Buy now, pay later came onto the scene several years ago cloaked in virtue. It was a new way of financing purchases that rejected the toxicity of revolving credit. Younger consumers embraced the model, which broadly allows consumers to pay off purchases in installments, at low or zero interest. BNPL was at the vanguard of the “debit economy” as Afterpay founder and CEO Nick Molnar has often declared.
BNPL is a now white-hot market. Companies like Affirm, Klarna, and Afterpay have racked up valuations in the tens of billions. Strategic players like Square, Paypal, even Apple have seen the urgency of adding BNPL and have launched their own products. In Square’s case, it laid out $29 billion to acquire Afterpay.
BNPL gained popularity as a way to acquire clothing and accessories. Today, you can use BNPL to buy everything from travel to furniture to health care. And the space is moving rapidly into B2B as well.
Debt by Any Other Name
But something happened during BNPL’s journey from payments innovation to fintech juggernaut. Analysts and regulators began to question the premise of BNPL. And some of the contradictions in the storytelling.
For example, BNPL sells itself to the public as a responsible lending instrument. Yet one of its key selling points to merchants is that it drives higher average orders. Consumers don’t have to pay in full right away. So naturally, they make bigger purchases with BNPL than they would otherwise. Immediate gratification. Delayed pain. But can you really call it a responsible lending instrument if it enables consumers to buy things they cannot afford? And with the illusion of financial responsibility.
Then evidence emerged that BNPL default rates are rising. And that using BNPL has a negative impact on a consumer’s credit score. Signs of rising default rates also began showing up in company financial results.
And then Prof. Galloway, once a BNPL fan, swooped. Galloway, famous for incisive and funny takedowns of companies, trends, or business models he doesn’t like, turned his guns on BNPL. He now says that BNPL is leading young consumers into debt while convincing them they are being financially responsible.
“By most measures, BNPL services aren’t even good credit offerings,” Galloway writes. “With a traditional credit card, you pay nothing upfront, then you’ve got, on average, five weeks to pay without incurring any fees or interest. Closer to two months if you manage your billing cycles carefully. Carrying a balance will cost you, though, 1%-2% in interest per month. Miss a payment, and you get a late fee, about $30 — on which you’ll also pay interest.”
Galloway then contrasts this with the consumer experience on Afterpay. “When you buy your new jeans, you have to come up with 25% of the money at purchase, then the lender gives you six weeks to pay off the remainder, in three installments. Miss an installment and Afterpay hits you with a late fee. Continue in arrears, and the late fees increase, up to a cap of 25% of the purchase price.”
Inevitably Scrutiny
So this all is an inevitable lead-up to this week’s announcement that U.S. Consumer Finance Protection Bureau has opened a probe into BNPL.
The agency seems to be concerned that BNPL is leading consumers into a debt trap.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately, too,” CFPB Director Rohit Chopra said in a statement.
“We have ordered Affirm, Afterpay, Klarna, PayPal, and Zip to submit information so that we can report to the public about industry practices and risks.”
Ten agency is also asking questions about what data the industry collects on consumers and how it uses it. This may be a routine probe that leads to a slap on the wrist or no action at all. We imagine that the industry won’t get off quite that easy. We imagine the BNPL industry of the future will have stricter underwriting practices and face much tougher rules on how they can position their products to consumers.
Is BNPL a scourge? No, we don’t think so. It’s essentially layaway in reverse. But it has clearly been oversold as a financially responsible choice for consumers. You cannot enable consumers to buy something a bit on the expensive side, like a piece of jewelry, then not pay for it in full with cash, and insist that it isn’t debt. It’s debt. And the industry will likely have to be much more explicit about saying so in the future.
