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BNPL, Block, Apple, MedMen
Programming note: Money Puff - Finance was supposed to come out yesterday, but it was opening day for the New York Yankees and I was at the ballpark. As a reminder, we’ll have a slightly expanded focus outside of cannabis in the finance edition — pot, pumps, and the pandemic. We’ll try not to bother you on Fridays anymore; no one likes getting an email right before the weekend, no matter how witty and insightful. If you’d only like to receive Money Puff - Cannabis on Mondays and Wednesdays, head to account Settings, select your subscription and choose which newsletters to receive.
I was a fintech investment banker when Buy Now Pay Later companies were on top of the world. Allowing consumers to finance internet purchases with zero-interest installment loans, companies like Affirm and Klarna garnered eye-popping valuations in the last few years.
Now, both companies have shed billions in value and are among the worst-performing fintechs in 2023. Part of the reason is rising interest rates; Affirm is not a bank, so they have to pay a bank to provide the loan. Loans are now more expensive, and it’s eating away at any earning potential.1 The sector’s evaporating value is one reason BNPL is a prime Money Puff target.
But the other reason, as noted by Emily Stewart, is their deceptive — or at least disingenuous — marketing tactics. Besides dubious return policies and pay-down options, it’s right there in the name. They call it, ‘Buy Now Pay Later,’ instead of, you know, zero-interest promotional credit provided by merchant subvention.2 The goal is to get people to pay for their pizza in installments, not put them to sleep.
I’m not saying the whole space is a scam. If folks know what they’re getting, and use it responsibly, BNPL can be an effective tactic to increase ticket size and spur purchases. It’s also used in other industries, under other names, with varying degrees of success. Goldman Sachs, for instance, made a splashy purchase of a BNPL company in 2021, called GreenSky. (Full disclosure: I worked on the transaction as a banker.)
GreenSky primarily allows their network of home improvement contractors to originate zero-interest loans at the point of sale.3 You won’t often hear them referred to as BNPL, but that’s effectively what they are. The rationale behind the deal from Goldman’s perspective was less about the promotional credit, and more about distribution; it’s hard to build relationships with small businesses like contractors and dentists, and it’s attractive to lend to their credit-worthy customers. GreenSky built slick tech to both integrate with the merchant and literally enter the customer’s home.
Now, though, Goldman has some regrets and is once again thinking of putting GreenSky back on the market. For the first nine months of 2022, the new unit that includes GreenSky, called platform solutions, lost $1.2 billion.
Elsewhere in massive losses, Block’s stock was down 15% last Thursday after a report from short-seller Hindenburg Research accused the company of facilitating fraud through its popular Cash App.4 Amid blasé claims of pandemic relief fraud and interchange gouging, Hindenburg also cites rappers who brag about paying for drugs and murder on the app.
The company formerly known as Square also comes under fire in the report for its acquisition of BNPL company Afterpay:
Block’s $29 billion deal to acquire ‘buy now pay later’ (BNPL) service Afterpay closed in January 2022. Afterpay has been celebrated by Block as a major financial innovation, allowing users to buy things like a pair of shoes or a t-shirt and pay over time, only incurring massive fees if subsequent payments are late.
Afterpay was designed in a way that avoided responsible lending rules in its native Australia, extending a form of credit to users without income verification or credit checks. The service doesn’t technically charge “interest”, but late fees can reach APR equivalents as high as 289%.
The acquisition is flopping. In 2022, the year Afterpay was acquired, the pro forma combined entity lost $357 million, accelerating from pro forma 2021 losses of $184 million.
Fitch Ratings reported that Afterpay delinquencies through March 2022 had more than doubled to 4.1%, from 1.7% in June 2021 (just prior to the announced acquisition). Total processing volume declined -4.8% from the previous year.
We’ll likely talk more about Squa — er, I mean, Block— around here at Money Puff, beyond scathing acquisition reviews. The name change, for instance, is quite interesting.
With all the negative press swirling about BNPL, Apple’s announcement that they are launching their own service may come as a bit of a head-scratcher. I think PYMNTS offers the most plausible reasoning:
Without official word from Apple, answers to “why now” are still in the air. One possibility is that the company may not be facing the same economic challenges pure play BNPL FinTechs face. With Apple’s dedicated and loyal customer base and many merchants already accepting its wallet, the tech giant has no need to spend on customer acquisition or further retailer integration.
Given this significant difference than pure play competitors, Apple could have better unit economics. After all, it only needs to ensure that more people pay back these loans than don’t, which may be one clue as to why the company is keeping Pay Later invite-only for now.
Additionally, if Apple’s overall strategy is to keep their users in-house through a variety of offerings, then the goodwill and brand affinity generated by Pay Later may turn out to be more lucrative than strict dollars and cents.
The last one, though, about goodwill and brand affinity, sounds dubious. Few things can torpedo a high-end brand like consumer finance. Goldman, for instance, resisted it for most of its history until DJ D-Sol decided he wanted to do things a little differently. Apple, by the way, is a big partner in Goldman’s consumer division, which we said is losing billions of dollars.
It’s easier when those stories are being written about your financial partner. How will Apple react when the story is about their own CFPB investigation instead?
Speaking of Apple, MedMen is a company that wanted to be the Apple Store of cannabis. Now, they are on the brink of collapse. Here is SFGate last month:
MedMen went public on the Canadian stock exchange in 2018, raising $110 million at an evaluation of $1.65 billion. The stock was trading at more than $6 a share in 2018, but it’s now worth less than $0.04.
Priya Sopori, a cannabis attorney based in Los Angeles, said MedMen’s value as a business has been “hotly disputed” for many years.
“I think there was significant disagreement as to whether or not MedMen was worth what MedMen said it was worth,” Sopori told SFGATE. “In many ways I think we’re seeing the consequences of those valuations from years ago.”
Here’s Politico from May 2020, with a series of devastating details surrounding everyone involved with MedMen, including former CEO Adam Bierman and ex-President Andrew Modlin:
In February, MedMen laid off 128 more employees and cut more the next month. Also in February, Modlin sold his West Hollywood home to 18-year-old YouTube star Emma Chamberlain, leaving him with just the Hollywood Hills mansion.
That may be in jeopardy, too. In April, a creditor sued Bierman and Modlin, saying the co-founders had personally guaranteed its investment in MedMen stock late last year, putting up their homes as collateral. But, the creditor alleged, the men had failed to deliver documents securing their pledges. It asked a California judge to force them to pony up. Lawyers for Bierman and Modlin did not respond to questions about the case, which is ongoing.
In some cases, vendors, unable to get cash for the product they have supplied to the company, have instead been taking payment in MedMen stock. As of mid-May, its stock price was down more than 95 percent from its late-2018 high, according to data from the Canadian Securities Exchange.
Normally, a business in such dire straits could seek federal bankruptcy protection. Because of weed’s legal status, that option is not open to MedMen.
Bierman and Modlin were unceremoniously ousted as MedMen’s leaders in January 2020. This resulted both from the aforementioned financial struggles as well as accusations of improper use of funds and other corporate misdeeds. Bierman, though, did win $3.1 million in an arbitration settlement with MedMen back in December and is apparently thinking of getting back in the biz.
A BNPL service for the cannabis industry is not out of the realm of possibility.
Banks fund their loans with deposits, which are cheap.
Subvention is a ‘subsidy’ for the loan that makes up for the zero interest. It takes the form of a transaction fee paid from the merchant to the BNPL company. That fee is higher than a credit-card processing fee, for instance, but the merchant hopes that the consumer will buy more stuff if they can pay for it later. It’s also not that much different from layaway.
They also dabbled in elective healthcare procedures (plastic surgery) and consumer recreation (ATVs).
Though it has gained back nearly half the lost value since.