Who really pays with buy now, pay later companies like Klarna and Affirm: NPR
CHERYL W THOMPSON, HOST:
If you’ve shopped online recently, you might have seen an option that would let you pay some now and the rest later, interest-free. Buy now, pay later Businesses have exploded in popularity during the pandemic. Klarna, Afterpay and Affirm are just a few of them. Now Apple is getting in the game with Pay Later. So what’s behind this trend, how does it work and who is actually paying? For that, we called Alexi Horowitz-Ghazi of Planet Money. He looked at buy-now-pay-later services in a recent episode of Planet Money. Alexis, welcome.
ALEXI HOROWITZ-GHAZI, BYLINE: Thanks for inviting me.
THOMPSON: So buy now, pay later sounds simple, but is it? Can you explain to us how these services work?
HOROWITZ-GHAZI: Of course. So buy now, pay later is a form of consumer credit – like credit cards or payday loans or other things that we’ve seen – but it’s sort of a new form. So the way it works is you’ll be shopping online or increasingly at more and more IRL stores and instead of paying the full price with a credit card or debit card or something, you will be offered a buy now, option to pay later. Usually it’s this four-part payment model, which means they’ll ask for installment payments. You’ll pay the first installment immediately using, you know, whatever bank account or credit or debit card you want. They’ll take that upfront payment, and then you pay them back in regular installments. And everything is irrelevant. It works much like an old-fashioned layaway, except with buy now, pay later, you get what you buy immediately.
THOMPSON: So how do companies make money if there’s no interest? Someone gets paid.
HOROWITZ-GHAZI: That’s true. So generally lending money is profitable due to a combination of interest and fees or perhaps collateral. There is no warranty with these things. They’re not going to repossess your Nike sneakers and try to resell them to recover, you know, your missed payments or whatever. And there is no interest, as you mentioned. And the fees, although there are late fees and there are forms of interest that kick in if you repeatedly fail to pay, the fees really aren’t that high. And that’s not the center of the business model. The way these companies make their money is that they collect fees from merchants – so the companies that sell you the goods you buy online or in person. And they charge between 4 and 9.5%, which can be much higher than what credit cards usually charge, which is between 2 and 4%.
THOMPSON: If the merchant has to pay these fees, do merchants pass these fees on to the consumer through higher prices?
HOROWITZ-GHAZI: Presumably it’s happening to some extent, but it’s still just the beginning for this model. And for the most part, it seems like the model is actually working for everyone involved, because what the buy now, pay later businesses are offering these merchants is the promise of a lot more sales. So they’re bringing in a bunch of new customers, people who maybe haven’t used credit cards or might be a little allergic to the idea of using credit – so a lot of Zoomers and the millennials who grew up in the aftermath of the financial crisis and just don’t want to use credit cards – and people who, you know, might have thin credit histories or bad credit and might otherwise not not have access to things like credit cards and other forms of loans. So they’re bringing in new people, and then also there’s something in the psychology of sort of breaking down the total price into those installments – into those smaller installment prices that make people a little less hesitant to complete their order – you know, to click buy when they’re at the end of their purchase, when they’re at checkout.
THOMPSON: So you know the old adage, don’t you? – that if it sounds too good to be true, it probably is. Where can this go wrong for the consumer?
HOROWITZ-GHAZI: That’s true. So, you know, it’s – these payments are interest-free, which means it can be pretty cheap money, you know, if you meet all the terms and conditions of the loans. The problem with these is kind of the flip side of being outside the normal credit reporting system. This means it’s easier to get these buy now, pay later loans early. But that also means that each of those loans isn’t reported to any sort of central repository, which means you can take out, you know, five or six different loans from five or six different companies without any of they don’t know. That means you can get into all that payout whirlwind and get in trouble pretty quickly.
And that’s one of the things that raised red flags for, you know, consumer groups and regulators. Last fall, the House Financial Services Committee of Congress held a hearing on all of this. And right now, the Consumer Financial Protection Bureau has opened an investigation into the buy now, pay later industry. They examine the risk to consumers of overextending themselves, what types of data are collected by these companies and how they are used, and how these services fit into existing regulations for other types of credit products.
THOMPSON: Why do you think, Alexi, this practice took off during the pandemic?
HOROWITZ-GHAZI: Well, buy now, pay later companies started in places like Australia and Scandinavia, and they kind of grew over the years. They came to the United States largely around 2015, and they were kind of at that moment of critical mass right at the start of the pandemic. They were starting to get picked up by bigger and bigger companies, eventually places like Amazon and Walmart and Target, which exposed them to a lot more people. And that happened just as a lot of lockdowns were happening, and a lot of people were turning to the internet and online shopping as a form of retail therapy or just a place to find basic essentials so that they were struggling to figure out how to work from home. And that sort of hovered over this huge explosion in online shopping that’s happened over the years since the pandemic began. It has become a new and increasingly convenient way for people to shop online.
THOMPSON: Some sort of accidental explosion.
HOROWITZ-GHAZI: Yes. I would say it was good timing and a lot of trading strategies came at the right time.
THOMPSON: It was Alexi Horowitz-Ghazi, host and reporter for NPR’s Planet Money. Thank you, Alexis.
HOROWITZ-GHAZI: Thank you.
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