Buy Now, Pay Later. Tech At Its Finest Or At Its Worst?
The way we as consumers shop has changed drastically in the last year. While so much focus has gone into online ordering, delivery intermediaries, and facilitating touchless transactions, what will be the most important trend in retail has remained relatively unnoticed: Buy now, pay later (BNPL).?Buy now, pay later will be the best innovation to happen to retail since online shopping and, at the same time, the most catastrophic thing to happen to American’s personal finances since sub-prime mortgages.
What is Buy Now, Pay Later:
?????????????Basically, BNPL is an installment plan, strikingly similar to the layaway of years past.?Instead of paying for a product in-full and up-front, shoppers can use a BNPL service (Affirm, Klarna & Paypal, etc.) to make smaller, interest-free payments until the item is paid in-full. Unlike traditional layaway, purchasers receive the product immediately instead of having to pay for the product in full before assuming possession of the item.
Below is an example from Walmart.com where the sticker price of a TV is $598, but Affirm allows shoppers to purchase the TV for installments of just $56. Unlike traditional credit cards, BNPL does not charge any interest on payments and often does not require a hard credit check to begin using. There are substantial fees- as high as 30%- on missed payments. ?
Does Anyone Actually Use Buy Now, Pay Later:
?????????????The short answer is yes, though a wise MBA professor once told me, “the answer is always it depends.” According to CNBC’s 2021 Small Business Saturday Survey, 7% of respondents indicated they would use BNPL as a source of payment while holiday shopping in 2021. This puts BNPL’s popularity just above checks (5%) and well behind debit card (55%) and credit cards (51%).
However, the generational breakdown tells a drastically different story. Fox Business reports that “28% of Gen Z consumers & 27% of Millennial consumers will utilize (BNPL) this holiday season.” A whopping 0% of age 65+ shoppers identified as having used BNPL. Come on Boomers, you can do better!
Disclosure: I am writing from my parents’ home while watching my (Boomer) father use an adding machine. Pic below for those of us born after 1980 who may not know what an adding machine is. I imagine I am looking at my father with the same befuddled look that my future child will look at me with when I am using Excel in 2050.
How Retail Wins Part 1- the Beauty of BNPL:
?????????????This likely goes without saying. BNPL can take an amount that feels insurmountable toan everyday shopper, like a $598 TV, and turns it into an easily affordable, interest free payment of just $56/month. Couple that with mobile shopping and suddenly people have the ability to literally reach into their pocket and afford many products they previously couldn’t.?While the lower up-front price and ease of ordering the item are likely enough of a reason to show why BNPL is a win for retail, a very basic understanding of human psychology elevates this to an almost academic level explanation.
A Brief, but Necessary Digression into Behavioral Economics:
In his book “Thinking Fast & Slow” Daniel Kahneman highlights how the human brain processes information in different ways using what he refers to as System 1 & System 2. System 1 is the “hot” processing system of the brain- the system that allows you to slam on your breaks “without even thinking” when a child runs in front of your car. System 2 is the “analytical” system- the system that allows for more “effortful mental activities” like trying to solve a challenging multiplication problem, like 174 x 128. You can likely feel how hard you brain is working trying to devise the solution- BTW its 22,272. You’re welcome for relieving your mental anguish!
One of Kahneman’s most important findings highlights that humans make most of their decisions with System 1 thinking as it is faster and requires less mental energy than System 2 thinking. The brain will only go into System 2 thinking when necessary or when it notices an incongruency in its System 1 thinking.
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How Retail Wins Part 2- Applying ?Kahneman’s Learning to Retail:
Retail has thrived on System 1 thinking since…forever and maybe even before then.?Ever grabbed something in the store then wonder why you bought it when you got home? There is a reason why we as CPG suppliers pay SO MUCH MONEY for endcap space, free-standing displays, shelf talkers in aisle, and those pesky register peg hooks.?BNPL is at it’s core the latest retail tactic designed to incent shoppers to purchase items without ever leaving their System 1 thinking.
The low installment price that BNPL providers offer reduces the list price of an item enough to where a shopper never has to go into the analytical, System 2 thinking of whether they can actually afford the item. I don’t know how you feel, but $56 sounds a whole lot more affordable to me than $598 dollars.?Impulse purchasing has now gone from just occurring on endcaps or by the register, typically on low-cost, high-volume products, to applying to almost any item available on retailer.com.?As great as System 1 can be at preventing a car accident, it can be equally as horrific to a poorly disciplined shopper.
How Personal Finance Loses- the Ugly of BNPL:
?????????????Let’s face it, American’s aren’t good at managing personal finances. Take a quick look at the below:
We can attribute the above statistics to a multitude of reasons. The hardest to accept, yet one frequently demonstrated by research, is that people REALLY STRUGGLE giving up short-term happiness for long-term benefits. Haven’t you ever eaten that doughnut at work even though you just started a new diet? Then you understand the feeling; that feeling of knowing something isn’t aligned to your goals, but it’s just sooo hard to say no, especially when that dang doughnut is just staring at you from across your desk. Don’t worry, you’ll make it up later with an extra workout, right??
This thinking is exactly where the ugly underbelly of BNPL begins to show. BNPL takes items that were previously unaffordable and puts them within reach. While retailers tell us that there is nothing good about high prices, sometimes there actually is. A high retail price can put an item, like a $598 TV, just out of budget when our System 1 brain is shouting “WE NEED A NEW TV RIGHT NOW! Don’t worry, we’ll make it up by saving money on our groceries over the next month.”
BNPL’s ability to reduce sticker shock and make it seem significantly more affordable will unquestionably lead to an increase in purchases. More purchases, not appropriately budgeted for will lead to high installment payments, which will lead to delinquency. Suddenly those 30% missed payment fees start hitting like an angry Mike Tyson punch. Most alarmingly, based on current usage demographics, this issue will disproportionally impact younger and lower-income people.
But Regulators are Here to Save the Day, Right?
Just this week, the Consumer Financial Protection Bureau opened an inquiry into BNPL vendors due to concerns around “(shoppers) accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.” While it is too early to see how regulators plan to police BNPL, one thing we have experienced is regulation, especially on tech products, is often too little and too late- Mr. Zuckerberg still finds this humorous even though Facebook launched almost 20 years ago. I suspect the impact that regulation has on BNPL will remain minimal until too many young people find themselves in far too deep of a hole to dig out of.
There are Always Caveats:
?????????????As I write this opinion piece, I realize the slightly cynical and, at times, overly pessimistic tone that I have taken. This inaccurately depicts my feelings. BNPL is a great service, that provides a true win-win for retailers and shoppers. My SINCERE hope is this service is used appropriately by shoppers to purchase NECCESAARY items (NOT TVs) like groceries and personal care products that might be out of reach on a given week for someone living paycheck-to-paycheck. BNPL also gives people who are personal finance wizards the ability to structure payments around their cash flow, which allows these astute investors to deploy their capital in more impactful ways if they so desire. These are large potential opportunities for shoppers on very different ends of the economic spectrum showing how wide of an impact this service can have.??
?????????????My hope is that we as shoppers can override our System 1 brain at the point of purchase to avoid purchasing an unnecessary item and instead use our System 2 brains to take advantage of this great new technology. If we can do this, the only regulation necessary will be around protecting consumers financial information which credit card companies have had figured out for years.
?????????????Both retailers and individuals stand to benefit from BNPL, if, we, as strong-minded individual shoppers muster the ability to self-manage ourselves and our shopping behaviors!
But how about that doughnut?