From Brian X. Chen’s “Should You Buy Now, Pay Later? Tread Carefully.” in Thursday’s New York Times:
[A] friction-free option to pay off items in chunks — called “buy now, pay later” — was popularized by Afterpay, a financial tech firm based in Australia and founded in 2014. Throughout the pandemic, as people hunkered down at home and sought to fill voids with material possessions, installment payment plans gained traction. Afterpay, which Square acquired for $29 billion in 2020, spawned copycats, including Affirm, Klarna and Fingerhut. This month, Apple announced that it would offer a similar program.
While the financing programs offer upsides like interest-free payments, there are potential dangers. The rule of thumb for financial security is to be aware of your budget and in control of your spending, personal finance experts said. But buy now, pay later programs seem intended to make people perceive a product to be cheaper than it truly is and lose control of their spending, critics said.
In December, the Consumer Financial Protection Bureau opened an inquiry into these programs, expressing concern that people could accumulate debt with multiple purchases.
“They can be helpful to consumers in the sense that they don’t carry interest if paid on time, but consumers can end up buying more than they planned,” said Laura Udis, a program manager at the bureau.
My take: This is one of the quirks of the news business. A problem that has been festering for some time becomes news when Apple enters the picture.
If the individual lacks the financial means today then what guarantee exists the individual gains the means later once they walk out the door with the merchandise? Most folk who use BNPL plans already are financially stressed, up to their eye-balls in debt.
I stopped extending credit when I ran my business because of the high financial risks involved. I decided if the individual lacked a satisfactory credit score to hold a credit card, a debit card, or carry sufficient cash that I need not act as a bank extending credit.
The problem with BNPL plans is individuals using the plan most likely already are over extended on credit through other sources and can’t take on more debt today. So, they pursue the BNPL installment route of adding even more debt making the situation intolerable for some of them. Along comes a financial recession, some type of negative financial or family event and these individuals can’t make the payback. We now are beginning to see this unfold with “Affirm” whose CEO yesterday was grilled about the rising delinquencies his company is facing.
BNPL installment plans add more debt for many consumers who should not be taking on more financial risks in the absence of having the financial means today to consummate the transaction through credit at the point-of-sale. I suspect Apple has done a thorough job through credit checks and algorithms to decide who can participate in the company’s BNPL plan. Still, Apple’s algorithms and credit checks cannot discern unexpected negative personal, family and job events.
“BNPL plans target individuals who lack the means…”
I disagree. Apple is literally “targeting” its own clientele, who definitely don’t lack means, as a rule.
See my comment below.
What I mean by the above statement Joseph is that most consumers electing the BNPL plan currently don’t have the financial means to make the purchase. Those consumers don’t have a savings account to get the needed funds. They cannot write a check to spend the needed funds. They are tapped-out in credit card purchases and not able to charge anything more to their accounts. Most consumers who use the BNPL plan are already up to their eyeballs-in-debt. So, they use the BNPL plan as an easy path to spend more money they don’t have or don’t have access to “now.” That is what I am indicating by making the statement, “lacking the means (financially).”
Many of these consumers are running up ever more debt in the absence of being able to pay “now” for what they desire or need. It works until they have some unfortunate unscheduled event in their lives such as loss-of-job, a reduction-in-hours work, or a financial pressing event such as car maintenance, housing maintenance, or whatever comes along and takes precedent over their meeting the next financial installment of the BNPL plan. The bottom line is that many of these individuals already are highly leveraged and can’t come-up with the needed funds to consummate the purchase or to even charge the purchase on a credit card or debit card. That is what I mean by “lacking the (financial) means.”
“…most consumers electing the BNPL plan currently don’t have the financial means…”
That’s an assumption, Jerry, and I have offered reasons why “it ain’t necessarily so”. If I’m offered free money, why do I have to be poor to want to take advantage of it? Zero percent interest is essentially free money.
And more so by the day, in an 8% inflation rate world….
Maybe I need to spell it out. We have an American Express savings account paying almost 1%. Leaving in the cash in exchange for a free interest purchase earns us money.
Sometimes, you don’t realize you’re in trouble until you’re in trouble. And the only way to learn those hard lessons is to make those mistakes & survive it.
Tim Cook stated clearly that he wants Apple’s fintech to help people improve the way they manage money, not get them in trouble.
Back to Philip’s point: If only the NYT (they’re not alone on this) listened to what Apple says… Instead they pick a shallow narrative and use Apple as click bait.
Pretty darned despicable.
Look. Credit is a wonderful thing. Perhaps only those who never had it can appreciate just how wonderful.
In an inflationary time such as ours, BNPL at zero interest makes good fiduciary sense from the customer’s POV. Yes, it assumes due diligence, but why withhold that from those who practice due diligence?
There is definitely risk to the extender of credit as well, but clearly there are advantages to extending credit, or credit wouldn’t exist. Apple, as pretty much everyone should know, has customers that are less likely to default, and so their risk is quite mitigated.
Bottom line: This is Apple performing a valuable service for its users.
Let’s start a campaign to put to bed the phrase “fake news”.
It’s too much a nod to the clam-head who coined the term and made it sadly “popular’.