Who really pays with buy now, pay later? Companies like Klarna and Affirm: NPR

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CHERYL W THOMPSON, HOST:

If you’ve made any online purchases recently, you may have seen an option that would allow you to pay a little now and the rest later, interest-free. Buy now, pay later Businesses have skyrocketed in popularity during the pandemic. Klarna, Afterpay and Affirm are just a few of them. Now Apple is getting into the game with Pay Later. So what is behind this trend, how does it work and who is really paying? For that, we called in Alexi Horowitz-Ghazi of Planet Money. He investigated buy now pay later services on a recent episode of Planet Money. Alex, welcome.

ALEXI HOROWITZ-GHAZI, BYLINE: Thanks for having me.

THOMPSON: Buy now, pay later sounds simple, but is it? Can you explain to us how these services work?

HOROWITZ-GHAZI: Sure. 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 kind of a new way. So the way this works is that you’ll be shopping online or, increasingly, at more and more IRL stores, and instead of paying the full price with a credit or debit card or something like that, you’ll be offered buy now , Post payment option. Usually it is this model of payment in four, which means that they will request payments in installments. You will pay the first installment immediately using, you know, the bank account or the credit or debit card you want. They will take that down payment and then pay it back in regular installments. And everything is without interest. It works like a traditional payment method, except with buy now, pay later, you get what you’re buying right away.

THOMPSON: So how do companies make money on this if there’s no interest? Someone is charging.

HOROWITZ-GHAZI: Right. Lending money is usually profitable due to a combination of interest and fees or perhaps collateral. There is no guarantee with these things. They’re not going to, like, take back your Nike sneakers and try to resell them to get back, you know, your back payments or anything. And there is no interest, as you mentioned. And the fees, while there are late fees and interest rates that kick in if you repeatedly miss payments, the fees aren’t really that high. And that is not the core of the business model. The way these companies make money is actually by charging fees from merchants, meaning the companies that sell you the products 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, are the merchants passing those fees on to the consumer through higher prices?

HOROWITZ-GHAZI: Presumably that’s happening to some degree, but it’s still a bit early for this model. And for the most part, it seems like the model really works for everyone involved because what the buy-now-pay-later companies are offering these merchants is the promise of many more sales. So they’re bringing in a lot of new customers, people who might not have used credit cards or might be a little bit allergic to the idea of ​​using credit, for example, a lot of Zoomers and millennials who grew up in the wake of the financial crisis and just don’t want to use credit cards, and people who, you know, may have poor credit histories or bad credit and might not otherwise be able to access things like credit cards and other forms of loans. So they’re bringing in new people, and then also, there’s something about the psychology of breaking down the total price into these installments, into these smaller installment prices that makes people hesitate a little less to complete their order, you know, to click buy when they are at the end of their purchase, when they are in the payment process.

THOMPSON: So you know the old adage, right? – that if it sounds too good to be true, it probably is. Where can this go wrong for the consumer?

HOROWITZ-GHAZI: Right. So, you know, it is: 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 the flip side of being outside of the normal credit reporting system. It means it’s easier to get these bought now and paid for later at first. But it also means that each of these loans is not reported to any kind of central repository, which means you can get, you know, five or six different loans from five or six different companies without any of them knowing. It means that you can get into all this payment whirlwind and get into trouble pretty quickly.

And this is one of the things that has raised red flags for, you know, consumer advocacy groups and regulators. Last fall, the House Financial Services Committee of Congress held a hearing to look into all of this. And right now, the Consumer Financial Protection Bureau has an open investigation into the buy now, pay later industry. They are looking at the risk to consumers of overextending, what kind of data these companies collect and how it is used, and how these services fit in with existing regulations for other types of credit products.

THOMPSON: Why do you think, Alexi, this practice has taken off during the pandemic?

HOROWITZ-GHAZI: Well, buy now, pay later. The companies started in places like Australia and Scandinavia, and have seen increasing momentum over the years. They arrived in the US largely around 2015, and were at this point of critical mass just as the pandemic started. They were starting to be adopted by larger and larger companies, eventually places like Amazon, Walmart, and Target, which exposed them to a lot more people. And this happened just as a lot of lockdowns were happening, with many people turning to the internet and online shopping as a form of retail therapy or just a place to find essential items as they struggled to figure out how to work from home. . And it somehow staged this huge explosion in online shopping that has happened over the years since the pandemic started. It just became a new and increasingly convenient way for people to shop online.

THOMPSON: Some kind of accidental explosion.

HOROWITZ-GHAZI: Yes. I would say it was a good time and a lot of trading strategies hit their stride at just the right time.

THOMPSON: That was Alexi Horowitz-Ghazi, host and reporter for NPR’s Planet Money. Thank you, Alex.

HOROWITZ-GHAZI: Thank you.

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