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.
They’re free but there’s an opportunity cost - by using BNPL you forego 2% or whatever in credit card rewards, so you’re effectively paying ~8% annualized for a 3-month term. My understanding is that the BNPL providers are effectively paying interest out of their merchant fees (in that they securitize and sell the debt for less than face value and rely on fees to make up the difference), so as interest rates go up I’d expect the terms to become less consumer-friendly.
Credit card rewards are quite stupid, though, as it obviously requires way higher credit card fees than if they weren't a thing. Customers just end up buying higher priced products and potentially getting the higher price difference back as rewards.
In Norway a card transaction with the national system BankAxept costs 0,06% + ~$1 cent per transaction [1], in the US the fees are usually at least a percentage point or two.
It's not about the card per se, it's about the network.
Visa/Mastercard in Norway is about as expensive as in the US. The US doesn't have a widespread miniscule fee/no rewards card network option however, like BankAxept is in Norway.
As a former merchant, this was not my experience -- I recall seeing a notable difference between fees on similar transactions, and the tracing those differences back to rewards cards.
Yup, I don't know how credit cards are in Europe, but, here in America a lot of credit card usage is decided on what rewards the user gets for using it.
Some are better for groceries, air fares, or hotel bookings and pay out in different ways(cash, or an abstract token system that is formulaically tied to redeemable goods and their USD worth.)
This whole system is financed through credit card transaction fees that are applied to the business owner's expenses during the transaction. Note, the customer is not meant to pay for this fee and business that tac this fee onto the customer's bill can have their license taken away by the company that provides in the interface(VISA, MasterCard, etc.). The whole system is really interesting and worth a read on Wikipedia.
> This whole system is financed through credit card transaction fees that are applied to the business owner's expenses during the transaction.
That's part of it, but isn't another big piece of it financed by interest payments from people who don't realize that you're supposed to pay off your entire balance every month?
> by using BNPL you forego 2% or whatever in credit card rewards, so you’re effectively paying ~8% annualized for a 3-month term.
I love your chutzpah, but you don’t get to do that math that way. The 2% doesn’t compound, it’s a one-time thing (unless you’re continually rolling over your BNPL purchases)
It’s still useful to convert to an annualized interest rate even if your “investment” period is less than a year, because annualized returns are the standard unit of measurement for investment returns.
For example, if you’re debating whether to use a 2% rewards credit card or to use BNPL and keep the difference in a savings or money market account for 90 days, the latter strategy only wins if that account is yielding more than ~8%. Or if you’re deciding whether to use BNPL to let you pay down other debt a little faster, it’s only worth it if the interest rate on that debt is above ~8%.
Yes. But let’s break this into first principles.
You get $200 rewards on a $10k purchase.
In no world do you get $800 on $10k. You only get $800 on $40k because the 2% isn’t a rate in principle so 8% literally never happens.
The opportunity cost of 2% credit card rewards isn't a rate, but you can convert it to a rate by dividing by the time period. If you forego $200 in rewards to keep $10k for an extra 3 months, you're paying $67 or 0.67% per month for that money. If you instead forego that same $200 in rewards but get to keep your money for 6 months, you're only paying $33 or 0.33% per month. Converting those monthly rates to annualized rates of ~8% and ~4% respectively is just a matter of convenience, the math still works out the same if you keep everything on a monthly basis instead.
Think of two scenarios where you're buying something for $1000.
Scenario 1: You use a credit card with a 2% cash back reward to make the purchase. You immediately pay off the credit card balance and claim the $20 of rewards. Your net cash flow is -$980 at time 0.
Scenario 2: You buy a 3-month zero-coupon CD for $980 today, and then use 3-month BNPL to make the purchase. In three months, the CD earns $20 of interest. You cash in the CD for $1000 and then use that $1000 to pay off the BNPL. Your net cash flow is again just -$980 at time 0.
The annual effective interest rate yielded by the CD for scenario 2 to work out exactly as described is roughly 8% (actually around 8.42%).
Yes but who is going to pay you the 2% for the remaining 9 months?!?!
You’re incorporating a theoretical (and unrelated to 2% credit card rewards) interest rate into your calculations. I could easily say a CD yields 10% and this is a 50% APR then.
EDIT: Maybe to help you think about this: this is a purchase loan. It is not a cash loan. You got $1k worth of goods for $1k dollars. You can make arguments about opportunity costs, but that’s different than the traditional concept of APR.
EDIT 2: I’m posting banned but indulge me, what’s the APR of cash purchases?
> Yes but who is going to pay you the 2% for the remaining 9 months?!?!
Don't think of equalizing the terms by extending the BNPL. Think of equalizing the terms by shortening the CD.
> You’re incorporating a theoretical (and unrelated to 2% credit card rewards) interest rate into your calculations. I could easily say a CD yields 10% and this is a 50% APR then.
I'm not claiming that the ~8% interest rate is real. My calculations mean that if you can get that rate or better, then you should use 3-month BNPL, and if you can't, then you should use your credit card with 2% cash back instead.
> EDIT: Maybe to help you think about this: this is a purchase loan. It is not a cash loan. You got $1k worth of goods for $1k dollars. You can make arguments about opportunity costs, but that’s different than the traditional concept of APR.
I fail to see how that makes any difference.
> what’s the APR of cash purchases?
It's either the highest APR of any of your debt, if you have any, or the risk-free APR you could get from a savings account otherwise.
Where did the parent suggest there was compounding? I read it as 2% of the purchase price, on a 3-month term. 2% * 4 = 8% annually, without compounding.
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?
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.
Not just the extremely rich. That's why HELOC exists. So people can take a loan out on the value of their home. I wouldn't want to do this just to have some extra cash to invest, but some do use this to say, pay for college tuition, assuming the HELOC rate is lower than the college loan rate.
Credit cards give 1%+ cash back plus are interest free loans as well. You have 30 days to pay your bill and on average a purchase will be made 15 days into a billing cycle ie 45 days total.
So BNPL is not a compelling offer for those who have good enough credit to have credit cards.
Short term investing for 3 months though? Seems like a good way to lose money on fees, then also either lose money on the investment itself or have your gains eaten up by capital gains tax, not to mention the time cost of finding good short-term investments in the first place. Or am I misunderstanding? Because yes of course BNPL is a hell of a lot better than credit card interest.
If there's a steady amount of spend you can put on BNPL (eg. $1000/month), you can roll over that investment month after month, rather than constantly investing/cashing out. Alternatively, you can park that money in a savings account or similar, and count that towards your "bonds" allocation of your portfolio.
One snag of BNPL is that not all credit cards are accepted. When I tried it recently, I wasn’t able to use a Visa point card and had to use another low-points card instead. I didn’t do the math, but if you’re optimizing down to the yield from payment terms, you’re probably better off optimizing for points.
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.
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.
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.
> 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.
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.
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.
> 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.
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.
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.
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 ),
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
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.
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.
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.
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.
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?
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.
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.
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?
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)
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.