Affirm Holdings (NASDAQ:AFRM) stock is down 26% in the last month. The market’s honeymoon with Buy Now, Pay Later (BNPL) is over.

Many finance and tech stocks fell in December. Affirm failed to bounce back in the market’s comeback.

It’s trading today at around $101 per share with a market cap of $28.4 billion. That’s still a hefty 22 times its expected fiscal 2022 revenue, but well short of its November high.

BNPL offers buyers a fixed-term payment plan with no interest, compared with interest rates of up to 20% with revolving credit cards. The income comes out of a bigger discount charged merchants, often 10%, against the 2-3% cut they get from Visa (NYSE:V) or MasterCard (NYSE:MA). It’s consumer credit disruption.

BNPL and AFRM Stock

Affirm went public Jan. 13 and its stock has had a wild ride. It was at $140 per share in February, $50 per share in May and $168/share in November. For all of 2021 it’s now up just under 5%.

The stock got its biggest boost in August when Square, now known as Block (NASDAQ:SQ), offered $29 billion for AfterPay, a BNPL outfit based in Australia.

That deal sent AFRM stock up and the credit card processors down. Fidelity National Information Services (NYSE:FIS), a leading processor, is still down 22% from that date. Affirm, despite its recent fall, is still up 56%.

The problem for the processors is that BNPL companies step in front of them, taking not just their transaction revenue but their settlement income.

With transactions settling three days after they’re made, income from holding the money can be substantial. The deal also hurt credit card banks like Capital One (NYSE:COF), but not as hard. It’s down 10%.

The BNPL Hangover

There’s a dark side to all this.

Affirm’s loans have varying terms, up to 12 months. It’s easy for consumers to run up several BNPL obligations and find themselves short.

Merchants take the bigger discount because they’re getting a bigger sale. The loans are rolled-up into large notes and resold. Some fear this could become like the mortgage loan fiasco.

Mainly, the concern is that the BNPL operations aren’t regulated the way banks and processors are. The Consumer Finance Regulatory Bureau (CFRB) has opened an inquiry, but so far it’s just collecting data.

Affirm founder Max Levchin says he supports new rules to improve disclosure and stamp out hidden charges.

There’s also a dark side to Affirm’s finances. It had revenue of $269 million in its most recent quarter, 55% ahead of last year, but a large operating loss.

It’s projecting operating losses for the year at 12-14% of revenue, double what they were in the first quarter.  Levchin, who previously co-founded Paypal (NASDAQ:PYPL), said he’s comfortable with the losses, given the growth.

Growth is coming. Affirm signed a deal with Amazon.Com (NASDAQ:AMZN) in August, one with American Airlines (NYSE:AAL) in November, and one with Newegg (NASDAQ:NEGG) this month.

It signed a deal with Shopify (NASDAQ:SHOP) in 2020.

The Bottom Line

AFRM stock will rise or fall depending on the market’s appetite for growth over income.

BNPL also has growing pains ahead, after the current gold rush to line up big merchants fades. You can expect more consolidation in the space. I also expect processors to get into the game with offerings like Visa Installments.

Over the next few years, BNPL is going to be absorbed into the existing credit infrastructure. That will include some form of regulation. How big the niche becomes depends on how consumers behave, and how the paper BNPL creates does in the market.

A 5% gain for the year at Affirm sounds about right. It’s an interesting speculation, but still speculation.

On the date of publication, Dana Blankenhorn held long positions in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. Just in time for the holidays he has a collection of COVID-19 stories https://www.amazon.com/Bridget-OFlynn-Virus-COVID-19-Pandemic-ebook/dp/B09K8PSQC8/ at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.