The Trap of Buy Now, Pay Later
Lizzie O’Leary: In the early days of the pandemic, Bloomberg News reporter Paulina Cachero found herself scrolling through TikTok. Yeah, part of it was Doomscrolling, but she was also looking for something escapist to watch.
Speaker 2: And it was kind of fun to see all of these things that people were buying online. Everyone was online shopping right.
Lizzie O’Leary: After payday is finally here. So let’s recap all of the outfits I.
Speaker 2: Purchased for vacation.
Lizzie O’Leary: Paulina covers personal finance and she noticed that more and more of that online shopping was done through apps that let you buy now pay later from companies like Klarna or Afterpay. Afterpay got me heels bought. I don’t care if it’s just $20. Karen. I said split it up into four equal payments of $5.
Speaker 2: But then I started to see some problematic videos of, you know, younger borrowers talking about, oh, I have, you know, this massive balance on Afterpay that I can’t afford. Maybe if I just close my account, no one will find me.
Lizzie O’Leary: Paulina knew she’d found a story, one about Generation Z and a new kind of debt.
Speaker 2: While they were joking about it, this seemed to me to be a very real issue. And this was a new, trendy, niche financial product that really made themselves out to be made for this younger generation. But to me, as someone who was. Manage my own credit cards taken on student loans. I was like, These are loans and this is debt that you have to pay. And it seemed like they might not understand the consequences.
Lizzie O’Leary: Today on the show, the consequences buy now pay later. Apps exploded during the pandemic. Now the real cost is becoming clear just in time for holiday shopping. I’m Lizzie O’Leary and you’re listening to what next, TBD. A show about technology, power and how the future will be determined. Stick around now, not later.
Lizzie O’Leary: The idea of buy now, pay later isn’t exactly new. It’s not unlike paying for your TV with the layaway plan. If you remember those except with Bnpl, as it’s called, you get your item immediately, usually only for a small down payment and the rest you pay off in installments. One of the biggest bnpl companies, Afterpay, was started in Australia in 2014. But it was the pandemic that made Bnpl really take off in the U.S..
Speaker 2: It was kind of a perfect storm. These services, you know, started to be adopted by these online clothing retailers at a time when consumers were flush with stimulus cash. And, you know, they had nowhere to go. They were stuck in COVID 19 lockdowns and they were limited to online shopping. And suddenly they’re going through their checkouts and they’re finding this seemingly risk free way to break up their payments for this item on online checkouts. And suddenly it seemed like buy, now pay later.
Speaker 2: Options were available everywhere. They’re available at major retailers like Target, Walmart, Home Depot. But they really started with, you know, targeting a younger demographic. They’ll go on forever 21 and Urban Outfitters and, you know, stores like that. And now that you can use them virtually online and online checkout, which is where they started to, you know, now they have physical cards so you can use them in person.
Speaker 2: One really interesting thing that the Consumer Financial Protection Bureau found in their most recent report, they looked at five major buy now pay later companies, which includes the ones that you most likely use, affirm, Afterpay, zip, Klarna, etc.. And in the U.S., they originated 180 million loans totaling 24.2 billion in 2021. That’s a tenfold increase from 2019. So you can see how much that these buy now pay later. Companies really exploded. And if you think about it, without really regulation until this year.
Lizzie O’Leary: How is it supposed to work? Like, let’s let’s go through it on a really granular basis. So let’s say I buy a pair of shoes that costs $200. If everything went right. How does it work? What would happen?
Speaker 2: You want to buy this pair of $200 shoes? You can opt in for the buy now. Pay later option hosted by one of many services in your checkout. You would pay a small down payment, let’s say 25% of that purchase. And then from the date of that purchase, you would be charged typically for installment loans over six weeks. So every two weeks you would get charged for that purchase in whatever it’s broken up into. And to sign up for these services, all you have to do is put in your credit card information or your debit card information. And that service will automatically charge you whenever the date for that installment loan is due.
Lizzie O’Leary: Bnpl companies make most of their money by charging retailers a fee for using their services, usually somewhere between two and 8% of the purchase.
Speaker 2: The value proposition that they give to merchants is that they have studies or research that they’re doing internally that shows that when customers used buy now pay later services, on average their checkout cost is bigger. People are spending more using buy now, pay later services, because there’s a sense that I’m not feeling the financial burden of this purchase right now. It’s spread out over time. And, you know, I think that it convinces consumers that they can buy more because they’re not going to see that balance automatically. The full amount of that balance automatically deducted from their bank account.
Lizzie O’Leary: So it doesn’t feel like I bought a $200 pair of shoes. It feels like maybe I spent 50 bucks and it’s okay. Like, hey, I can handle that. Yeah.
Speaker 2: And I think that’s something that they advertise to retailers. It’s like if you pay to use our services, customers will spend more and purchase more.
Lizzie O’Leary: The marketing for these apps is all about how they are a safe alternative to credit cards with no interest and no fees. If you pay on time and if you do everything right. That’s true. But if not, things start to get tricky. Let’s say I miss a payment. What happens then?
Speaker 2: So this is one of the things that the Consumer Financial Protection Bureau cited as a risk to consumers. It’s just that there’s really inconsistent consumer protections. Every buy now pay later service has different terms and conditions on what happens if you fall behind on payments. You can incur anything from late fees to interest on whatever your money you borrowed. Sometimes that’s more than what you would incur on a regular credit card.
Lizzie O’Leary: I want to understand that a little bit. So they say there’s no interest, but actually there is interest.
Speaker 2: Yeah. And I that’s one of the things that the Consumer Financial Protection Bureau and consumer advocates have cited. Bnpl firms like to advertise themselves as risk free credit options, but it’s only free if you follow all the rules. Many consumers complained to the Consumer Financial Protection Bureau that these firms aren’t disclosing the costly hidden fees and interest rates that can be incurred when someone falls behind on payments. One survey from Credit Karma earlier this year found that a quarter of respondents saw their total debt increase after using the apps, and more than 20% ended up using credit cards to pay down their bnpl balances. This is like the hidden interest that people talk about. You’re paying double the interest if you’re falling back on payments. If you’re using credit to pay back credit you’re taking out.
Lizzie O’Leary: So it’s loans on top of loans.
Speaker 2: And loans on top of loans. But people don’t think about it that way because buy now, pay later. Services are not advertising themselves as loans. And until this year, they weren’t treated as loans or credit.
Lizzie O’Leary: What do we know about who is most likely to use buy now? Pay later.
Speaker 2: I’m sure you’ve read a ton of stories that Gen Z is using Buy now, pay later. Total blah, blah, blah all the time. Actually, younger cohorts are generally overindexed in surveys on bnpl usage. The most recent Consumer Financial Protection Bureau pointed out that actually the biggest age cohort for a buy now pay later users are people ages 34 to 40. They’re millennials. So millennials are actually driving a lot of the usage of buy now pay later services.
Speaker 2: For the most part, I think a lot of those customers are using buy now, pay later responsibly because they understand that while they might not be advertising themselves as a loan, they are older consumers probably remember the layaway plans of the early aughts. And buy now Pay later is like that, repackaged but with an instant gratification twist. And I think that’s allowed them to use buy now, pay later services responsibly and in a way that actually helps them manage their finances. But for younger consumers who, you know, don’t really understand that or didn’t work with layaway plans or didn’t get to use that, they don’t understand that. And they’re the ones who are more likely to fall behind on payments and become delinquent.
Lizzie O’Leary: So it’s not that it’s just more popular among younger users. It’s just maybe that that’s the population that is more likely to get in trouble. Yes.
Lizzie O’Leary: I’m also really curious about, let’s say someone who has a lower income, doesn’t have a credit card or didn’t qualify. What do we know about their usage of Bnpl?
Speaker 2: I think that if you look at what buy now, pay later services offer or what they advertise, they offer soft credit checks and access to credit that they may not get otherwise. In a story that I worked on, I talked to a young consumer who, you know, she was paying her own way through college and she actually tried to apply for credit cards and got rejected. She’s a woman of color. She just didn’t have any credit history. And I think that appeals to a demographic that, you know, might not have the credit history to to get a credit card. This is credit that they can actually access. There’s a huge percentage of people who are at lower income communities who do use buy now, pay later services.
Lizzie O’Leary: Yeah, I was curious about the kind of due diligence that the buy now pay later companies are doing, like is anyone running a credit check? Because in the normal consumer finance world, if I apply for a card and Equifax or TransUnion or whatever, one of the big credit agencies says, Oh, Lucy’s kind of overextended on her other debts, they’re not going to give it to me. And yet it sounds like that might happen here. Like, is anyone checking to make sure that the people who are using these services can pay for them?
Speaker 2: So that’s a bit of a black box at the moment. A Consumer Federation of America has cited issues that there’s a lack of transparency with their underwriting. You know, a lot of these buy now pay later firms claim to run soft credit checks, but we don’t know what that means. And one of the things that the Consumer Financial Protection Bureau cited was that most firms can’t accurately assess their underwriting because they’re not reporting two major credit reporting bureaus.
Speaker 2: It’s pretty common for consumers to use multiple buy now, pay later services at once. This is a practice known as loan stacking. And that’s not something buy now, pay later. Firms can assess when they’re, you know, looking at their customers after pay. Doesn’t know if a customer has a loan with klarna or ZIP or any other number of services. That wouldn’t be the case if they were applying for a credit card. You would be able to see if someone has a credit line open or have an auto loan open.
Lizzie O’Leary: I mean, on the one hand it seems like, hey, it’s great if you get in trouble, it’s not going to ding your credit score. On the other, you could get in trouble really quickly.
Speaker 2: Yeah. And if you talk to buy now pay later firms, they will say that they haven’t started reporting to these credit bureaus because the way that they’re assessing these what are effectively short term loans isn’t beneficial to consumers. They say they’re on the consumer side. They don’t want to report loans that could hurt consumers credit scores.
Lizzie O’Leary: But they’re because every time there’s an inquiry, it it shows that in your credit score.
Speaker 2: Right. And I think that there might be a case for that argument. But also, if you can’t assess how many other loans customers are taking out at once, that’s seems to be riskier. And as of right now, I don’t believe they have started reporting to credit bureaus. And while they say that they’re not actively, you know, sending consumer data to these credit reporting agencies, there are still other ways that, you know, these buy now pay later loans can find, you know, make their way to credit reporting, their credit histories. For example, if you fall behind on payments and a buy now pay later service decides to send, you know, that loan to a third party collection, debt collection agency, that debt collection agency could report it and that could make it onto your credit history.
Lizzie O’Leary: When we come back, why Bnpl is so appealing and so dangerous to Generation Z. Even though they’re not the largest demographic group using Bnpl services, Gen Z seems particularly vulnerable to ending up in debt. In Paulina’s reporting, she found college students and 20 somethings who got themselves quickly and sometimes naively overextended.
Speaker 2: They thought that buy now pay later services were a safer alternative to credit cards. So a lot of them thought they were making smart financial decisions by using buy now pay later services because they were told that, hey, there’s no late fees, it’s interest free. And, you know, we run soft credit checks, so you will likely qualify. That made buy now pay later services particularly attractive to young consumers who may not have credit history or many of whom graduated in the pandemic and in this economic downturn. And they didn’t have as much money and maybe struggled to find jobs right out of college. So it was a way for them to get credit and to avoid kind of these horror stories about falling into debt with credit cards. And I think that because a lot of these buy now pay later services are not actually explaining what happens when you fall behind on payments. They didn’t understand the risks.
Lizzie O’Leary: Plus, there’s another wrinkle. If you use more than one Bnpl app for more than one purchase over a short period of time, the debt can quickly spiral out of control.
Speaker 2: While you know these installment loans seem simple enough. A lot of people have trouble actually keeping track of what they owe and when these repayment sketches can quickly become confusing. So as an example, let’s say I buy something using Klarna on a monday, one week, and the next week I use a firm to buy something on a Thursday with the repayments set on a two week basis from the date of that purchase. I could automatically be charged on a monday, one week, a Thursday, the following week. Now imagine you’re making a number of purchases on different days of the week with more than two dozen services available, all offering different terms and conditions, some of them working on different payment schedules. It’s not hard to understand how it can be really confusing keeping up with what you owe and when.
Lizzie O’Leary: Yeah.
Speaker 2: And a lot of the buy now pay later services require kind of this mandatory autopay. So whenever you sign up with your credit or debit card, they can automatically charge that card that you have on file. So that’s how people are falling behind on payments. I saw some users talking about I couldn’t even keep track of what I was spending and then I was time to pay my rent and I had no money in my bank account.
Lizzie O’Leary: So, my gosh, there’s.
Speaker 2: Just a lot of issues that come with these payment schedules.
Lizzie O’Leary: But maybe the biggest issue is something hardwired into our psychology. We assume that everything will be okay or even better in the future and discount the chance the things might get worse.
Speaker 2: One younger consumer I talked to said that it felt like using buy now pay later services for free because they were able to buy things that they didn’t have the money in their account for thinking that they would eventually get that money. So the financial burden of these purchases are not hitting them immediately. And I think that encourages people to buy more. There’s this subreddit online called Shopping Addictions, and there were just so many posts about from users saying that some of these buy now pay later services fueled their spending in a way that they couldn’t control. And one person that I talked to for my story just kind of became very when she saw her balances ballooning, she was like, oh, what’s the point? And she felt like she had to keep spending. Just kept spending and kept spending because.
Lizzie O’Leary: She couldn’t never make a dent.
Speaker 2: Because she couldn’t make a dent in paying it back. I think it’s kind of changing people’s shopping behaviors by taking away the kind of gravity of those purchases and that until they’re stuck in a place where they don’t know what to do.
Lizzie O’Leary: The devil’s advocate argument here, of course, is you are buying things. Nothing is free. Why didn’t you realize that? I wonder what customers say to that.
Speaker 2: I think for younger customers in particular, you know, these payment schedules can be confusing. And if you are if you have for different buy now, pay later service apps, it can be hard to keep track of what you bought across all different platforms. One person customer I talked to said that she didn’t even realize how much she spent until she went through every app and kind of added up the total of what she owed across buy now pay later services.
Lizzie O’Leary: Washington has begun to notice that Bnpl companies have exploded in popularity, leading to congressional hearings.
Speaker 3: Indeed it is. Difficult to shop online without seeing buy now pay later option and early pay has become a popular benefit for both employers and employees. However, these products also raise. Important questions about the use of consumer data. The export exploitation around spending patterns, the application of lending laws and the potential for unsustainable levels of consumer debt.
Lizzie O’Leary: Is any of this regulated?
Speaker 2: So the Consumer Financial Protection Bureau and actually a lot of financial regulatory bodies in New Zealand and the UK have started to crack down on this. And that’s due in part because while buy now pay later services start out primarily for retail purchases, with inflation hitting a 40 year high, people have started to use them for things that they need, like groceries, rent, medical bills, what basically, whatever, because buy now, pay later.
Speaker 2: Services are pretty ubiquitous and now customers are, you know, falling. Into trouble. Some of the buy now pay later. Firms have been plagued by delinquency this year, which is not hard to understand when you look at how much pressure consumers are facing from rising costs. And it’s not just for these, you know, material purchases like new clothes or makeup. It’s for things that they actually need.
Lizzie O’Leary: In reading your reporting and reading another Bloomberg story, I noticed that the way the Bnpl services are set up, they actually avoid being scrutinized under the Truth in Lending Act, which if you follow that law, which is from the sixties, it requires a lot of disclosures. If consumer loans are split into five payments or more. But here we’re generally talking about four payments. Does that make you wonder, was was that a conscious choice in the way these things were set up, the sort of regulatory gray area?
Speaker 2: I don’t know if I can say if it was intentional, but that’s definitely the buy now. Pay later Sector has faced criticism because they haven’t been subject to the same regulatory oversight that normally applies to lenders. As you mentioned, the Truth and Lending Act is a landmark law that requires pretty extensive disclosures for unsecured consumer loans and buy now pay later services don’t apply to that.
Speaker 2: And so one of the things that the Consumer Financial Protection Bureau announced in September after they conducted this investigation, which was prompted by an explosion in consumer complaints about these services in 2021, they announced some of the most extensive regulations yet to the sector, and that includes identifying surveillance policies in the industry that need to be curtailed and the collection of consumer purchase and demographic data for targeted ads. They also said that buy now pay later providers will have to undergo supervisory examinations similar to those applied to credit card companies. And they’re really ramping up, trying to create options for these companies to send their data to credit reporting agencies. Whether or not, you know, these companies are doing so yet as of September, October, they weren’t.
Lizzie O’Leary: There is a tremendous amount of consumer data collected in this process, and I have been thinking about it since we’re a tech show, right? Like your granular purchases, what your browsing on all of that stuff gets sucked in to these company services. What happens to that data?
Speaker 2: A lot of the buy now pay later. Providers are harvesting, actively harvesting, harvesting and monetizing consumer data across these payments and lending ecosystems. This is something that the Consumer Financial Protection Bureau cited as a concern to consumers privacy, security and autonomy. And they’re using this data to deploy models and product features and marketing campaigns to increase the likelihood of sales and maximize, you know, the value that they can get from those customers.
Lizzie O’Leary: After spending time writing about these companies and talking to consumers, are you are you willing to take a take a guess, like what’s the what’s the future of these services? Was this like a short lived blip or are they here to stay?
Speaker 2: So this is something that I have been talking to some friends about. To be honest, I don’t think that. The buy now, pay later, you know, kind of installment loan financing option. Is an issue itself. I think it’s the lack of regulation and protections and the way that these, you know, providers have been allowed to flourish without answering answering to the same regulatory oversight of credit cards and traditional lenders, the kind of pay and for installment loan plan, I don’t think is going anywhere.
Speaker 2: And I was actually talking to some international friends who, particularly from South America, who have said we’ve had this kind of pay and for payment plan available all along. Why is buy now pay later just now taking hold in? You know, the U.S., the U.K., Australia and New Zealand? And I think it’s just that we’re not accustomed to this, you know, type of financial payment option. We’re used to, you know, our credit card bills where we can swipe plastic and the balances to once a month. But this idea of installment loans and splitting up payments over time is actually not new. So I don’t think it’s going away. But I think the way that these buy now pay later providers will be able to give credit to consumers and how they’re able to use data from consumers will be changing soon.
Lizzie O’Leary: I spent some time digging around on tick tock and it actually feels like some of these tech talks are coming full circle. Now I’m seeing tech talkers warning other tech talkers about how not to get in trouble with this. Yeah.
Speaker 2: I think we started to hit that turn a little bit earlier this year when some of the major credit reporting agencies announced that they would be accepting consumer data, not that buy now pay later provider. It’s unclear whether buy now pay later providers are actually offering up data. But I think when that happened, some older tech talkers were like, Hey, this might hurt your credit history and have long term financial consequences.
Speaker 2: And particularly for younger consumers who have very little credit history, any negative report is that much more damaging to their credit history. And that impacts whether or not they can get along the terms of a loan in the future for a mortgage or for their student loans or, you know, even getting an apartment. They do credit checks when you’re applying for an apartment. So I think there’s just a lot of downstream effects of buy now, pay later services that younger consumers in particular are disproportionately impacted by.
Lizzie O’Leary: For obviously heading into one of the biggest shopping times of the year. Are you going to be watching the data that comes out of this? I feel like this could be a big boom for buy now, pay later firms.
Speaker 2: So a lot of early surveys have shown that. Customers are increasingly interested in buy now pay later options this holiday season, some of which have come from buy now, pay later firms themselves. So a grain of salt. But, you know, if you’re looking at the kind of. You know, economic environment that we’re in right now, it makes sense. The Fed’s attempts to tamp down inflation is driving up borrowing costs, and that includes credit card interest rates, credit card interest rates, which some people are estimating are now at 30%. Pretty crazy. That’s putting customers in a financial catch 22 who are increasingly being forced to use credit cards and buy now pay later options to pay for the rising costs of goods and services while borrowing that money is more expensive than ever.
Speaker 2: So again, the way that buy now pay later services advertise themselves paying interest fee and little to no late payments. It seems pretty attractive this holiday season. And some surveys show that a lot of customers are planning to use buy now, pay later to buy gifts for their loved ones. So I guess we’ll have to see.
Lizzie O’Leary: Paulina Cachero, Thank you for your reporting and for talking to me today.
Speaker 2: Yeah, of course. Thanks for having me.
Lizzie O’Leary: Paulina Cachero is a personal finance reporter for Bloomberg News. And that is it for our show today. What next?
Lizzie O’Leary: TBD is produced by Evan Campbell. Our show is edited by Jonathan Fisher. Joanne Levine is the executive producer for What next? Alicia montgomery is vice president of Audio for Slate. TBD is part of the larger What Next Family. And we’re also part of Future Tense, a partnership of Slate, Arizona State University and New America. And if you are a fan of this show, I have a little request for you. Just become a Slate plus member. Head on over to Slate.com Slash what next?
Lizzie O’Leary: Plus, just sign up. We will be back next week with more episodes. I’m Lizzie O’Leary. Thanks for listening.
