HOT AIR BALLOON FLIGHT

By Julia Horowitz • Monday, August 2

Good morning. In today's newsletter: Behind the "buy now, pay later" boom. Plus, Wall Street is rushing to buy up family homes, and the SEC is putting Chinese firms under the microscope. 

 

US stock futures are up after the S&P 500 logged its sixth straight month of gains in July. Markets in Europe mostly rose in early trading, while stocks in Asia jumped.

 

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DEAL MONITOR

'Buy now, pay later' is becoming a huge business

 

Want to buy a new coat without shelling out the entire cost upfront? For shoppers, that's becoming an increasingly popular payment option — generating a windfall for the handful of companies that facilitate such services.

 

What's happening: Square, which owns the Cash App, announced Sunday that it's buying Afterpay for $29 billion, the largest acquisition of an Australian company ever.

 

Meanwhile, Sweden's Klarna raised money in June at a nearly $46 billion valuation. Affirm, a San Francisco company that went public earlier this year, is now valued at nearly $15 billion (and its stock is up 8% in premarket trading). 

 

How it works: These companies partner with retailers like Target, H&M, Sephora, Macy's and ASOS online or in stores to offer customers the option at checkout to pay in installments. That lets shoppers snap up a $200 handbag for the cost of just $50 initially without having to undergo a credit check. The remainder is paid off in chunks over the coming months, often without interest.

 

A firm like Afterpay covers the entire cost right away for the retailer, less fees.

 

So-called "point of sale" lending has existed for decades. But the service has boomed alongside the spike in online shopping during the pandemic, which also ushered in significant financial instability for many households.

 

According to Adobe, "buy now, pay later" experienced 215% year-over-year growth in the first two months of 2021. Its researchers noted that more retailers are signing up — which makes sense given that consumers using the service place orders that are 18% larger than shoppers who don't. 

 

"Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers and an expanding set of players," McKinsey said in a report published last month.

 

Taking notice: PayPal rolled out its own service last year. On the company's earnings call last week, executives said its "buy now, pay later" product logged $1.5 billion in payments in its most recent quarter, and that more than 7 million customers have now made over 20 million transactions.

 

The veterans who have historically controlled the payments industry are paying attention, too. McKinsey estimates that the popularity of "buy now, pay later" options is diverting up to $10 billion in annual revenues away from banks.

 

Some warnings: Consumer Reports cautions that customers should be careful to know what they're signing up for. While many "buy now, pay later" companies offer zero-interest loans — tempting for those looking to avoid racking up credit card debt — a number have interest-bearing products as well. Actual terms can also vary by retailer, while paying installments late may incur fees.

 

Regulators are starting to watch this space. Earlier this year, the UK Financial Conduct Authority said "buy now, pay later" credit agreements would now be part of its portfolio.

 

"Although the average transaction tends to be relatively low, shoppers can take out multiple agreements with different providers," the agency said. "It would be relatively easy to accrue around £1,000 ($1,391) of debt that credit reference agencies and mainstream lenders cannot see."

 

There's more: "With several buy-now-pay-later providers planning to expand to higher-value retailers, or offer their products in-store, the risk that consumers could take on unaffordable levels of debt is increasing."

 

VOICES

The US eviction ban is ending, putting millions at risk

"These moratoria and protections, they haven't been perfect, but they've undeniably had a massive effect in preventing eviction filings."

 

PETER HEPBURN, EVICTION LAB RESEARCH FELLOW

 

Read more from CNN Business.

MARKET FLASH

Wall Street is rushing to buy up family homes

Housing markets are hotter than ever, and big money is getting in on the act.

 

Pension funds, investment firms and Wall Street banks are snapping up family homes in Europe and the United States at a rapid pace as prices rocket higher, my CNN Business colleague Hanna Ziady reports.

 

Driving the rush: Investors are looking for alternatives to lockdown-hit office parks and shopping malls, and betting that a permanent increase in remote working following the coronavirus pandemic will keep demand for suburban houses elevated.

 

At the same time, the soaring cost of home ownership means that growing numbers of younger Americans and Brits are renting rather than buying houses as they start families and gravitate away from cities. Some of them may find their next landlord is based on Wall Street or in London's financial district.

 

"Even before the pandemic hit, institutions already heavily invested in commercial real estate were looking at ways to diversify their income streams," said Jeremy Eddy, head of living and hospitality capital markets for Europe, Middle East and Africa at JLL. "Residential real estate provided an obvious alternative and one that has only become more attractive since the pandemic."

 

Analysts argue that this will improve standards in the rental sector and offer more choice in desirable neighborhoods. But some tenants who rent from corporate landlords dispute this, alleging substandard services and excessive rent increases.

 

That's not all: If investors are hoovering up existing properties that would otherwise have been sold to individuals, that could squeeze out first-time buyers who were already struggling to afford their first homes.

 

Read the full story here.

UP NEXT

Heineken and Ferrari report earnings before US markets open.

Also today: The ISM Manufacturing Index, which surveys US factories, posts at 10 a.m. ET.

 

Coming tomorrow: Earnings from Alibaba, BP and Marriott.

WHAT WE'RE READING AND WATCHING

▸ Tech startup financing hits record as giant funds move in (WSJ)
▸ Why you're waiting months for your new couch (CNN Business)
▸ Pandemic fuels broadest global house price boom in decades (FT)
▸ Can 10-minute grocery delivery be profitable? (Bloomberg)
▸ HSBC's profit more than doubles to $10.8 billion (CNN Business)
▸ Dave says hi: The era of friendly-sounding financial startups (NYT)

FINAL WORD

Regulators put Chinese firms under the microscope

After recent tumult spooked American investors, the US Securities and Exchange Commission has told staff to ask for more disclosures from Chinese companies looking to go public in the United States before approving plans to sell shares.

 

"In light of the recent developments in China ... I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective," SEC chair Gary Gensler said in a statement Friday.

 

Remember: The announcement follows the disastrous meltdown of ridesharing giant Didi, my CNN Business colleague Paul R. La Monica notes. Shortly after Didi went public on the New York Stock Exchange in late June, Beijing cracked down on the company due to concerns about its cybersecurity practices, sending shares plunging. 

 

The move was part of a broader government pressure campaign against private business that's gathered steam in recent months.

 

The SEC is specifically concerned about Chinese companies based in China but set up as offshore shell companies to issue stock. Gensler is also looking for more disclosure about the risks Chinese companies face as a result of any future regulatory changes made by the government.

 

On Sunday, the China Securities Regulatory Commission called for Beijing and Washington to "enhance communication" on how Chinese companies should be monitored in order to "form stable policy expectations."

 

Step back: US investors have been reassessing their positions in Chinese stocks, considering whether payouts outweigh significant uncertainty. Greater oversight could ease some anxiety. But that won't alleviate anxiety about Beijing's recent course of action, which quickly wiped billions of dollars in value off the market.