Two recent transactions show, I think, that buy now, pay later has arrived as a mainstream purchase/payment option. They are: Square’s proposed acquisition of Afterpay for $29 billion and Amazon’s just-announced partnership with Affirm.
what it was
When I was growing up, we shopped at a local grocery store just up the street. The grocer, Mr. O’Dowd, kept a record of our purchases in a school notebook. When my father got paid, we settled the bill.
Layaway plans, a Great Depression-era device, have had a revival during the Great Recession. In its simplest form, a merchant “lays away” in a storeroom an item that a customer pays for in installments. Once the final payment is made, the merchant retrieves the item and turns it over to the customer.
Key features: no interest payments (at least no explicit interest component in the payments); and, in the layaway case, the customer is assured of its availability but gets the merchandise only after paying in full.
what it is now
It’s either an app the buyer has or a purchase option at online checkout. No interest payments, small amounts of credit, installment payments for a purchase over a month or so, limited if any credit check in advance. There’s also the possibility of an increased credit limit based on on-time payment history. The biggest difference, however, is that the user gets the merchandise right away.
how do BNPL providers make money?
They charge a fee, usually higher than a credit card issuer would, to merchants. Again like credit card companies, they charge late fees. Customer payment history gives BNPL firms an edge in deciding the risk in offering customers longer-term interest-bearing loans.
Merchants sell stuff they otherwise wouldn’t. Apparently return rates are lower, too, for BNPL customers.
BNPL appeals to Millennials and younger, maybe because it’s (for them) new, maybe because of scars from the recession. Something like one in six Americans operates outside the traditional banking system, so BNPL can be a way to get credit services cheaply, as well as develop a credit history that will make traditional credit more accessible.
The big question for me is how dependent BNPL firms are on the current zero interest rate environment. Are they really an innovative disintermediation of traditional credit services or will they wilt away if the cost to them of the short-term loans they make begins to rise above zero.
My guess is that the industry will have more wiggle room than I fear as/when rates begin to rise. Also, this is not a near-term problem.