Binding – what a great word! This will be the sentiment amongst most shareholders in buy-now-pay-later company humm group (ASX: HUM) which like its peers has seen a sharp downturn in BNPL customers. Thankfully for those shareholders though, humm has a “binding” agreement to sell their consumer finance business to Latitude Group (ASX: LFS) with the purchase price locked in already. 

Identical to its BNPL peers headlined by ZipCo (ASX: ZIP), humm is being held down significantly by net losses which are incurred as a result of unpaid BNPL purchases. While some companies will eventually recoup those payments while ruining the financial futures of their customers with bad debt ratings, most will have any margins earned from good customers cannibalised by the bad ones. 

Earning $10 from a $100 retail purchase for example is lost if just 1 customer who made that same $100 purchase fails to pay off their purchase, the risk carried by BNPL operators. For humm, the delinquency rates primarily apply for their Little Things offering, designed for smaller BNPL purchases and an extension of the Big Things division which has long been humm’s stomping ground for BNPL purchases up to $30,000. For larger purchases, the delinquency risk is substantially lower. 

While net volumes of purchases from humm Consumer Finance (HCF) were up 14.5% on the previous March quarter to $595.8 million, the Group’s net loss of 2.8% is still too high and unsuitable, although improvements to internal procedures has reduced it down from 3.1%. 

In comparison, Zip reported bad debts of 2.8% which totalled $148.2m in losses which accounted for the majority of their $172.2m net loss for the half year ended 31 December 2021. In that same period, humm reported a $27.8m profit after tax but that may be eaten into based on bad debts incurred during the March quarter. 

“Despite growth period on period, HCF volumes have been impacted by the slower than anticipated return of travel spend and declining consumer sentiment, headwinds which we expect to continue into the next quarter,” said humm CEO, Rebecca James. 

“This has been compounded by widespread flooding across the East coast of Australia impacting solar installations, a key vertical for our Big Things offering.” 

Having foreseen some of the headwinds in the future for BNPL operators, humm’s board unanimously recommended the sale of their consumer finance division to Latitude back in February 2022 for $335 million. This binding, definitive agreement is largely now a formality with shareholders likely to vote in favour of the sale once relevant paperwork is filed with authorities. Pending the independent expert’s report expected to be delivered to shareholders before the end of May 2022, the shareholder vote will then take place on a date to be confirmed. 

Upon divestment of HCF to Latitude, which will include James moving offices to lead the division under the Latitude banner, humm will remain an ASX listed company focusing on their B2B commercial business, flexicommercial. 

“Our Commercial and Leasing business continues its strong performance, with the business delivering record volumes in the quarter, up 93.6% on pcp. Notably, while volume increased credit quality improved by 70bps,” said James. 

Ironically, it will likely result in another company name change after humm was rebranded from FlexiGroup in 2020, despite the flexi division being the long-time profit driver of the company and OG pioneer of BNPL in Australia which was offered decades before anyone had heard of Afterpay. 

Gotta love that word ‘Binding’…