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  • If you want to buy this pair of Adidas, you can use your credit card or a buy now, pay later service.

  • The result seems similar.

  • You don't pay upfront, but with BNPL, you can break that full payment out into installments usually with no interest.

  • Buy now, pay later firms have boomed over the last three years, and companies like PayPal, Apple, and credit cards themselves are joining in on the hype.

  • But as some of the companies scale up with their growing customer base, they're struggling to turn a profit.

  • Here's how buy now, pay later services compare to credit cards and what it means for the next time you're checking out.

  • Everything today is pay-as-you-go.

  • Dan Dolev is an analyst who follows companies like Affirm, Block and PayPal.

  • Credit is becoming a pay-as-you-go thing especially in very young millennial demographics.

  • Buy now, pay later companies took off in the US during the pandemic.

  • Affirm, the only BNPL focused company that's public in the US reported its revenue more than doubled over the last two years.

  • One of the main ways these companies make money is through merchant discount rates.

  • A fee the retailer pays to the company on each buy now, pay later purchase.

  • Selling is better than not selling, and merchants are willing to accept somewhat of a discount in order to make the sale.

  • The number of retailers signed on to use Affirm jumped from just 6,000 in 2020 to 235,000 in 2022.

  • Part of the reason for its popularity is that buy now, pay later is more accessible than a credit card.

  • BNPL is very attractive to people who have credit difficulties.

  • Todd Baker is a lecturer at Columbia Law School who's worked as an executive in finance and teaches about emerging Fintech.

  • Other people do it just because it seems like a good idea.

  • Let's go back to that cart with our Adidas.

  • With a credit card, tou need approval to use that credit often well before you put your shoes in the cart.

  • Companies like Affirm, Klarna and Afterpay, on the other hand, can approve on the spot and make approvals purchase by purchase.

  • That's because of the different ways they check your credit.

  • Credit card companies do a deep dive into your credit history that shows up on your credit score.

  • Buy now, pay later companies typically perform a less formal credit check and look at additional data like previous times you've used their service.

  • BNPL can give more spending power to people who may not have access to credit or have credit built up, but that can be an issue.

  • There is a risk that credit will be extended to you in a situation where you're not likely to be able to repay and that's not good either for the issuer of the credit or for the consumer.

  • Affirm's CEO Max Levchin says the company accounts for this.

  • We do have to say no and tell our consumers with love and compassion, "You're overextending yourself. Please don't buy this."

  • Klarna says it also takes measures to make sure it only extends loans to borrowers who can repay.

  • Both Klarna and Afterpay restrict use of their services if a borrower misses a payment.

  • Buy now, pay later lacks some of the regulated safeguards that credit cards have for consumers in the US.

  • That's in part because they're not covered by the Truth in Lending Act.

  • This is a law that requires that lenders provide you all of your loan information upfront, no hidden costs.

  • It applies to loans that are paid for in more than four installments.

  • Buy now, pay later falls just below that.

  • The product was structured essentially to avoid the application of the Truth in Lending Act.

  • The beauty of BNPL for the retailers is that it's instantaneous and the provision of significant disclosure before a particular transaction would be very difficult.

  • Affirm says it provides a truth and lending disclosure for all credit extensions and Klarna says it supports additional regulation of the sector.

  • The Consumer Financial Protection Bureau also warns that consumers could risk over extension meaning they have more debt than they can handle.

  • This could happen because they could borrow from multiple lenders at once since BNPL platforms can't see borrowing activity on other platforms.

  • Customer defaults, when they happen, can have an impact on company's costs.

  • So they have to balance the risk of delinquencies with approving enough transactions to cover their costs.

  • That's the key to a successful buy now, pay later.

  • It's underwriting, underwriting, underwriting.

  • Klarna said that its underwriting practices have helped keep its default rates below 1%,

  • but delinquencies aren't the only thing that can undermine profits.

  • Shifting consumer habits can cut down on transactions, and many buy now, pay later programs rely on funding that is sensitive to interest rates.

  • Since merchant fees make up the bulk of their profit, companies might have to raise them to make up for higher borrowing costs.

  • If interest rates go up a lot, then they're in trouble because the cost of money's gonna be too high to more than offset with the merchant discount rate.

  • Affirm and Klarna offer services beyond BNPL, and are continuing to diversify their offerings.

  • But they're also facing increasing competition from Apple, PayPal and credit card installment plans.

  • Still, for some buy now, pay later CEOs, like Affirm's Levchin, the competition is clear.

  • The enemy or the competitor is the credit cards, not each other.

  • Despite these challenges, Delev thinks that buy now, pay later is here to stay.

  • And as they become bigger and offer more services, they will be able to gain scale and increase profitability.

  • But some buy now, pay later firms like Afterpay have been bought by larger companies.

  • The fundamental question has always been, is BNPL a business or is it just a product for other providers of financial services?

  • And I think the consensus seems to be shifting towards the idea that BNPL as a standalone business is not likely to be successful in the competitive market.

If you want to buy this pair of Adidas, you can use your credit card or a buy now, pay later service.

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