The Buy Now, Pay Later Bubble Is About to Burst

[Hydrogen]

As familiar as Americans are with the concept of credit, many of us, upon encountering a sandwich that can be financed in four easy payments of $3.49, might think: Yikes, we’re in trouble.

Putting a banh mi on layaway—this is the world that buy-now, pay-later programs have wrought. In a few short years, financial-technology firms such as Affirm, Afterpay, and Klarna, which allow consumers to pay for purchases over several interest-free installments, have infiltrated nearly every corner of e-commerce. People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30 percent of Affirm’s revenue. And though Americans have used layaway programs since the Great Depression, today’s pay-later plans flip the order of operations: Rather than claiming an item and taking it home only after you’ve paid in full, consumers using these modern payment plans can acquire an item for just a small deposit and a cursory credit check.

From 2019 to 2021, the total value of buy-now, pay-later (or BNPL) loans originated in the United States grew more than 1,000 percent, from $2 billion to $24.2 billion. That’s still a small fraction of the amount charged to credit cards, but the fast adoption of BNPL points to its mainstream appeal. The popular embrace of this kind of lending system says a lot about Americans’ relationship to debt—particularly among the younger borrowers who made BNPL popular (about half of BNPL users are 33 or under). “We found that most of the people that use buy now, pay later either don’t have or don’t use a credit card,” Marco Di Maggio, an economist at Harvard, told me. He said that Gen Z was skeptical of credit cards, possibly because many of them had seen their parents sink into debt. Following the ’08 financial crisis, personal debt became a public bogeyman. The elimination of housing wealth for millions of Americans fueled a credit crunch, in which banks tightened credit standards and sharply curtailed their lending. Government agencies such as the Consumer Financial Protection Bureau also strongly discouraged overextension.  

“We have sort of indoctrinated younger borrowers in the idea that having credit-card debt is bad,” Anastasiya Ghosh, a University of Arizona marketing professor, told me. Ghosh’s research involves polling consumers about which method of spending makes them feel the most guilty. “Credit cards are always the worst,” she said. Conversely, when given the option between BNPL and debit, shoppers made no moral distinction. Even the most prosaic items were fair game for financing. Ghosh had assumed people would tend to reserve BNPL “for hedonic things that are harder to justify”—until a control group in one of her studies happily used it on groceries. “They felt absolutely nothing negative,” she said, “which blew my mind.”

Older consumers might see fractured payments on chicken thighs as a sign of financial precarity, but many young people find BNPL’s nuances liberating, Di Maggio told me. They perceive credit cards as encouraging a kick-the-can attitude toward debt, with interest steadily accruing from month to month. (Indeed, roughly 60 percent of credit-card holders don’t pay the full amount on their monthly bills, according to a McKinsey survey.) Traditional lenders profit from sustained delinquency, whereas most BNPL loan terms are fixed at six weeks. BNPL providers can offer zero-percent interest rates because they charge merchants three to four times the average credit-card processing fee. To many Gen Zers, that business model seems less risky than credit cards. It gives them a sense of security that the debt from a purchase won’t balloon from interest and hang over their heads forever.

The tendrils of those credit-card anxieties stretch all the way to Instagram and TikTok, where countless “debt success stories” feature creators digging their way out of credit-card bills. As the reigning king of product placement, Instagram is a crucial node in the BNPL network: #Afterpay is tagged in more than 1.6 million posts on the platform, most of them from brands and influencers hawking apparel. But Gen Z’s lifestyle gurus live on TikTok, where they articulate new modes of consumption in real time—distilling whole philosophies at incredible scale.

To a generation of borrowers, zero interest means free money, and the idea of paying down daily indulgences doesn’t faze many young consumers. “One thing about me? Ima Afterpay that shit,” says the creator behind All Things Naisa on TikTok, where she has more than 130,000 followers. “I don’t care if I have $40 million in my account. I don’t care if the cart came up to $6.74. Afterpay that shit!” The video has almost 180,000 likes. In another video, John Liang, a TikTok influencer with 2.1 million followers, presents the decision to use BNPL as one of pure reason. Standing in front of a green-screened Apple Store, Liang explains that by not paying the total price for a product upfront, he can invest the remainder of his money.

When I pitched this latter reasoning to Di Maggio, he said it made little sense economically and psychologically. He pointed out that investments don’t typically yield appreciable returns over just six weeks. And even if they did, most consumers who find an extra $20 or so in their pocket don’t think to buy stocks or bonds with it—they spend it on something else. A recent study he co-authored supports this notion, finding that BNPL use causes a permanent increase in total spending of about $60 a week, stretching the average household retail budget 30 percent. Another study found that, on paper, people who borrow from these financial-technology firms look as creditworthy as their conventional-banking counterparts, but “after they get the loan, they are much more likely to be delinquent,” Di Maggio said. BNPL delinquency rates are outpacing those of credit cards, and the companies have seen their valuations slashed in the face of waning interest from investors.

Many financial-technology firms frame their mission as one of inclusion—they say they’re building a bigger tent for America’s un- and underbanked, which include gig workers and young people with poor credit histories. Klarna, for instance, recently launched a “creator platform” to match merchants with influencers who have access to their target audiences. But because BNPL providers aren’t subject to the same scrutiny as banks (most of them engage in forms of lending not explicitly covered by the Truth in Lending or Dodd-Frank Acts), consumer protections are scant. BNPL programs increase the likelihood of borrowers dipping into their savings and incurring overdraft and other fees. And most of the companies don’t furnish credit-score-boosting data to agencies such as TransUnion, meaning that even if you use BNPL and pay on time, “you have thousands of dollars of debt on your balance sheet that nobody knows about,” Di Maggio said.

What companies like Klarna once characterized as paradigm-busting behavior—young people rejecting stodgy banks in favor of more freeing forms of finance—now looks like the crest of yet another credit cycle, a familiar note in the motif of American consumption. As with young credit-card holders, BNPL users under 25 have the highest default and delinquency rates. If credit dries up in a broader downturn, they are at risk of losing access even to those programs. Meanwhile, they may find that their reliance on these parallel lending methods, which only glancingly intersect with the conventional credit ecosystem, has hobbled their credit history at the worst possible time.

The new debt, in many ways, is exactly the same as the old debt. On TikTok, a small cadre of folks is starting to inch toward denunciation. The opening line of one finance influencer’s video last month: “I’m gonna explain to you why you should never use the buy-now-and-pay-later feature.”



https://www.theatlantic.com/culture/archive/2023/01/buy-now-pay-later-affirm-afterpay-credit-card-debt/672686/

....


The phrase "record levels of credit card debt" has made headlines in US media for the past 20 years. It had become so integrated and normalized, I hadn't realized generation Z and youth demographics may have formed negative opinions around credit cards. Causing them to avoid use of cc.

According to this, BNPL (buy now pay later) debt is often not included in credit scores or personal debt statistics. Which could lead to average debt per consumer/household statistics resembling the portion of an iceberg which remains above water. There have been rumors for months now that a high percentage of US consumers were charging necessities to BNPL or credit cards. A bill which they may not be able to afford. The headline appears to indicate it could be an affirmative claim.

There could be a crisis in the near future. As americans search for alternative methods to cover their monthly expenses once their credit cards and BNPL plans are tapped out. However, considering BNPL doesn't appear to track consumer debt. It is possible american consumers could rack up an unlimited number of BNPL plans without the additional debt appearing on credit check radar. Perhaps that is the way?

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[DrBeer]

Let me disagree with the assessment.
I have worked and communicate with representatives of the banking sector and large grocery chains. The essence of this process, at least in our country (I'm sure the situation is identical in others) is as follows:
1. There is a problem of overproduction or strong competition in the market
2. Banks have accumulated huge reserves of money that are "dead weight" and that generate losses rather than profits.
3. Lending, in terms of interest rates, has sagged a lot.

As a result, installment selling solves these problems:
- purchasing power is growing (it's easier to buy an expensive thing and pay 6-12-24 months for it). For example, now in Ukraine, with all the well-known problems, an installment plan for the purchase of equipment for 6 months costs 0% rise in price. For 12 months - approximately 5% per annum
- banks receive an additional % from retail chains, which, with mass purchases, gives tangible income instead of losses
- producers receive higher consumption of their goods, which allows them not to reduce production and not increase costs
- retail chains do not bear the costs of storage and / or disposal of goods that become less relevant due to the release of new product lines.

so that the system is quite beneficial to everyone - the consumer, the financial sector, manufacturers, sellers. Without the movement of money - the economy begins to die ....

[Coyster]

There could be a crisis in the near future. As americans search for alternative methods to cover their monthly expenses once their credit cards and BNPL plans are tapped out. However, considering BNPL doesn't appear to track consumer debt. It is possible american consumers could rack up an unlimited number of BNPL plans without the additional debt appearing on credit check radar. Perhaps that is the way?

I think the right way should be for one to search for alternative means of making more income for themselves to cover their monthly expenses rather than this, because no matter how you look at it, a debt is a debt, and a debt must eventually be paid, if not early, then when it must have accrued quite a lot of interest fee.

Having said that, the concept of BNPL is not a bad one (but i don't think it should be abused), though in my country it isn't as yet so popular, but i know you can buy stuffs like phones, laptops and mostly electronic gadgets and pay around 30% of it there and then, and then choose to pay what's remaining in installments of either a 3-6-12 month period, and of course with interest. I don't really know how BNPL works in your country (USA), but would it be possible to rack up an unlimited number of it without running into trouble, and what about the interest fee accrued on it.

[paxmao]

Let me disagree with the assessment.
I have worked and communicate with representatives of the banking sector and large grocery chains. The essence of this process, at least in our country (I'm sure the situation is identical in others) is as follows:
1. There is a problem of overproduction or strong competition in the market
2. Banks have accumulated huge reserves of money that are "dead weight" and that generate losses rather than profits.
3. Lending, in terms of interest rates, has sagged a lot.

As a result, installment selling solves these problems:
- purchasing power is growing (it's easier to buy an expensive thing and pay 6-12-24 months for it). For example, now in Ukraine, with all the well-known problems, an installment plan for the purchase of equipment for 6 months costs 0% rise in price. For 12 months - approximately 5% per annum
- banks receive an additional % from retail chains, which, with mass purchases, gives tangible income instead of losses
- producers receive higher consumption of their goods, which allows them not to reduce production and not increase costs
- retail chains do not bear the costs of storage and / or disposal of goods that become less relevant due to the release of new product lines.

so that the system is quite beneficial to everyone - the consumer, the financial sector, manufacturers, sellers. Without the movement of money - the economy begins to die ....

Being that true, the BNPL "revolution" comes hand in hand with the new Fintech, is not exactly as ye-olde-credit card with a 22% interest. The concept is the seller using the BNPL supplier as a service that is appreciated by the customer and tends to increase sales. For the seller, the Fintech provides immediate liquidity in exchange for a commission. Is not exactly the model of a bank, which does not by default provide immediate liquidity.

[yhiaali3]

Economic culture differs from country to country and from person to person, for example, in countries where income is somewhat limited, such as my country, such programs (BNPL) are very active because people are unable to pay the expensive things they need directly, so the company resorts to these programs until it marketing its products and disposing of the accumulated goods.

Despite the positivity that can be apparent at first sight, other negative aspects quickly become evident because these programs encourage people to buy products that they do not really need, and debts begin to accumulate without realizing, and in the end they fail to pay the debt.

BNPL helps move the economic cycle in the country and helps ease the recession to some extent, but it creates other problems such as a culture of unnecessary consumption and the inability to pay all premiums, so there must be some kind of stricter controls on these programs.

[Die_empty]

Economic culture differs from country to country and from person to person, for example, in countries where income is somewhat limited, such as my country, such programs (BNPL) are very active because people are unable to pay the expensive things they need directly, so the company resorts to these programs until it marketing its products and disposing of the accumulated goods.

Despite the positivity that can be apparent at first sight, other negative aspects quickly become evident because these programs encourage people to buy products that they do not really need, and debts begin to accumulate without realizing, and in the end they fail to pay the debt.

BNPL helps move the economic cycle in the country and helps ease the recession to some extent, but it creates other problems such as a culture of unnecessary consumption and the inability to pay all premiums, so there must be some kind of stricter controls on these programs.

It is true that BNPL schemes assists people in mostly developing economies to buy what they might not be able to afford paying in full. It has also created employment opportunities as well as more revenue avenues to the government.

But in my country this program has been greatly abused. This is because we don't have accurate data to check the financial or debt status of most BNPL customers which have made many of them to buy products that they might not have the financial strength to pay for them. Some of them can even buy products from different BNPL firms by giving false information.

Recently, I got two calls from different BNPL firms that one of my friends that I have not seen for over a decade bought some gadgets from them and used me as his guarantor. And they have been contacting him to pay his monthly payments for the things he bought but he has been avoiding the firm for over three months. I was shocked that these firms didn't contact me when he gave my name and contact as his guarantor. And now they want me to produce him. This is an example of how these firm because of competition reduce thier standard because they want to attract more clients.

[adaseb]

Well credit cards have record balances for 2 reasons.

1) Most credit cards give you usually 1-2% cash back or some bonus so people use them when paying for things and Apple Pay makes it quick to pay for things.

2) Inflation is high so everything costs more so it’s normal that balances will be higher.

So I am not surprised by this at all.

[davis196]

The BNPL concept is more like a thing from the western world. In my country there aren't any financial companies offering BNPL services.
Buy now pay later is just another form of debt. Is there any serious difference between the BNPL debt and the credit card debt? I don't know, because I'm not an expert. There's nothing wrong with credit card debt, as long as you pay your debt in time. Actually using credit cards and paying this type of debt in time is useful for building a better credit score and affording bigger loans.
Maybe the Federal Reserve will have to increase money printing and lower the interest rates, in order to save the debt bubble in the USA from bursting.

[Hispo]

Sometimes all these concepts of Buy Now, Pay Later and similar plans sound pretty much alien to me.
Here in my country, because inflation, banks do not offer credit; here cash is king.

Banks used to offer credits but eventually the inflation started to go much faster than the interest and banks started to lose money with loans.
Here it is rare for someone to even have debt, and listening about people in USA living on credit sounds kind of crazy to me. 

[jrrsparkles]

Let me disagree with the assessment.


so that the system is quite beneficial to everyone - the consumer, the financial sector, manufacturers, sellers. Without the movement of money - the economy begins to die ....

But we don't know how many of the people used the feature wisely to tackle their temporary financial hardship by splitting the bills and paying in multiple installments but my assumption is mostly people used it to buy luxury items which are not really needed for them but for the sake of pride statement and buy now pay later is same as credit card trap but covers almost everyone even who doesn't have credit line to have one so they opt for these kind of small installment plans and trapped them.

[Fortify]

The phrase "record levels of credit card debt" has made headlines in US media for the past 20 years. It had become so integrated and normalized, I hadn't realized generation Z and youth demographics may have formed negative opinions around credit cards. Causing them to avoid use of cc.

According to this, BNPL (buy now pay later) debt is often not included in credit scores or personal debt statistics. Which could lead to average debt per consumer/household statistics resembling the portion of an iceberg which remains above water. There have been rumors for months now that a high percentage of US consumers were charging necessities to BNPL or credit cards. A bill which they may not be able to afford. The headline appears to indicate it could be an affirmative claim.

There could be a crisis in the near future. As americans search for alternative methods to cover their monthly expenses once their credit cards and BNPL plans are tapped out. However, considering BNPL doesn't appear to track consumer debt. It is possible american consumers could rack up an unlimited number of BNPL plans without the additional debt appearing on credit check radar. Perhaps that is the way?

It seems like every generation has it's financial crisis where companies figure out a new way to abuse people, but they also tend to loop through the same old schemes with a slight twist - pay day loans, buy now pay later, credit cards. The problem is they can all be used sensibly and benefit a consumer who is aware of the traps, however they really make the huge money from people who don't understand all the catches that come with them. Whether that is the "honeymoon" period for credit cards at a certain APR, zero percent interest on loans for the first year or two or the extortionate rate that payday borrowing can have. No doubt the finance people are already angling the next scheme that will fly under the radar of regulators for a few years to come. Financial education is one tool, but they can also target desperate borrowers who might know better anyway.

[franky1]

Let me disagree with the assessment.


so that the system is quite beneficial to everyone - the consumer, the financial sector, manufacturers, sellers. Without the movement of money - the economy begins to die ....

But we don't know how many of the people used the feature wisely to tackle their temporary financial hardship by splitting the bills and paying in multiple installments but my assumption is mostly people used it to buy luxury items which are not really needed for them but for the sake of pride statement and buy now pay later is same as credit card trap but covers almost everyone even who doesn't have credit line to have one so they opt for these kind of small installment plans and trapped them.

https://www.citizensadvice.org.uk/about-us/about-us1/media/press-releases/two-fifths-borrowed-to-pay-off-buy-now-pay-later/
2 in 5 people used further loans to make repayments of initial BNPL

https://www.finder.com/uk/buy-now-pay-later-statistics
Money from their:
current account 52%
Credit card 26%
Savings 23%
Bank overdraft 9%
Borrowed from friends/family 7%
Personal loan 6% Payday loan 5%
Guarantor loan 3%
Other 8%
1 in 4 people used further loans to make repayments of initial BNPL

as for what they buy..
https://www.finder.com/uk/buy-now-pay-later-statistics

One-third (33%) of BNPL customers have used the service to purchase casual wear clothing. With many online fashion brands such as ASOS, boohoo and SHEIN accepting BNPL services, this is a popular way to afford clothing, especially for the younger generations. After casual wear, eating out is not far behind with 31% of consumers using BNPL to pay for trips to restaurants. These are followed by beauty products, with one-quarter (26%) of consumers paying for these using BNPL services.

Technology purchases (22%), travel (19%) and home improvements (19%) follow. Perhaps worryingly, 14% of consumers use BNPL to pay for their rent.

mostly paying for clothes, fastfood and beauty products (small purchases under $£50)
so in both separate statistics ATLEAST 40% are unwisely using BNPL
so in both separate statistics ATLEAST 25% are unwisely managing BNPL repayments

[Jody.Drummer]

Let me disagree with the assessment.


so that the system is quite beneficial to everyone - the consumer, the financial sector, manufacturers, sellers. Without the movement of money - the economy begins to die ....

But we don't know how many of the people used the feature wisely to tackle their temporary financial hardship by splitting the bills and paying in multiple installments but my assumption is mostly people used it to buy luxury items which are not really needed for them but for the sake of pride statement and buy now pay later is same as credit card trap but covers almost everyone even who doesn't have credit line to have one so they opt for these kind of small installment plans and trapped them.

The convenience of things like this makes most people unable to manage their expenses. Yes, we are starting to feel it now where users find it easiest with the Buy Now Pay Later service, so they don't think about what happened at the end of their month. Swelling spending will be felt and it will be more pronounced when the economy starts to deteriorate. Maybe it doesn't really matter when they still have a steady income, but there is a risk at stake, I mean do they know what will happen to their finances in the future? The answer is no. It is possible that bad things will happen to their financial condition so that it will be difficult for them to pay their installments every month.
I agree that the ease of this feature is a kind of trap that ensnares its users, maybe now they feel it's easier, but you have to think about the long term use of this feature.

[franky1]

most BNPL are not people that cant afford things. BNPL is not really used much on items over $1k

BNPL is used mainly for those the 'could' afford it, but simply dont want to see £$20-£$100 just go from their bank in one shot

their thinking is 'rather then see $100 go now i can see $10 go per month for 10 months of the 12 month 'interest free'  period
their problem is doing this YY times a year ends up they then see YY x $10 go from their bank=$YY0 again.. but locked into paying $YY0 a month for multiple months.

EG
where buying $100 in groceries per week, via BNPL feels like "oh its only only $10 a month for 10 months, i can afford that". but doing it each week means they are ending up with $440 a month payments by the 10th month, and continuing that cycle because they are now obligated to pay that.

[The Sceptical Chymist]

People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30 percent of Affirm’s revenue.

So the gist of this is that poor people are living beyond their means, maybe even at record levels....and I just have to shrug my shoulders at this piece of non-news.  Buying on credit, layaway, and every permutation of that concept has been going on probably since the beginning of commerce.

Anyone see John Travolta in Saturday Night Fever from 1977?  I think the first line of dialog is him putting a disco shirt on layaway--in New York City, no less, which had to have been expensive (if it were real).  **Edit: Ah fuck it, that's what Youtube is for: it's at 3:50 in this clip**

So whaddya expect these days?  The Fed has pumped so much money into the system, and interest rates have been so low for so long that this outcome was inevitable.  The only thing that's going to prevent people from using their money responsibly is a major crisis like 2006 to whenever it ended, or worse.  I'm not hoping for that, but that's the reality I see.

[Beparanf]

I'm surprised how BNPL works in your country. Here some major banks offer this credit option with zero percent interest for up to 12 months of installation. I'm always availing this option when purchasing expensive appliances. They just charged me of annual card fee worth 20$ but that's all. The only downside is when I missed my monthly dues because they charge me 5% of the total value. But in general BNPL in my credit card works perfectly without painful fees. Probably banks partnered with the merchant to get fees for my purchases.

[nara1892]

Sometimes all these concepts of Buy Now, Pay Later and similar plans sound pretty much alien to me.
Here in my country, because inflation, banks do not offer credit; here cash is king.

Banks used to offer credits but eventually the inflation started to go much faster than the interest and banks started to lose money with loans.
Here it is rare for someone to even have debt, and listening about people in USA living on credit sounds kind of crazy to me. 

I think you are lucky because there is not so much "Buy Now Pay Later" there. What I know now is that many people around me are using this, yes it looks helpful if we use it very wisely. But this will be disastrous for us if we only use it for things that are not considered important.
My neighbor uses Buy Now Pay Later, but he uses it for business. Yes, he opened installments for other people, but he used the BNPL, things like this are profitable because he can see business opportunities without spending capital. But what is a pity is the person who credits it, because the costs incurred will be greater than the price of the goods.

[Hispo]

-snip-

I think you are lucky because there is not so much "Buy Now Pay Later" there. What I know now is that many people around me are using this, yes it looks helpful if we use it very wisely. But this will be disastrous for us if we only use it for things that are not considered important.
My neighbor uses Buy Now Pay Later, but he uses it for business. Yes, he opened installments for other people, but he used the BNPL, things like this are profitable because he can see business opportunities without spending capital. But what is a pity is the person who credits it, because the costs incurred will be greater than the price of the goods.

Well, there is a good reason some people think credit is a trap and living on it is a new form of slavery.
Unfortunately, there are folks who do not have much option and end up acquiring debt beyond their capacities, also I believe the fact BNPL purchases do not affect the credit score of the clients only helps for people not to meditate on the consequences of its abuse and facilitate recklessness.

I doubt it is a model which will "burst" any time soon, not yet.

[Mr.right85]

Well, there is a good reason some people think credit is a trap and living on it is a new form of slavery.
Unfortunately, there are folks who do not have much option and end up acquiring debt beyond their capacities,

I doubt it is a model which will "burst" any time soon, not yet.

It always feels so bad to be in such position but, its hard to sat there isn't of an option. Choosing to buy stuff on credit is very much an option and th other options are:
Seeking alternatives with lower price or
Having to wait a while to save up so you can afford just what you want.

It's not so obvious how buying of credit or getting getting to take loans to satisfy wants always seems like the easiest option. At least, you get to extend your payment through time but, its actually keeping keeping up with the payment that is always the issue and even in the given time, your likely to accumulate even more debts.

A typical spending g more than you can afford and that's a trend that builds up for sure.
Some business model it is and I don't think it's it's any time soon as well. It only gets better and better with easier ways to access them.

[Davidvictorson]

Well, there is a good reason some people think credit is a trap and living on it is a new form of slavery.
Unfortunately, there are folks who do not have much option and end up acquiring debt beyond their capacities,

I doubt it is a model which will "burst" any time soon, not yet.

If someone used this carelessly, they may soon go over their spending limit. These services, in my opinion, provide people a false sense of financial stability. Simply put, you're more likely to overspend despite maintaining your budget. I've used one of those companies in the past and have previously tried the six-month plan. Never once more Because I was unaware that the expense would be reported to credit bureaus, my credit score was negatively impacted. I paid it off right away and haven't looked back since.