The phenomenon of buy now, pay later technology has taken businesses and consumers by storm, and the popularity of this method of paying for goods and services is only growing. But are there bigger and potentially more serious ramifications that could accompany the broader use of the buy now, pay later trend? In this segment of Backstage pass, recorded on December 17, 2021, Fool contributors Jason Hall, Toby Bordelon and Rachel Warren discuss.
Jason Hall: I think what really worries me, just to get to the heart of the matter, is backing up. What is happening now in broader terms, in the state of the economy? The economy is hot. There are tons of pent up requests. The average person’s balance sheet is in better shape. People have more money saved and better job prospects than many people have ever had in their entire lives. Particularly young people.
But in general, if you want a job, you can get a job. If you want income, you can get income. All of those things so yes, we should see more credit being rolled out because it’s an economic boom happening right now.
It all makes sense. What I don’t know, frankly I haven’t looked at the metrics to see is how much buy now pay later is used instead of traditional credit cards? Or is it also…
Rachel Warren: Sometimes it’s instead of.
Room: In other words, are people just racking up this type of debt or are they also racking up the usual credit card debt for junk they don’t need anyway?
That’s the other thing I’m not sure about. The other thing too is that I think a lot of people don’t realize that you can sign up for these installment loans is buy now, pay later and still pay around 30% interest. It is not guaranteed that they will give you a low rate. It comes back and it’s like when you buy a car. Your major consumer reports are telling you not to buy a car based on payment.
That’s what the seller will do. They’re gonna sell you a payment and then they’re gonna sell you a more expensive car and they’re gonna stick with an extra year on the term so people will decide what payment they can afford and then they’ll find a term that makes sense for the thing they bought. That’s another big problem with this broad thinking. But I don’t think it’s like buy now, pay later.
Because I think people have been doing this since there’s someone willing to give them money to buy things they don’t need, that’s just reality. But that tells us, to me, where we are in the economy and where we are in the credit cycle.
I think the reality about this as a tool, about this as a profit center for many businesses, we’re going to find out on a business-by-business basis, on their ability to manage and make good loans based on the risk the decisions. Just as we have done with every other bank or financial institution in the history of this sector as a public investment.
We’ll find out when we get into the next recession, the next weak economic period whenever that happens and people suddenly can’t afford to pay those bills and defaults increase. Then we will really have the answer. That’s when we’re really going to find out.
My biggest fear, a company that I’m going to throw out there is To block that I want to keep calling Square. It really makes me worry about them was it After-payment what did they buy? Did they pay around $28 billion, $29 billion?
If you’re going to pay that much to buy one of these specific niche lenders, how much control are you going to have on credit quality? When you expect a certain level of performance, how much of the tail will the dog wag?
That’s my biggest worry about Block, about Square right now. I am thinking of other companies like PayPal which we talked about earlier on another show, made a much smaller investment in the same space.
I feel like it’s much more likely that they’ll make better credit risk decisions because they haven’t made huge investments and expect big returns . That’s what I think.
Toby Bordelon: I think one of the reasons we see this, right. I do not know. What am I saying here?
Room: Well, the merchants get more out of it, like the Visa, they get better data, and there’s all that stuff too, right?
Bordeaux: Yeah. This is one of my concerns. I’m not going to say that it’s not going to be helpful to people, okay, and on some level, all that stuff you talked about Jason with the credit cards, that they’re spending more on it, and less on credit cards, what does it really do is it a change? We don’t know if it would be nice to have information about it. My concern comes with, I think from the corporate side, could you see all of this? I know you’ve seen it.
If you go to any website, you can see it. To assert, pay by Affirm, 0%, pay no interest. You see that and that’s how they do it. They offer little or no interest. They claim to be able to do this, in part because they charge merchants a fee to get the sale.
Room: Let me show you it’s happening Amazon‘s when you explore the details of their Affirm.
Warren: Yes, read the terms and conditions. [laughs]
Room: Yeah. Now they put it in plain English, but you have to really dig to get to it.
Warren: Here we are.
Bordeaux: 10% to 30%, yes.
Room: There are offers, on certain things and it depends on the merchant, depends on the product and the manufacturer as there are offers. But usually, and this is what happens, people buy TV, it’s 0% and then they assume everything else is the same. But don’t read the label.
Bordeaux: I wonder, however, about those large purchases that they award with 0%. What happens when you go through a tough time or an economic downturn driven by consumer spending, consumers can’t afford those prices. Is that blowing up dramatically for some of these companies that can end up with these loans that, oh, they’re in default and they haven’t charged enough interest to cover that risk.
They did not evaluate them correctly. I do not know. I think it reminds me, in a way, of a very different business model. But do you remember loan club? The peer-to-peer lending that was important a few years ago?
Bordeaux: My concern with that was letting me see what happens when you go through a full credit cycle, including a downturn, but I want to see how your model deals with that, I want to see how the systems work with that. I’m kind of the same way with buy now pay later.
I want to see what this industry looks like in a downturn before I get too terribly excited about it.
But it’s hot right now and we’ve had a bunch of deals with these companies, Square buying Afterpay, Affirm going online, not being acquired but making deals with Amazon, with Shopify. People want to be here. We’ll see how it develops.