Buy now, pay… forever?

Don't bet on consumer failure. Bet on their success!

About 10 years ago, my best friend called me and asked, "Hey, do you want to play bass in my new band?"

Of course, I said "yes," but there was a problem: I didn't have a bass or an amp or anything I really needed to play. I got on a large online retailer’s website and bought the cheapest equipment I could find.

In the long run, that purchase wasn’t a smart move. Eventually, as we started playing shows at bigger venues and my needs outgrew what I had bought. It was time to buy more stuff.

For decades, many guitar communities have been afflicted by Gear Acquisition Syndrome or GAS for short. This condition drives musicians to purchase the latest and greatest gear. That need to get the best instruments and accessories is how I first dipped my toe into the world of “Buy Now, Pay Later.”

Today, more and more companies are offering customers access to the BNPL payment method allowing consumers to break up the cost of big-ticket purchases into smaller, more manageable chunks. On the surface, BNPL sounds like a good deal for consumers. It only requires a soft credit check, it's built-in to many merchant's checkout systems and often offers zero interest… as long as the item is paid off on time.

If e-commerce was one big step for accessibility, BNPL will be a giant step towards affordability.

Consumers seem to have fallen in love with the BNPL option, especially throughout the COVID-19 pandemic. According to money.co.uk, one-in-six shoppers used BNPL to purchase an item that was just too expensive for their budget. Buy Now, Pay Later has become so popular in the United Kingdom that it's become a £2.7bn industry! Another survey from March 2021 also found that 56 percent of consumers in the United States had used a BNPL service, a 50-percent increase over 2020.

So what's the big deal? Consumers have been deferring payments on expensive items for decades now. That's what credit is, right? On paper, that line of thinking does make sense. In fact, BNPL caused credit card use to dip 14 percent.

One of the first factors to consider is that BNPL is not actually credit. While there is a soft credit check when making a purchase, the balance isn't counted on the consumer's credit report. This keeps them from building a solid credit history for themselves.

While BNPL schemes are often marketed as having 30- to 90-day repayment windows, research has shown that it usually takes eight to nine times longer than advertised.

Customers can get carried away with their BNPL purchases. The ease of use and low payments can lure customers into making too many purchases, which stacks up each of their payments, unlike how multiple purchases might accumulate on a zero-percent-interest credit card. One BNPL firm states that 91 percent of its users are repeat customers and some consumers even use BNPL 48 times a year! That’s a lot of guitars!

Let’s say the consumer gets overwhelmed with these allegedly "microloan" payments. What can they do? They often turn to credit cards to make their payments and dig themselves into further debt. While these BNPL schemes are often marketed as having 30- to 90-day repayment windows, research has shown that it usually takes eight to nine times longer than advertised. No wonder a recent survey found a third of consumers were slapped with a late fee and 47 percent of consumers were in the 18 to 24 age group. Those are worrisome percentages and can hit consumers hard in the long run.

Let us not bet on consumer failure, again!

We saw it firsthand what credit card debt can do to households. The US has $840 billion in credit card debt, and the average household credit card debt is $5,315. These are staggering facts. The interest and late-payment fees have been wreaking havoc on consumer financial wellbeing for decades. The whole revenue model is about betting against timely consumer payments. Is BNPL different? No. In fact, with BNPL, the ease of “Buy Now” is even more significant than a credit card purchase. So, what can we predict where this will lead? I know what you are thinking, but BNPL is no credit card program, and if done right, it has all the ingredients to help enhance consumer financial wellbeing like never before. But how?

It is time to flip the script and focus more on Pay Later than the Buy Now aspect!

BNPL instantly turns a consumer into a subscriber, similar to any other subscription service like Netflix. We have learned from the Quibi debacle that in a subscription economy, content is king, and engagement is queen. BNPL, with such a subscription-type model and added affordability built-in, has tremendous potential NOT to do everything that credit cards did but also go beyond and enhance consumer financial health.

Financial institutions offering BNPL should provide tools to their subscribers that engage and deliver content to make smarter decisions. Tools that will help customers understand the importance of being just as prepared for bad times as they are when things are good. By giving them the correct information, they will see the importance of working with an FI that cares about them and their money and the importance of working for their benefit and not the benefit of a creditor. Instead of hoping consumers will miss payments and pay fines, helping them pay off on time can make people their customers not just for the pay period but forever!

Nearly a decade later, my band is still going strong, and I've finally settled on the equipment I need, but the symptoms of GAS still persist. Time will tell if BNPL will fire up my GAS or help make it sustainable!

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