The Explosion of 'Buy Now, Pay Later'
Hi all, Julie here. Thoughts and prayers go out to all of our West Coast readers impacted by the fires. I’ve only visited that side of the country, so I can’t even imagine what you guys are going through. Stay safe and know we’re thinking of you!
This week I wanted to talk about installment lending, or “buy now, pay later,” since that’s suddenly in vogue. Covering fintech at Bloomberg, I think I first started watching them around 2017, when Affirm was in talks to raise a new round of funding. At that point, I think the only time I had come across it from a consumer standpoint was when I bought my Peloton bike years ago (little did I know how much I’d be using it in 2020).
Since then, Affirm and other startups have continued to expand. More recently, major players like Visa, PayPal, AmEx, and others have stepped into the space; and consumers have slowly started using these types of offerings a bit more.
Here are some interesting stats from [a recent survey](https://www.fool.com/the-ascent/research/buy-now-pay-later-statistics/: * Over a third of U.S. consumers have used a BNPL service. * Those aged 35 to 44 are most likely to have used a BNPL service, while those over the age of 54 are least likely to have used one. * Most people use BNPL services to avoid paying credit card interest or buy something not in their budget. * Electronics are the most common type of item to buy with BNPL. Though some people use it for groceries? That’s terrifying. * Only 22.13% of people say they understand all of the terms and conditions of BNPL. * Among people who have used a BNPL service, 44.51% first did so in 2019, while 20.83% first did so in 2020, and only 7.42% had used a BNPL service prior to 2015.
There are a few things driving this trend in my mind.
- Covid. People are buying electronics or fitness equipment—big ticket items that most BNPL’s are selling with 0% interest offerings.
- Another, broader, one is fear of credit cards. Since I pay off my credit each month, I prefer to just do that and rack up points, but some of my peers are scared to death of debt. And for some reason, they don’t think of installment loans as debt even though they are. I’ve only tried installments once, and it was when I was buying some furniture for a new apartment that I was moving into. AmEx, who also started offering installment options on its website, gave me a 0% interest offer for giving it a shot, so I did. It was nice, but I haven’t used it again since.
That brings me to one of the advantages of Affirm and what has been its moat: it’s deep integration at the point of sale. For consumers, it literally can’t get easier than that.
If you look at a screenshot of its new partnership with Shopify, it's extremely seamless. Whereas for AmEx, I had to click a million things in my account with them to make it happen after already putting it on my credit card. Basically, one is easy and the other is not.
While I love making finances easier for people, there are also downsides to this (yes, downsides to simplifying finance...just hear me out). You see, as Alex Johnson of FICO pointed out in a recent blog post: “If financial services become exclusively embedded in non-financial activities, then financial services itself stops being an activity. That’s a problem because as easy as Uber might make it to get a checking account or Amazon to get a loan, there won’t be anyone around to help you make the hard choices necessary to achieve financial security and build wealth. If every financial choice is made in context, customers will lose the perspective to see how those individual choices impact their holistic financial health.”
So, while making finances easy isn’t in itself a bad thing, we need to do a better job of making sure financial education and the like stay up to speed with it. Why can’t we embed questions, advice, and other points into the customer experience? Its similar to how many robo-advisors have found ways to nudge positive behavior and creative healthy habits without making people read a ton of boring blog posts?
In that same survey I referenced above, only 22% said they had a strong understanding of the terms and conditions of BNPL. On the flip side, 30% said they had very little understanding of it. These types of products are great for avoiding interest payments since a lot of them are 0% offerings if paid within a certain time frame, but I believe the education around them hasn’t held pace (as is the case with many fintech offerings).
There’s benefit here to both the companies offering education related as well as the consumers using them. The company benefits because there’s a group of consumers that haven’t tried these services since they don’t understand them. The consumer benefits because they can better understand whether these products are right for them and the specific purchase. Several of these installment companies also can’t come after the buyer if they stop paying, so education would help with future defaults as well.
Obviously, financial products will always be misused and not every consumer is going to make great choices. But that doesn’t mean we shouldn’t all do our part to try to change that. Whether that be teaching our kids, our friends, our families, or investing in companies that have the chance to make an impact here. Let’s do our part to make finances easier but make financial education a top priority as well.