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Pain Postponed

Phil Kernen

BUY NOW PAY LATER is an online payment method that’s growing in popularity. Money and investors have moved toward participating companies big and small, as they seek to stake their claim in this growing market. What’s the big deal and why is everyone excited?

Buy Now Pay Later (BNPL) allows consumers to purchase goods and pay for them in the future. Approval happens in seconds. You make a down payment, such as 25% of the total purchase, and pay off the remaining amount in a series of interest-free installments.

This isn’t new. Variations have been around for more than a century. When I was a kid, I bought a camera on layaway from the nearby Target store. I don’t remember how much it cost, but I do remember how great it felt to bring the camera home after I made the last payment. The difference now? Financial technology and new apps allow companies to aim BNPL at young people making online impulse purchases of, say, fashion items or small electronics.

Young people, it seems, dislike credit cards and the very high interest charges that banks impose when customers don’t pay off their full balance. Gen Z shoppers prefer the feeling of control they get from BNPL’s fixed payment schedules. Britain’s Financial Conduct Authority cites data showing half of BNPL users are under age 36, and the average spend on a BNPL app was recently reported to be $100.

Who’s offering these payment methods? Compared to the U.K. or Australia, there’s much less market penetration in the U.S. Pure-play companies include Affirm Holdings in the U.S., Klarna in Sweden, Afterpay in Australia and Revolut in Britain. Established companies are buying or developing their way in: PayPal bought Japan’s Paidy. Apple is teaming up with Goldman Sachs. Shopify now offers BNPL, and Visa and Mastercard are developing technology for their issuer banks.

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Why is it becoming popular now? The new companies didn’t make much headway at first. Then, in 2019, Walmart switched its credit-card servicer, partly because of frustration at the slow pace of new credit approvals. Simultaneously, Walmart partnered with Affirm to offer BNPL in hopes of finding a more efficient way to extend credit and thereby increase sales.

Over the same period, online retailers were struggling with ways to turn abandoned shopping carts into completed purchases. As BNPL gained traction within Walmart, others figured BNPL could help with the abandoned cart problem. In 2021, Square announced it would acquire Afterpay and Amazon announced it would partner with Affirm to introduce BNPL for the vendors on its platform.

How does buying now and paying later differ from using a credit card?

  • Users don’t pay interest. Merchants pay a transaction fee to the BNPL company.
  • Many BNPL vendors conduct soft credit checks, the kind usually used for informational purposes that don’t affect your credit score. This leads to faster approvals than the hard credit checks lenders perform when you apply for a credit card or a mortgage. Hard credit checks affect your credit score.
  • BNPL companies aren’t just offering the technology and facilitating the transaction. They also take on the credit risk of lending to customers who use the payment method.
  • Users incur fees for missed payments. Missing multiple payments could result in an account landing with a collection agency.

A 2020 report from the Australian Securities & Investments Commission revealed that 20% of consumers were missing payments and 15% of consumers had to take out additional loans to cover their BNPL obligations. The U.K. reported similar conclusions. Buy Now Pay Later doesn’t benefit everyone involved.

Still, it’s a payment method that’s here to stay. Best to think of it as just another way to more easily separate consumers from their money.

Phil Kernen, CFA, is a portfolio manager and partner with Mitchell Capital, a financial planning and investment management firm in Leawood, Kansas. When he’s not working, Phil enjoys spending time with his family and friends, reading, hiking and riding his bike. You can connect with Phil via LinkedIn. Check out his earlier articles.

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Peter H.
Peter H.
11 months ago

I would never encourage someone to take on debt lightly. But BNPL is not a bad alternative for those who must.

Most consumer credit is a function of credit scores. People with low scores or no access to credit pay high, often borderline usurious rates: payday loans, title loans, credit card penalty rates, auto loans, personal loans, credit builder “loans” (a truly awful product), the list goes on. People with high credit scores pay much less and can easily refinance.

BNPL is available at the same rate to all consumers. Effectively, because merchants pay the lender through exchange fees, those with good credit subsidize those with bad credit (just like cash payers subsidize credit card payers). For people who live paycheck-to-paycheck this can be a good option to spread payments without paying egregious finance charges.

Yes, BNPL late fees can negate this benefit. Instant credit can be a dangerous temptation. But used wisely BNPL is a better option than most.

Ormode
Ormode
11 months ago

Many of the companies offering these plans are “disruptors” that are heavily capitalized by the manic stock market. Their investors are looking for growth, not profits, and of course you can grow very rapidly if you loan money to anyone who applies. What could possibly go wrong? After the next down cycle, we’ll find out.

parkslope
parkslope
11 months ago

Timely article!

Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit Buy Now, Pay Later Expected to Set New Records for Lending this Holiday SeasonDEC 16, 2021
 The CFPB is concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.
https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-opens-inquiry-into-buy-now-pay-later-credit/

Jim Wasserman
Jim Wasserman
11 months ago

Interesting piece, Phil. When I taught economics, I would ask students from whom they are borrowing money with credit cards. They would say the bank, but I would tell them it was from their future self, betting that their future self would be able to make the payments and, due to both inflation and having more money, future self would be paying with money worth less.

It seems BNPL is a same appeal. We all think of our future self as the model person who will stick to the diet/use those airline points/live within the budget/call his mother, and most of all, never default on a payment. Unfortunately, future self often lets us down by being same-old-self, and I suspect the companies offering BNPL are betting on that.

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