7 ms·

Are Buy Now Pay Laters the Next Bubble?

44 points by alexvomwald 4y ago

hammyhavoc 4y ago
Are bubbles the next bubble?
alexvomwald 4y ago
Many players out there fighting fiercely to get more customers, every-time making it easier to get financing, which might not necessarily be the best on the long run or in the best interest of consumers. There has been multiple analysts and news outlets writing about this. When 33% of users from BNPL services claim that a reason to do it is that their credit cards are already max, I see this as a potential issue. Also as someone that has been testing & doing research on this field, it is amazing how the services differ between Europe/US and Latam (probably Africa too but I didn't dig into this one yet). BNPL services in Latam charge quite high interest to the consumers. I'm a bit worried when I get ads to pay for sneakers over the course of 3 months and they would end up costing around 30% more, which means many people actually purchase such items in such way. What are your guys thoughts? While easier access to credit can be quite helpful, it does seem like there might be some potential issues in the industry, particularly in these days.
- bitxbitxbitcoin 4y ago
  Credit needs to be easier for small business formation, not sneakers. This is predatory lending through and through dresses up as I don’t know what but it preys on the people with the least financial literacy.
- mrweasel 4y ago
  > While easier access to credit can be quite helpful I've argued against this so many times, both online and to the management at a previous job. There is a small group of people to whom these payment options are completely sensible, and they manage them very responsibly. These people will argue in favor of Buy Now, Pay Later as well as easy access to small loan, reasoning that they are a good options for people like themselfs. Their argumentation is more or less valid, it's just they aren't the target customers for this type of payment. It might not be situation anymore, but it the past a company like Klarna made no money on a customer who paid off their loan on time. The entire business model was people who needed payment plans, people who made bad finasical choices, people who were already poor. My take is that BNPL is such a dangerous product, for a certain group of people, that it should be at least be restricted to select purchases. For instance, you should NEVER be allowed to use it for fashion, consumer electronics, and other now essential goods. Sadly that's where these options are primarily presented to consumers.
  - gruez 4y ago
    >For instance, you should NEVER be allowed to use it for fashion, consumer electronics, and other now essential goods. So what's left? Cars and houses?
- dehrmann 4y ago
  > When 33% of users from BNPL services claim that a reason to do it is that their credit cards are already max, I see this as a potential issue. I also find it bizarre that 45% say it's easier to make payment than on a credit card and 44% says it's more flexible. Really?! I don't find it hard to give the credit card company money, and it seems like lower interest rates should be #1.
  - HWR_14 4y ago
    I think "more flexible" means that the payment periods are better aligned with your pay periods. The CC companies are going to want money every month on the same day.
    - smugma 4y ago
      Most credit cards let you pick your payment due date.
    - gruez 4y ago
      Why is this a relevant factor? With a credit card you have a 3-4 week grace period to pay the bill. If you get paid every 2 weeks/twice a month then the due date is never more than a week away from your last paycheck.
      - HWR_14 4y ago
        No, you have a 3-4 week grace period. People with poor credit do not.
- HWR_14 4y ago
  I think 30% over 3 months is a lot, but not prohibitive. First that's only like 27% after adjusting for inflation. Second, they're for luxury goods. Third, there was has to be a fairly high default rate. I mean, that's a lot higher than a US credit card, but a lot less than a US payday loan.
raunak 4y ago
Yes
analog31 4y ago
If it's an unregulated financial service, then, yes. The only question is: Who's holding the bag?
- dehrmann 4y ago
  Merchants. They're also holding a lot of inventory right now. If there's a recession in the next year, they're going to be hit hard.
__derek__ 4y ago
BNPL is a new sub-prime issue, but it's not clear where a bubble enters the picture given that these loans are not securitized AFAIK. On the asset side, Affirm's valuation has already dropped 90% from ATHs, and Klarna is apparently raising at a similar fraction of its previous value. (edit: demoting comment about flagging for an editorialized title to this addendum)
- davidw 4y ago
  IIRC, you should use the 'flag' link for stuff that's really off topic, not just for a bad title.
  - __derek__ 4y ago
    Both the FAQs[1] and Guidelines[2] suggest that it's appropriate to flag submissions that violate the Guidelines, and editorializing titles does so: > Otherwise please use the original title, unless it is misleading or linkbait; don't editorialize. [1]: https://news.ycombinator.com/newsfaq.html https://news.ycombinator.com/newsfaq.html [2]: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
- tyrfing 4y ago
  > these loans are not securitized AFAIK. They are, but not in quantities to actually matter. Here's background on Affirm's ABSes, the last offering was pulled: https://www.bloomberg.com/news/articles/2022-03-11/-buy-now-pay-later-lender-affirm-delays-asset-backed-bond-sale https://www.bloomberg.com/news/articles/2022-03-11/-buy-now-... A cool consequence of this is that you can find background info on what sort of loans they make: https://finsight.com/deal-51195-affirm-asset-securitization-trust-affrm-2021-a https://finsight.com/deal-51195-affirm-asset-securitization-...
  - __derek__ 4y ago
    Thanks for the correction. It makes sense that they would be, but I hadn't looked into it before.
dehrmann 4y ago
I wouldn't touch that business because as soon as it gets much traction, credit card companies will move in with similar offers. What's weird is that BNPL merchant rates are significantly lower than interest rates on credit cards. Either interest rates on credit cards are too high, BNPL is being subsidized by VC, or merchants are assuming the risk of tail events. On the merchant end, I'd worry that this is a one-time incremental bump in sales in exchange for an 8% financing charge. That might be more than they pay for bonds.
- mgraczyk 4y ago
  Chase has been doing BNPL for around 2 years (My Chase Plan). It's a different UX than other BNPL like affirm, and they don't own a spot in the conversion pipeline so I think long term that will hurt their ability to compete. I'm not super familiar with Chase's business though, maybe they have something in the pipe that would improve the situation for them?
  - dehrmann 4y ago
    It'd have to be part of the checkout flow for customer certainly, so either the payment processor or card network would have to make it happen since there are so many issuers.
    - toomuchtodo 4y ago
      Can't speak to Chase, but Amex offers this post purchase with a fee. Could offer it without the fee considering they're charging the merchant fee anyway, but I suppose they've done their revenue research. https://www.americanexpress.com/en-us/credit-cards/features-benefits/plan-it/ https://www.americanexpress.com/en-us/credit-cards/features-...
- hakfoo 4y ago
  I believe Visa is moving in a direction where they will be integrating installment options in the conversion flow. https://usa.visa.com/partner-with-us/payment-technology/installments.html https://usa.visa.com/partner-with-us/payment-technology/inst... When I looked into it, it seemed to be a small-scale trial-- a handful of merchants and a single card issuing bank-- but I suspect the point is to define and bulletproof the interface before throwing it out to the world. It makes sense to me: BNPL is a feature, not a product, in the payments ecosystem. No consumer wants to say "Well, I can only shop at merchants X, Y, and Z, because only they accept the BNPL platform I want to use." and no merchant wants to say "let me integrate with 25 different BNPL platforms each with their own API gremlins". If you end up with four monsters of the market-- one from each major card brand-- that's probably worth it for the volume each one can provide. It also likely means that they'll turn into things you just see as add-ons for popular shopping carts and payment modules. Maybe the "embeddable card entry form" your payment processor offers suddenly sprouts a new field to show BNPL plan choices.
gusbremm 4y ago
In Brazil, paying by installments is a culture thing.. for instance, most people really don't calculate how much a smartphone will cost as long they can afford the installment. Even pharmacy. I read sometime ago that Brazil was the only country where certain luxury brands would accept installments. ( Jewelry, watches, etc ),
- shmoogy 4y ago
  This is a problem in the US with cars as well. People focus on the monthly payment they can handle, and financing department extends loan term and plays other games to make it work, despite ballooning overall cost
  - MandieD 4y ago
    It took moving to Germany and then becoming seriously involved with a German whose family had always paid for lightly-used cars in cash (and have a general horror of consumer debt) to break me of the assumption that car payments were just part of adult life.
    - bittercynic 4y ago
      I don't think this is as universal as people assume it is in the US. I'm from the SF bay area, and in my family and among many peers it is normal to pay cash for used cars. I'd be interested to see the data on this and learn how normal or weird my opinions are.
kwatsonafter 4y ago
If you consider that there's a dire economic need for the, "out of reach" inflated economy to work for the less fortunate that this might actually end up being, "privatized UBI" or, "thing that replaces credit cards" when we get it right. I don't think this will take the form it's taking now (ie. Forward Layaway Apps) but if you consider that in the last 10 years in the State of Utah that Target and Walmart have both applied for Industrial Loan Company affordances. If you consider what, "customer loyalty programs" would look like when Target can issue credit to itself with impunity you can see what I'm getting at-- you could give poor people money buy things they need and then (in theory) ledger the net gains in terms of growth as being non-losses. This basically amounts to the formation of a new kind of post-Westphalian nation-state. Very dangerous but also could have extreme value for the socially vulnerable. Consider that there's little real difference between a, "well financed person" and a, "person in debt." The key difference is the object of the sentence. If the object of the sentence is, "society-scale economic growth" you can easily justify, "printing money and giving it to people to spend" as in normal conditions the resultant growth for issuing credit to the consumer spending economy prevents the currency from inflating but outside of just curtailing inflation without curtailing expansion you've also met the financial needs of the populace. You've guaranteed all citizens bread. https://en.wikipedia.org/wiki/Cura_Annonae https://en.wikipedia.org/wiki/Cura_Annonae Consider that great class difference between, "the well financed" and, "those in debt."
- hansword 4y ago
  I hope you don't take this the wrong way, but what you write is both very interesting and very confusing. The 'difference between well-financed and in-debt' is very clear and to-the-point, this is excellent writing. The long 'if you consider this, if you consider that, post-Westphalia' paragraph in the beginning is not. Could you perhaps summarize the first part? What exactly do you want to say? How do 'customer loyalty programs' and 'Industrial Loan Company affordances' and 'privatized UBI' and 'replaces credit cards' fit together? How did Westphalia slip in there? I am quite convinced there is a coherent idea here, but your writing fails to communicate it. Or at least it failed to communicate it to me.
jameslk 4y ago
If BNPL are basically zero interest loans, doesn't it make sense for everyone to use BNPL as much as possible? The unspent money can then be presumably reinvested into e.g. the stock market or even a high yield savings account. A sort of interest rate arbitrage. Ultimately the merchants are footing the bill and then they pass it on to consumers in the form of higher prices, further reinforcing the need to pay via BNPL to capitalize on the arbitrage opportunity. Kind of like how everyone pays with credit cards for the rewards.
- theandrewbailey 4y ago
  For all the advice about taking a loan and investing the cash you would have spent, no one I know of does that. Secondly, you are supposed to invest money you aren't going to use for at least 5 years. That's a much longer horizon than most product purchases. Why? Sometimes stocks/real estate/crypto/etc. goes down. Have you checked the markets lately?
  - bobkazamakis 4y ago
    >Secondly, you are supposed to invest money you aren't going to use for at least 5 years. lol. Supposed to?
    - dang 4y ago
      Could you please not post unsubstantive and/or flamebait comments to Hacker News? It's not what this site is for, and it destroys what it is for. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
  - RC_ITR 4y ago
    Exactly, no one you know does that because it’s actually sort of bad advice derived from how extremely rich people allocate capital. Normal people generally have to hold a certain amount of cash anyway since they do not have access to collateral-backed revolving lines of credit and because they can’t afford to lose money that they know they will need to send in the future. Unsurprisingly all the BNPL maximalists do not live under those constraints.
r3drock 4y ago
I am doubting the representativeness of this survey, as it was done on Amazon Mechanical Turk.
prepend 4y ago
What happens when the customer doesn’t pay? The way I understand it is they don’t have enough info to refer me to the credit bureau, so do they send $79 or whatever to collections?
- Sebguer 4y ago
  Some of them report to credit bureaus, some of them don't.
SnowHill9902 4y ago
Credit card companies already offer install payments themselves at least in most of Latin America. I don’t understand what’s the innovation here.

44 points by alexvomwald 4y ago

Are bubbles the next bubble?

Many players out there fighting fiercely to get more customers, every-time making it easier to get financing, which might not necessarily be the best on the long run or in the best interest of consumers. There has been multiple analysts and news outlets writing about this. When 33% of users from BNPL services claim that a reason to do it is that their credit cards are already max, I see this as a potential issue. Also as someone that has been testing & doing research on this field, it is amazing how the services differ between Europe/US and Latam (probably Africa too but I didn't dig into this one yet). BNPL services in Latam charge quite high interest to the consumers. I'm a bit worried when I get ads to pay for sneakers over the course of 3 months and they would end up costing around 30% more, which means many people actually purchase such items in such way. What are your guys thoughts? While easier access to credit can be quite helpful, it does seem like there might be some potential issues in the industry, particularly in these days.

bitxbitxbitcoin 4y ago
Credit needs to be easier for small business formation, not sneakers. This is predatory lending through and through dresses up as I don’t know what but it preys on the people with the least financial literacy.
mrweasel 4y ago
> While easier access to credit can be quite helpful I've argued against this so many times, both online and to the management at a previous job. There is a small group of people to whom these payment options are completely sensible, and they manage them very responsibly. These people will argue in favor of Buy Now, Pay Later as well as easy access to small loan, reasoning that they are a good options for people like themselfs. Their argumentation is more or less valid, it's just they aren't the target customers for this type of payment. It might not be situation anymore, but it the past a company like Klarna made no money on a customer who paid off their loan on time. The entire business model was people who needed payment plans, people who made bad finasical choices, people who were already poor. My take is that BNPL is such a dangerous product, for a certain group of people, that it should be at least be restricted to select purchases. For instance, you should NEVER be allowed to use it for fashion, consumer electronics, and other now essential goods. Sadly that's where these options are primarily presented to consumers.
- gruez 4y ago
  >For instance, you should NEVER be allowed to use it for fashion, consumer electronics, and other now essential goods. So what's left? Cars and houses?
dehrmann 4y ago
> When 33% of users from BNPL services claim that a reason to do it is that their credit cards are already max, I see this as a potential issue. I also find it bizarre that 45% say it's easier to make payment than on a credit card and 44% says it's more flexible. Really?! I don't find it hard to give the credit card company money, and it seems like lower interest rates should be #1.
- HWR_14 4y ago
  I think "more flexible" means that the payment periods are better aligned with your pay periods. The CC companies are going to want money every month on the same day.
  - smugma 4y ago
    Most credit cards let you pick your payment due date.
  - gruez 4y ago
    Why is this a relevant factor? With a credit card you have a 3-4 week grace period to pay the bill. If you get paid every 2 weeks/twice a month then the due date is never more than a week away from your last paycheck.
    - HWR_14 4y ago
      No, you have a 3-4 week grace period. People with poor credit do not.
HWR_14 4y ago
I think 30% over 3 months is a lot, but not prohibitive. First that's only like 27% after adjusting for inflation. Second, they're for luxury goods. Third, there was has to be a fairly high default rate. I mean, that's a lot higher than a US credit card, but a lot less than a US payday loan.

raunak 4y ago

Yes

analog31 4y ago

If it's an unregulated financial service, then, yes. The only question is: Who's holding the bag?

dehrmann 4y ago
Merchants. They're also holding a lot of inventory right now. If there's a recession in the next year, they're going to be hit hard.

__derek__ 4y ago

BNPL is a new sub-prime issue, but it's not clear where a bubble enters the picture given that these loans are not securitized AFAIK. On the asset side, Affirm's valuation has already dropped 90% from ATHs, and Klarna is apparently raising at a similar fraction of its previous value. (edit: demoting comment about flagging for an editorialized title to this addendum)

davidw 4y ago
IIRC, you should use the 'flag' link for stuff that's really off topic, not just for a bad title.
- __derek__ 4y ago
  Both the FAQs[1] and Guidelines[2] suggest that it's appropriate to flag submissions that violate the Guidelines, and editorializing titles does so: > Otherwise please use the original title, unless it is misleading or linkbait; don't editorialize. [1]: https://news.ycombinator.com/newsfaq.html https://news.ycombinator.com/newsfaq.html [2]: https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
tyrfing 4y ago
> these loans are not securitized AFAIK. They are, but not in quantities to actually matter. Here's background on Affirm's ABSes, the last offering was pulled: https://www.bloomberg.com/news/articles/2022-03-11/-buy-now-pay-later-lender-affirm-delays-asset-backed-bond-sale https://www.bloomberg.com/news/articles/2022-03-11/-buy-now-... A cool consequence of this is that you can find background info on what sort of loans they make: https://finsight.com/deal-51195-affirm-asset-securitization-trust-affrm-2021-a https://finsight.com/deal-51195-affirm-asset-securitization-...
- __derek__ 4y ago
  Thanks for the correction. It makes sense that they would be, but I hadn't looked into it before.

dehrmann 4y ago

I wouldn't touch that business because as soon as it gets much traction, credit card companies will move in with similar offers. What's weird is that BNPL merchant rates are significantly lower than interest rates on credit cards. Either interest rates on credit cards are too high, BNPL is being subsidized by VC, or merchants are assuming the risk of tail events. On the merchant end, I'd worry that this is a one-time incremental bump in sales in exchange for an 8% financing charge. That might be more than they pay for bonds.

mgraczyk 4y ago
Chase has been doing BNPL for around 2 years (My Chase Plan). It's a different UX than other BNPL like affirm, and they don't own a spot in the conversion pipeline so I think long term that will hurt their ability to compete. I'm not super familiar with Chase's business though, maybe they have something in the pipe that would improve the situation for them?
- dehrmann 4y ago
  It'd have to be part of the checkout flow for customer certainly, so either the payment processor or card network would have to make it happen since there are so many issuers.
  - toomuchtodo 4y ago
    Can't speak to Chase, but Amex offers this post purchase with a fee. Could offer it without the fee considering they're charging the merchant fee anyway, but I suppose they've done their revenue research. https://www.americanexpress.com/en-us/credit-cards/features-benefits/plan-it/ https://www.americanexpress.com/en-us/credit-cards/features-...
hakfoo 4y ago
I believe Visa is moving in a direction where they will be integrating installment options in the conversion flow. https://usa.visa.com/partner-with-us/payment-technology/installments.html https://usa.visa.com/partner-with-us/payment-technology/inst... When I looked into it, it seemed to be a small-scale trial-- a handful of merchants and a single card issuing bank-- but I suspect the point is to define and bulletproof the interface before throwing it out to the world. It makes sense to me: BNPL is a feature, not a product, in the payments ecosystem. No consumer wants to say "Well, I can only shop at merchants X, Y, and Z, because only they accept the BNPL platform I want to use." and no merchant wants to say "let me integrate with 25 different BNPL platforms each with their own API gremlins". If you end up with four monsters of the market-- one from each major card brand-- that's probably worth it for the volume each one can provide. It also likely means that they'll turn into things you just see as add-ons for popular shopping carts and payment modules. Maybe the "embeddable card entry form" your payment processor offers suddenly sprouts a new field to show BNPL plan choices.

gusbremm 4y ago

In Brazil, paying by installments is a culture thing.. for instance, most people really don't calculate how much a smartphone will cost as long they can afford the installment. Even pharmacy. I read sometime ago that Brazil was the only country where certain luxury brands would accept installments. ( Jewelry, watches, etc ),

shmoogy 4y ago
This is a problem in the US with cars as well. People focus on the monthly payment they can handle, and financing department extends loan term and plays other games to make it work, despite ballooning overall cost
- MandieD 4y ago
  It took moving to Germany and then becoming seriously involved with a German whose family had always paid for lightly-used cars in cash (and have a general horror of consumer debt) to break me of the assumption that car payments were just part of adult life.
  - bittercynic 4y ago
    I don't think this is as universal as people assume it is in the US. I'm from the SF bay area, and in my family and among many peers it is normal to pay cash for used cars. I'd be interested to see the data on this and learn how normal or weird my opinions are.

kwatsonafter 4y ago

If you consider that there's a dire economic need for the, "out of reach" inflated economy to work for the less fortunate that this might actually end up being, "privatized UBI" or, "thing that replaces credit cards" when we get it right. I don't think this will take the form it's taking now (ie. Forward Layaway Apps) but if you consider that in the last 10 years in the State of Utah that Target and Walmart have both applied for Industrial Loan Company affordances. If you consider what, "customer loyalty programs" would look like when Target can issue credit to itself with impunity you can see what I'm getting at-- you could give poor people money buy things they need and then (in theory) ledger the net gains in terms of growth as being non-losses. This basically amounts to the formation of a new kind of post-Westphalian nation-state. Very dangerous but also could have extreme value for the socially vulnerable. Consider that there's little real difference between a, "well financed person" and a, "person in debt." The key difference is the object of the sentence. If the object of the sentence is, "society-scale economic growth" you can easily justify, "printing money and giving it to people to spend" as in normal conditions the resultant growth for issuing credit to the consumer spending economy prevents the currency from inflating but outside of just curtailing inflation without curtailing expansion you've also met the financial needs of the populace. You've guaranteed all citizens bread. https://en.wikipedia.org/wiki/Cura_Annonae https://en.wikipedia.org/wiki/Cura_Annonae Consider that great class difference between, "the well financed" and, "those in debt."

hansword 4y ago
I hope you don't take this the wrong way, but what you write is both very interesting and very confusing. The 'difference between well-financed and in-debt' is very clear and to-the-point, this is excellent writing. The long 'if you consider this, if you consider that, post-Westphalia' paragraph in the beginning is not. Could you perhaps summarize the first part? What exactly do you want to say? How do 'customer loyalty programs' and 'Industrial Loan Company affordances' and 'privatized UBI' and 'replaces credit cards' fit together? How did Westphalia slip in there? I am quite convinced there is a coherent idea here, but your writing fails to communicate it. Or at least it failed to communicate it to me.

jameslk 4y ago

If BNPL are basically zero interest loans, doesn't it make sense for everyone to use BNPL as much as possible? The unspent money can then be presumably reinvested into e.g. the stock market or even a high yield savings account. A sort of interest rate arbitrage. Ultimately the merchants are footing the bill and then they pass it on to consumers in the form of higher prices, further reinforcing the need to pay via BNPL to capitalize on the arbitrage opportunity. Kind of like how everyone pays with credit cards for the rewards.

theandrewbailey 4y ago
For all the advice about taking a loan and investing the cash you would have spent, no one I know of does that. Secondly, you are supposed to invest money you aren't going to use for at least 5 years. That's a much longer horizon than most product purchases. Why? Sometimes stocks/real estate/crypto/etc. goes down. Have you checked the markets lately?
- bobkazamakis 4y ago
  >Secondly, you are supposed to invest money you aren't going to use for at least 5 years. lol. Supposed to?
  - dang 4y ago
    Could you please not post unsubstantive and/or flamebait comments to Hacker News? It's not what this site is for, and it destroys what it is for. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
- RC_ITR 4y ago
  Exactly, no one you know does that because it’s actually sort of bad advice derived from how extremely rich people allocate capital. Normal people generally have to hold a certain amount of cash anyway since they do not have access to collateral-backed revolving lines of credit and because they can’t afford to lose money that they know they will need to send in the future. Unsurprisingly all the BNPL maximalists do not live under those constraints.

r3drock 4y ago

I am doubting the representativeness of this survey, as it was done on Amazon Mechanical Turk.

prepend 4y ago

What happens when the customer doesn’t pay? The way I understand it is they don’t have enough info to refer me to the credit bureau, so do they send $79 or whatever to collections?

Sebguer 4y ago
Some of them report to credit bureaus, some of them don't.

SnowHill9902 4y ago

Credit card companies already offer install payments themselves at least in most of Latin America. I don’t understand what’s the innovation here.