Are Buy Now Pay Laters the Next Bubble?
crresearch.com
crresearch.com
Ultimately the merchants are footing the bill and then they pass it on to consumers in the form of higher prices, further reinforcing the need to pay via BNPL to capitalize on the arbitrage opportunity. Kind of like how everyone pays with credit cards for the rewards.
Secondly, you are supposed to invest money you aren't going to use for at least 5 years. That's a much longer horizon than most product purchases. Why? Sometimes stocks/real estate/crypto/etc. goes down. Have you checked the markets lately?
lol. Supposed to?
Normal people generally have to hold a certain amount of cash anyway since they do not have access to collateral-backed revolving lines of credit and because they can’t afford to lose money that they know they will need to send in the future.
Unsurprisingly all the BNPL maximalists do not live under those constraints.
In Norway a card transaction with the national system BankAxept costs 0,06% + ~$1 cent per transaction [1], in the US the fees are usually at least a percentage point or two.
Visa/Mastercard in Norway is about as expensive as in the US. The US doesn't have a widespread miniscule fee/no rewards card network option however, like BankAxept is in Norway.
Some are better for groceries, air fares, or hotel bookings and pay out in different ways(cash, or an abstract token system that is formulaically tied to redeemable goods and their USD worth.)
This whole system is financed through credit card transaction fees that are applied to the business owner's expenses during the transaction. Note, the customer is not meant to pay for this fee and business that tac this fee onto the customer's bill can have their license taken away by the company that provides in the interface(VISA, MasterCard, etc.). The whole system is really interesting and worth a read on Wikipedia.
That's part of it, but isn't another big piece of it financed by interest payments from people who don't realize that you're supposed to pay off your entire balance every month?
I love your chutzpah, but you don’t get to do that math that way. The 2% doesn’t compound, it’s a one-time thing (unless you’re continually rolling over your BNPL purchases)
You get $200 rewards on a $10k purchase.
In no world do you get $800 on $10k. You only get $800 on $40k because the 2% isn’t a rate in principle so 8% literally never happens.
For example, if you’re debating whether to use a 2% rewards credit card or to use BNPL and keep the difference in a savings or money market account for 90 days, the latter strategy only wins if that account is yielding more than ~8%. Or if you’re deciding whether to use BNPL to let you pay down other debt a little faster, it’s only worth it if the interest rate on that debt is above ~8%.
Does every cash purchase also have an infinite APR? Because there I’m paying $200 for nothing. If that’s not logical then where does it start being logical?
a) pay with a 2% reward credit card
b) pay with BNPL scheme with a 3 month term.
In the scenario a) you effectively paid $98 right away and in the scenario b) you pay $100 but after 90 days (let's say you don't have monthly payments for simplicity). For b) to be no more expensive than a) you need a way to make at least $2 from a $100 investment in 90 days. This means that whatever investment you make with the $100 has to yield 8% annually. Even though you withdraw money after 90 days.
If you have monthly payments you need even higher yield to compete with the 2% reward. E.g. if you pay $33.33 every month then you need to make 1% yield per month to collect $2 off your initial $100 in 3 months: you get 3 months of yield from the final $33.33 payment, 2 months of the previous payment and 1 month of the first payment for total 6 months yield from $33.33. That's 12% annualized yield.
Scenario 1: You use a credit card with a 2% cash back reward to make the purchase. You immediately pay off the credit card balance and claim the $20 of rewards. Your net cash flow is -$980 at time 0.
Scenario 2: You buy a 3-month zero-coupon CD for $980 today, and then use 3-month BNPL to make the purchase. In three months, the CD earns $20 of interest. You cash in the CD for $1000 and then use that $1000 to pay off the BNPL. Your net cash flow is again just -$980 at time 0.
The annual effective interest rate yielded by the CD for scenario 2 to work out exactly as described is roughly 8% (actually around 8.42%).
You’re incorporating a theoretical (and unrelated to 2% credit card rewards) interest rate into your calculations. I could easily say a CD yields 10% and this is a 50% APR then.
EDIT: Maybe to help you think about this: this is a purchase loan. It is not a cash loan. You got $1k worth of goods for $1k dollars. You can make arguments about opportunity costs, but that’s different than the traditional concept of APR.
EDIT 2: I’m posting banned but indulge me, what’s the APR of cash purchases?
Don't think of equalizing the terms by extending the BNPL. Think of equalizing the terms by shortening the CD.
> You’re incorporating a theoretical (and unrelated to 2% credit card rewards) interest rate into your calculations. I could easily say a CD yields 10% and this is a 50% APR then.
I'm not claiming that the ~8% interest rate is real. My calculations mean that if you can get that rate or better, then you should use 3-month BNPL, and if you can't, then you should use your credit card with 2% cash back instead.
> EDIT: Maybe to help you think about this: this is a purchase loan. It is not a cash loan. You got $1k worth of goods for $1k dollars. You can make arguments about opportunity costs, but that’s different than the traditional concept of APR.
I fail to see how that makes any difference.
> what’s the APR of cash purchases?
It's either the highest APR of any of your debt, if you have any, or the risk-free APR you could get from a savings account otherwise.
Yes, by your logic it is literally an infinite APR. $200 numerator / 0 years denominator. Doesn’t that imply that maybe your formula has some holes in it and this is a fundamentally different transaction (a take rate rather than an interest rate) than what you’re characterizing it as?
So BNPL is not a compelling offer for those who have good enough credit to have credit cards.
Consider that there's little real difference between a, "well financed person" and a, "person in debt." The key difference is the object of the sentence. If the object of the sentence is, "society-scale economic growth" you can easily justify, "printing money and giving it to people to spend" as in normal conditions the resultant growth for issuing credit to the consumer spending economy prevents the currency from inflating but outside of just curtailing inflation without curtailing expansion you've also met the financial needs of the populace. You've guaranteed all citizens bread.
https://en.wikipedia.org/wiki/Cura_Annonae
Consider that great class difference between, "the well financed" and, "those in debt."
The 'difference between well-financed and in-debt' is very clear and to-the-point, this is excellent writing.
The long 'if you consider this, if you consider that, post-Westphalia' paragraph in the beginning is not. Could you perhaps summarize the first part? What exactly do you want to say? How do 'customer loyalty programs' and 'Industrial Loan Company affordances' and 'privatized UBI' and 'replaces credit cards' fit together? How did Westphalia slip in there? I am quite convinced there is a coherent idea here, but your writing fails to communicate it. Or at least it failed to communicate it to me.
There has been multiple analysts and news outlets writing about this.
When 33% of users from BNPL services claim that a reason to do it is that their credit cards are already max, I see this as a potential issue.
Also as someone that has been testing & doing research on this field, it is amazing how the services differ between Europe/US and Latam (probably Africa too but I didn't dig into this one yet).
BNPL services in Latam charge quite high interest to the consumers. I'm a bit worried when I get ads to pay for sneakers over the course of 3 months and they would end up costing around 30% more, which means many people actually purchase such items in such way.
What are your guys thoughts? While easier access to credit can be quite helpful, it does seem like there might be some potential issues in the industry, particularly in these days.
I've argued against this so many times, both online and to the management at a previous job. There is a small group of people to whom these payment options are completely sensible, and they manage them very responsibly. These people will argue in favor of Buy Now, Pay Later as well as easy access to small loan, reasoning that they are a good options for people like themselfs.
Their argumentation is more or less valid, it's just they aren't the target customers for this type of payment. It might not be situation anymore, but it the past a company like Klarna made no money on a customer who paid off their loan on time. The entire business model was people who needed payment plans, people who made bad finasical choices, people who were already poor.
My take is that BNPL is such a dangerous product, for a certain group of people, that it should be at least be restricted to select purchases. For instance, you should NEVER be allowed to use it for fashion, consumer electronics, and other now essential goods. Sadly that's where these options are primarily presented to consumers.
So what's left? Cars and houses?
I also find it bizarre that 45% say it's easier to make payment than on a credit card and 44% says it's more flexible. Really?! I don't find it hard to give the credit card company money, and it seems like lower interest rates should be #1.
I mean, that's a lot higher than a US credit card, but a lot less than a US payday loan.
I read sometime ago that Brazil was the only country where certain luxury brands would accept installments. ( Jewelry, watches, etc ),
I'd be interested to see the data on this and learn how normal or weird my opinions are.
On the merchant end, I'd worry that this is a one-time incremental bump in sales in exchange for an 8% financing charge. That might be more than they pay for bonds.
https://www.americanexpress.com/en-us/credit-cards/features-...
https://usa.visa.com/partner-with-us/payment-technology/inst...
When I looked into it, it seemed to be a small-scale trial-- a handful of merchants and a single card issuing bank-- but I suspect the point is to define and bulletproof the interface before throwing it out to the world.
It makes sense to me: BNPL is a feature, not a product, in the payments ecosystem. No consumer wants to say "Well, I can only shop at merchants X, Y, and Z, because only they accept the BNPL platform I want to use." and no merchant wants to say "let me integrate with 25 different BNPL platforms each with their own API gremlins". If you end up with four monsters of the market-- one from each major card brand-- that's probably worth it for the volume each one can provide. It also likely means that they'll turn into things you just see as add-ons for popular shopping carts and payment modules. Maybe the "embeddable card entry form" your payment processor offers suddenly sprouts a new field to show BNPL plan choices.
(edit: demoting comment about flagging for an editorialized title to this addendum)
> Otherwise please use the original title, unless it is misleading or linkbait; don't editorialize.
They are, but not in quantities to actually matter. Here's background on Affirm's ABSes, the last offering was pulled: https://www.bloomberg.com/news/articles/2022-03-11/-buy-now-...
A cool consequence of this is that you can find background info on what sort of loans they make: https://finsight.com/deal-51195-affirm-asset-securitization-...