Against a lightly positive backdrop for the major equity indices, big-box retailer Walmart (NYSE:WMT) gained 1% for Monday’s late-morning session. A disclosure that Walmart-backed financial technology venture One may introduce its buy now, pay later (BNPL) loan program at the retailer as early as next year bolstered sentiment for WMT stock. Still, broader concerns about such loans may come back and haunt the discretionary retail industry.
According to a CNBC report, One “wants to launch a service that shoppers could use at Walmart’s website and stores, as well as at other retailers,” per sources familiar with the matter. The article added that “[t]he effort was motivated in part by a more challenging economic backdrop and consumers feeling pinched by inflation.”
Fundamentally, BNPLs allow customers to gradually pay off purchases via fixed monthly payments, along with interest. Naturally, the implication centers on Walmart expanding its revenue-making opportunities, thus theoretically boding well for WMT stock.
Indeed, Walmart CEO Doug McMillon weighed in, noting that even wealthier customers felt the pinch of inflation. Per CNBC, “[a]bout 75% of the retailer’s market share gains in grocery have come from households that make more than $100,000 in the past two quarters.”
Further, One’s potential debut in the BNPL space for Walmart aligns with this burgeoning sentiment. According to Business Insider, these loans resonate strongly with members of Generation Z and younger consumers overall. Nevertheless, BNPLs may come at a longer-term cost, affecting not only WMT stock but discretionary retail as a whole.
WMT Stock Might Rob Peter to Pay Paul
Notably, Walmart incurred heavy pressure from customers when it abandoned its popular layaway program. This service allowed customers to pay for gifts over time without suffering extra fees following a small deposit. Instead, Walmart suggested at the time customers use its BNPL program, which it offered through a partnership with Affirm (NASDAQ:AFRM).
Interestingly, both WMT stock and shares of Affirm popped higher, with the latter gaining around 5%.
However, the issue with Affirm is that not all customers qualify for the program because of credit issues or lack of connectivity. And while One might rectify certain pain points, BNPLs as an industry present broader challenges.
“BNPL plans are fraught with financial pitfalls,” Farnoosh Torabi, editor at large for CNET writes. “These plans don’t reward you with credit score boosts for timely payments. Instead, most will just ding your score if you ever pay late. BNPL late fees also tend to be much higher than what credit cards charge, according to a Harvard paper.”
In other words, while BNPLs may help extract more revenue under challenging circumstances — thus lifting WMT stock — at scale, these programs may not be sustainable. Worryingly, data from the Board of Governors of the Federal Reserve System confirms that credit card debt recently hit an all-time recorded high.
Therefore, an introduction of a BNPL might only represent a temporary fix. Without a substantive solution to inflation, WMT stock may end up deferring pain to a later date. How big the ultimate bill becomes will likely depend on outside forces that Walmart can’t control.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.