How Old-Style Buy Now, Pay Later Became Trendy ‘BNPL’
(Bloomberg) -- Millennials and Gen Z have a cool new way to buy stuff that would look pretty familiar to their great-great-grandparents. “Buy now, pay later” is a type of consumer credit that really got going back in the 19th century when Singer Sewing Machines sold its products for a “dollar down, dollar a week.” But the modern fintech twist in what’s known as “BNPL” is that it’s now being aimed at people making impulse purchases of fashion and other small items rather than sofas or refrigerators. It’s delivered through new apps that are wildly popular, leading to dizzying valuations of startups such as Klarna, Affirm and Afterpay. Regulators from the U.K. to Singapore are expressing worries about young borrowers getting in over their heads.
1. Where did BNPL come from?
The “installment plan” is the historical precursor to today’s BNPL craze. This way of paying off purchases weekly or monthly evolved from 1840 onward, as manufacturers of furniture, pianos and farm equipment looked to make their products more attainable. The rise of the motor car in the 20th century brought installment credit further into the mainstream, though the credit card eventually became the preferred way to delay payment on smaller purchases.
2. What’s new?
Most modern BNPL isn’t about buying the occasional big-ticket item, where you might have a hefty department-store installment plan lasting years; it’s about having a handy app that lets you snap up that must-have jacket in the expectation that you’ll pay it off in a few weeks or months. The average spend on a U.K. Klarna transaction is 75 pounds ($104). Because these purchases are relatively cheap with fast payment schedules, they’re usually interest free.
3. Why has BNPL become so popular?
The colorful apps are attractively simple and typically involve only minimal (so-called soft) credit checks, or none at all with Australia’s Afterpay. Some regulators worry that this painless borrowing at the click of a button is a “gamification” of shopping similar to how people use Robinhood’s trading app, creating a sense that spending isn’t real. Fitch Ratings wrote recently that, “Short-term, small-ticket BNPL offers may lead consumers to take up credit in situations where they’d have simply refrained from making the purchase.”
4. How is it possible to not charge interest?
The retailer pays the BNPL provider instead, often a low single-digit percentage of the transaction value. They’re betting that offering BNPL will pay off at the cash register. Store chains name-check BNPL in their marketing, telling shoppers there’s “no need to wait until payday.”
5. What happens when shoppers are late in paying?
Affirm doesn’t charge late fees, and Klarna doesn’t on its pay in 30 days product, though many of their peers do. BNPL customers who don’t pay their bills are blocked from making more purchases, and they may be passed on to debt collectors. While customer defaults have been low in this industry, Klarna’s credit losses have increased sharply in 2021 as it expands in the U.S.
6. Why not just use a credit card?
Young people dislike them. They’re wary of providers that make their money from sky-high interest charges when customers don’t pay their balances. Sebastian Siemiatkowski, Klarna’s founder, says credit cards reward rich users who can pay them off, and penalize the less fortunate. Gen Z shoppers appear to agree, and are flocking to BNPL, preferring the feeling of control they get from its one-off payment schedules. Britain’s Financial Conduct Authority cites data showing 25% of BNPL users are between 18 and 24 years old and half are 25 to 36.
7. Who are the big players?
Sweden’s Klarna is the big BNPL beast: With a $45.6 billion valuation and 90 million users, there are huge expectations about an initial public offering. San Francisco’s Affirm Holdings and Afterpay have millions of customers, too. The latter is being bought by Jack Dorsey’s Square Inc. for $29 billion, while Affirm’s market value has jumped to $29 billion after it teamed up with Amazon.com Inc. Revolut, a $33 billion British fintech, also intends to challenge Klarna. Elsewhere, PayPal Holdings Inc. underscored its own ambitions by agreeing to buy Japanese BNPL provider Paidy for $2.7 billion. Other finance giants are entering the fray: Apple Inc. is teaming up with Goldman Sachs Group Inc. to offer installment plans; Visa Inc. is offering something similar; and Shopify Inc. has started a BNPL service. In India, where credit card usage is low, a raft of existing services such as Amazon Pay, Flipkart and Paytm are being joined by startups such as Simpl, LazyPay and ZestMoney.
8. How big is BNPL?
Global sales volumes using BNPL were $93 billion last year and could top $181 billion by 2022, according to Bloomberg Intelligence. That’s still a small percentage of online retail -- 1.6% in 2020 -- but the share is growing fast. The U.S. is a juicy prospect because of lower BNPL penetration there. Lifting that to Australian and British levels would push U.S. BNPL sales volumes up from about $20 billion to $100 billion.
9. What are the worries about it?
That it’s irresponsible lending in a new skin, using shiny apps and seductive marketing to get people to buy what they can’t afford. The fear is that consumers load up on debt using different apps and then go overdrawn or take on expensive credit card debt to service their BNPL accounts. There have been reports of credit card companies banning BNPL payments, citing this risk. The Australian Securities and Investments Commission found that, over a year, 15% of BNPL users had to take out another loan to make their payments, and one in five cut back on buying essentials. In China, the BNPL services of Ant Group Co. and Tencent Holdings Ltd. have faced intense scrutiny in China’s crackdown on online lending to the young. Millennial fashionistas have driven the country’s BNPL boom, but Beijing’s actions are already slowing things down. And in Singapore, regulators are looking into whether to protect younger consumers from overspending via BNPL.
10. What are regulators doing?
Many of these products have escaped oversight because of their combination of small loans, zero interest and fast paybacks. But their rapid growth has changed the game. Britain’s FCA says the sector must be fully regulated -- meaning the rules will get tougher on responsible lending, marketing and sharing customer credit data. Australia has a new BNPL code of practice, while California has been leading the regulatory fight in the U.S. by fining some unlicensed lenders. The possibility that BNPL startups lead people into a chain of borrowing elsewhere to fund their extravagances creates hidden risk for the banking system -- and financial distress for the vulnerable.
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