized, and sturdy under the pressure. While BNPL companies have to hold their breath waiting to see what changes regulators make, we know what to expect from our regulatory overseers.
And for borrowers, the difference between a 3-year term with PatientFi, for example, and a 4-month term with BNPL, means having a monthly payment you can actually afford as opposed to something unsustainable (and with a greater risk of default).
4. Industry-specific. Another potential weakness for BNPL companies is that they’ll lend to just about anyone for just about any purchase—airline tickets, exercise bikes, furniture, etc. They’re effectively dipping their toes into every industry without having any real expertise in any of them.
PatientFi operates in precisely one industry—healthcare—and in a niche that we know a lot about. We’re not lending to anyone who needs a new blender. We have very clear parameters and we provide financing to patients for continuous care from their providers, with whom they have longer lasting relationships.
BNPL will survive in some form, but it will look very different from how it did during its 2021 boom. I can, of course, appreciate BNPL’s mission of making consumer purchases more affordable and accessible, but it will have to find ways to comply with new regulations, crack down on fraud, and control for credit risk.
Those are all considerations that PatientFi baked into its business model. We’re not scrambling to figure out who our borrowers are or if we’re up to regulatory muster. We know what we’re good at, we play by long-held rules, and we have a model that can weather natural economic fluctuations.