Shortcuts / 12 August 2021

Buy Now, Pay Later (BNPL)

Online shopping is a favourite pastime but how we finance it is big business. The sale of buy now, pay later business Afterpay is one thing that’s been making headlines lately. It’s been valued at $39 billion which makes it the biggest acquisition in Aussie history. So in this episode we’ll look at how buy now, pay later works, who’s who in the zoo, and the issues surrounding the sector.

Call me grandma but what is buy now, pay later?
First things first, let’s just call it BNPL. A BNPL service is used to buy a product and delay the payment. If you’re buying something that’s worth up to $2-3,000, you usually pay off your purchase over 6-8 weeks.

What about big-ticket items?
For those up to $30-50,000, the payment period can be longer.

So it’s essentially lay-by…
Sorta. The difference is, you get your goods upfront.

How does that work?
BNPL is essentially the extension of credit to shoppers by a 3rd party whereas lay-by is when the retailer puts the product aside and you only get your hands on your things when you’ve paid the full amount. With lay-by, there’s no 3rd party financial service required because the retailer holds the goods.

Who uses it?
A lot of people. But it’s particularly popular with millennials who are using it to buy things worth up to $2,000. About 15% of millennials in Oz have used it.

So it’s cool with the kids…
Yup. To make a gross generalisation, millennials don’t like debt and are suspicious of credit cards. And with the falling popularity of cash – which has been supercharged by the pandemic – there’s a lot more focus on digital payment options compared to the start of 2020 when you get to the cash register.

Talk me through the actual paying part…
So after adding all the items to your online shopping cart, you might be offered a BNPL service when you get to the checkout. There, you pay just one instalment upfront and have more payments spaced out over the coming weeks.

Just like that?
At the snap of a finger… It’s a short-term credit by the BNPL provider with approvals given over their tech platform in just seconds.

Which is why they stand out from the banks?
Exactly. The banks generally take hours or days to do extended credit. It’s the secret sauce of BNPL and a big part of why some of these companies are worth billions of dollars.

Are there any fees involved?
Nope. You won’t pay any upfront fees, or any interest.

There must be a catch…
Yep. One way that BNPL services make their money is through late fees. BNPL provider Afterpay, for example, makes about 10% of its revenue that way and a recent review by Australia’s financial regulators say about 1 in 5 BNPL users miss payments – so that adds up.

10%… What about the other 90%?
How many BNPL services generate the bulk of their revenue is to charge retailers a fee. Retailers have been up for paying that because companies like Afterpay have been growing rapidly and referring new customers to them. And as regulations currently stand, retailers can be prevented from putting a surcharge on shoppers who use those services.

You mentioned Afterpay, who are the other big names in the BNPL biz?
There’s a heap of options like Klana, Humm and Zip Pay. In total there are 22 BNPL providers operating in Oz, and there are some big new entrants to look out for.

Like who?
The Commonwealth Bank is working on something called StepPay; US giant PayPal is launching Pay In 4 which has the selling point of no late fees; and Apple is looking to expand its appeal of Apple Pay by offering a BNPL option.

But Afterpay is the leader of the pack?
Yup. And it’s front of mind because it’s in the process of being acquired by Square – you know that small, white, square tile that you tap your card on when purchasing something? That’s Square.

Gotcha. And how did Afterpay start?
It’s an Aussie business that was founded by Sydneysiders Nick Molnar and Anthony Eisen. Molnar is in his early 30s and Eisen is in his late 40s and they met because they lived on the same street.

What sparked the idea?
They used to chat about how consumer behaviour was changing during the global financial crisis of 2008-09, and that young people need an option to purchase things without using credit cards. Fast forward to 2014, they founded Afterpay.

And fast forward to 2021, they’re selling it…
For a neat $39 million. Which isn’t bad for a company that’s never turned a profit…

Wait, how can a business that’s only ever made losses be worth that much?
Building a business like Afterpay costs a lot, particularly when it’s expanding across the world. So investors look at the potential of what it could be, not what its balance sheet looks like in the here and now.

And the crystal ball says things are looking good?
Well if the last 18 months are anything to go by – yes. The fraught economic times have pushed customers towards BNPL services, and retailers have shifted their operations online. Long story short, Afterpay now has a value that’s more than 32-times bigger than was forecast. And it’s also in a lot of markets.

Where are its fans based?
It’s big across Oz, the UK, Canada, parts of Europe and New Zealand. And there’s a big opportunity in the US – which is what Square can help them crack.

With so many names in the biz, it’s got to be competitive…
Indeed. And anything that gets this big and popular attracts attention and ultimately, scrutiny.

What are the red flags?
Some of those 22 BNPL services are actually more like payday lenders. And that’s a problem because they’re known for huge fees and interest rates if you miss a payment or need to extend the time period of the arrangement.

Mhmm. It’s led to concerns that young people can end up in strife if they miss payments or they default. That can muck up their credit histories which can have a real impact when it comes time to get a home loan or credit from a bank.

That’s a big price to pay for a pair of shoes…
Exactly. Critics have also been calling on the government and regulators to start overseeing BNPL services like they do others in the finance sector.

Are they treated differently?
They are. BNPL companies don’t have the same responsibilities to ensure they’re only extending credit to consumers’ whose personal financial situations show that they can actually pay for what they’re purchasing.

Which is something the banks are monitored for…
And harshly criticised for when something goes awry. On top of that, BNPL services are also self-regulated.

Which means…
That the government isn’t as involved in monitoring BNPL businesses like they are the banks and other financial services. Instead, the major BNPL players in Oz have agreed to a code of practice that sets minimum standards.

What do those in the know say about that?
Consumer groups believe it doesn’t go far enough and the government needs to step up to ensure consumers are protected.

What’s the rebuttal?
The government and the Reserve Bank don’t see a reason to step in at the moment. They don’t want to stifle the innovation that’s happening in the sector that’s benefiting consumers. They also say that it’s important to keep things in perspective – less than 1% of the number and value of consumer transactions are made using BNPL services.

Lots of opinions…
There sure are. But what experts say is – do your homework. Understand what you’re signing up to before you agree and be realistic about the amounts you’ll need to pay – including any fees or interest if you go over.

And make sure your payments are on time…
Spot on.

Squiz recommends:

An interview by the ABC‘s Geraldine Doogue with Jonathan Shapiro and James Eyers from the Financial Review who have just written a book about Afterpay’s founders and the company.

A story by Kathryn McConnell, the founder of Brighte which provides BNPL-style finance for big purchases like solar panels and batteries. She’s a Squizer and a real innovator with the backing of billionaire Mike Cannon-Brookes and others who are excited about what she and her team are building.

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