Buy Now Pay Later services have received lots of coverage in recent months. The Covid Pandemic, coupled with unprecedented inflation in recent months, seem to have provided the perfect conditions for rapid growth in this industry, attracting predominantly younger consumers.

Buy Now Pay Later (BNPL)

Probably the biggest news recently in the BNPL arena is the entry of an offering from Apple called Apple Pay Later. It will be connected to use of Apple Pay and Apple Wallet, the other financial services offerings by Apple. MarketWatch and Reuters look at the potential impact on the incumbents, most of which saw a loss in their stock prices on the Apple announcement.

This Verge article argues that the entrance of Apple into this field will bring even more attention and scrutiny into the practices of the companies offering these loans, and their impact on those using them. This may bring regulation to the industry sooner rather than later. Verge also goes into the impact on GenZ finances, as they are the biggest users of these services. The article quotes an SFGate report:

• 73% of BNPL’s users are GenZ
• 43% of those Genz users have reported missing at least one BNPL payment
• GenZ spending using BNPL has gone up 925% in just two years

The article goes on to cite additional reports and statistics on BNPL usage and the behavior of users.

Fox Business also reports that Millennials and GenZ are almost four times more likely than older generations to use BNPL. And they are more likely to use them for luxury items than for essentials. This also makes them more vulnerable to potential fraud.

BNPL can be the worst of both worlds because most companies do not report your payment history (no upside benefit), but may report missing/late payments. (CNBC) The fact that BNPL players don’t report most loans makes it hard for other lenders in general to get a true idea of how much any individual actually owes, and how much more a lender should be willing to lend them. A this point, BNPL lenders have very different approaches to handling missing payments. Regardless, the biggest concern is that consumers will get themselves in a dangerous debt spiral with these loans.

If you need a refresher on BNPL or would like to use a video tutorial to explain the basics of how BNPL works, this Today show segment would be useful. The video also explains how BNPL can be helpful, how it is dangerous, user statistics, and explains how the company AfterPay deals with late payments as an example.

The BNPL company Affirm is different than its competitors in how it funds the loans it makes to its customers. Affirm securitizes roughly one third debt it extends, and its valuation has plummeted of late due to rising interest rates and increases costs of this method. Securitization is when the company bundles chunks of these loans into a new vehicle, and sells “slices” of this new debt. If this sounds familiar, it is exactly what was done with subprime mortgages prior to the crisis of 2008. (LA Times)

Credit Cards

(CNN) Credit card usage (outstanding debt) is back up to pre-pandemic record levels. It is not clear if this is a good sign or a bad sign about the underlying health of the economy. Even though consumers seem to be concerned about economic conditions, it does not appear that spending is slowing down.

Have you ever patronized a business that offers a discount for cash purchases? I have seen this most often in liquor stores, but have also seen it in small retail businesses. I don’t recall seeing this in a restaurant, but apparently it is totally legal to do this in restaurants. (However, I have been to restaurants that are cash-only.) It is usually about a 3% discount, either taken off the total, or two different prices are listed on a menu. Sometimes, instead of a discount, a surcharge is added to credit card orders, although this particular practice is prohibited in several states. (Verify This)

The Psychology of Money

This SciTechDaily article examines the “Cashless Effect,” which has been studied since 1979.

"The cashless effect describes our increased willingness to buy products and to pay more for them when no physical money changes hands."

Elizabeth Hirschman began to test her theory that those who use credit cards spend more than those who use cash back in 1979 by sending people out into the field to interview people after making purchases. Since that time, theories have been put forward to explain why this is so. One of those is that using a credit card reduces the “pain of payment.” It separated the pleasure of consumption from the pain of payment when the bill arrives. Apparently, it is not just delaying the payment that leads to spending more, as debit cards seem to have the same impact. Reducing the friction in the transaction seems to play a big role. An MRI study looking at the pleasure centers of the brain during purchases found:

"...buying things with credit cards activates the reward centres in our brains, and it does this regardless of the price. In contrast, when it comes to cash purchases, the rewards networks are only activated for purchases of cheaper items."

As we move to a cashless society, it is argued that we are getting used to operating in this environment, and technology allows us check our bank balances regularly, so the impact is muted. However, for those concerned about the tendency to spend more when no cash is in the picture, the article makes some suggestion on how to avoid overspending.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.

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