Consumers are increasingly opting for “Buy Now, Pay Later” services regarding financing options. These services are exploding in use and will only increase in the months and years ahead.
Quick Background
These services directly or indirectly use companies such as Affirm, Afterpay, Klarna, and PayPal Credit for consumers to make interest-free installment payments on a purchase over several weeks. These companies are high-tech clearinghouses in addition to their direct-to-consumer offerings.
Just today, Apple introduced its BNPL via Apple Pay, and I have no doubt it’ll be wildly profitable for them, given their various channels and cross opportunities.
Not A New Concept
Fundamentally BNPL is an old concept; I’ll pay you two hamburgers tomorrow for a hamburger today immortalized in Popeye cartoons or, on a more serious note, deferred interest credits or payments, no money down, layaway, and laybys. Installment payments with or without interest are ubiquitous, and BNPL essentially is a high-tech, considerably frictionless dialect of earlier offerings (in my opinion).
No Substantive Concerns At the Moment
My focus today is essentially a potential cautionary tale regarding BNPL offerings.
First and foremost, I don’t have serious concerns at the time of writing in June 2022, given that 60% of their customers pay no interest per Affirm. BNPL is a valuable service to many, especially during strained economic times, who benefit from interest-free BNPL when responsibly offered.
Primarily Potential Concerns In The Future
The responsibility offered is what I’ll focus on now.
I’m cognizant that practically any offering has the potential to be a concern in the future, so what I posit below could very well not happen (I hope it doesn’t).
My concern lies in the potential for interest rates to increase significantly and if one were to draw this curve out in the future enough, reach astronomical rates within what I see as considerably less oversight than the issuance of other types of loans.
My concern is the potential for hidden fees and interest rates disproportionately increasing when missing a payment (the rate should go up but not astronomically).
My concern is that the BNPL offers won’t be regulated enough to protect consumers or could fall prey to predator lending by unscrupulous players (the way housing loans were rushed through and then turned into CDOs).
My concern is ensuring BNPLs don’t turn into modern-day payday loans, loans that are approved today only to have disproportionate societal impact, and its ripple effect, both at an individual borrower level and on Wall Street — with negative social impact
To be clear, I have no issues with charging interest rates, although thankfully, I avoid doing so, provided the interest rates don’t rapidly increase, especially (a) as consumers become used to BNPL services and (b) there’s future pressure to increase profits by increasing interest rates and fees.
It doesn’t take an economist to realize that every basis point significantly increases revenue for a profitable BNPL offering.
I’ll be happy if all this is excessive smoke and unnecessary caution on my part, although economic history doesn’t have a rosy track record.