A trickier way to pay
The buy now, pay later setup has seen a huge resurgence in the U.S.—but there's a catch with this payment model.
Struggling millennials are likely to be interested in almost any financial service that promises to bring a shopping cart total closer to zero dollars.
Accordingly, the BNPL (buy now, pay later) setup has seen a huge resurgence in the U.S. Unlike older models of “hire purchase” (a system by which one pays for a product in regular installments while having the use of it), Klarna, Afterpay, Sezzle, Splitit, and other such BNPL services all pledge financial freedom, empowerment, and higher purchasing power to their customers. But is BNPL just a fast-track to financial ruin for a demographic that is already vulnerable when it comes to managing and saving money?
Because in a time of increasing insecurity—economic and otherwise—it seems especially reckless to be making risky financial decisions.
With BNPL, consumers are able to purchase items at a fraction of their total cost, take them home, then pay the rest of the balance in low- or zero-interest installments. Traditional layaway models (by which items are taken home only after the payments, made over time, are completed) like those offered by retailers such as Kmart can be restrictive: not every item is eligible for the program, and in some cases, those that are must start at a certain—sometimes higher—price point. Some stores, like Walmart, offer financing options for purchasing items via installment, but those are subject to credit check and approval.
Sezzle and the like, who seemingly do not penalize those shoppers with bad credit, naturally come across as more appealing—in fact, this is one of Afterpay’s selling points: the brand acknowledges that “63% of Millennials don’t own a single credit card,” and vows to subsequently lift shoppers up by “[turning] the credit industry on its head,” something the CEO of Klarna apparently also endorses. For sellers and small business owners, the hook is even better: companies like Paybright promise to pay sellers in full and upfront, even if their customers opt for BNPL.
Most of these businesses, in short, appear flexible; but even a cursory look at their terms and conditions tells a slightly different story.
Yes, Klarna offers payments in four installments, interest and fee-free, but only “when you follow your automatic payment schedule;” likewise, Sezzle allows a six-week payback time frame with “zero impact to your credit,” but only “if you pay on time.” Afterpay’s Terms of Service are more explicit about the fallout from missed payments: legal action, collection agencies, impact to credit—all of which sounds no different from the very financial imbroglios these companies claim to liberate shoppers from.
Millennials are still experiencing the aftershocks of the 2008 Great Recession. One of the most salient crises is credit card debt, on top of the crippling student loan debt they are already contending with, and in addition to shoddy employment prospects. It is clear that millennials cannot afford any more anxiety-inducing financial setbacks, yet what BNPL promises—despite being potentially calamitous—continues to entice.
Some of this attraction can be explained by the fear of the financial setback itself. Personal finance author Farnoosh Torabi suggests in CNBC’s MakeIt series that “[w]hen your financial life is in disarray, chances are, you will overspend […]. Emotions around money lead us to make irrational choices.” In times of high-stress and isolation, like what social distancing currently entails, it is not hard to imagine many turning to online shopping as a way to cope, even if it doesn't make sense for their bank accounts.
This ties into the bigger issue of some millennials’ poor know-how regarding financial management: between overspending (a monthly average of $478 on nonessentials, as opposed to Baby Boomers’ $359), and having low rapport with those, like parents or financial advisors, who could guide them, it seems inevitable that trouble follows suit. This is something Gary Wood Jr., a financial consultant for students and soon-to-be grads, is also keenly aware of. “Financial literacy should come into play during middle school and high school,” he tells Supermaker. “Too often, we as young people [...] are not proficient in money management.”
It’s this combination of poor financial knowledge and emotional spending that BNPL companies like Sezzle and Klarna ostensibly cash in on, playing on the effects of “delayed reward discounting,” emphasizing the pleasure rush of owning something over the toll of having to shell out for it over time. The flipside of BNPL’s shiny appeal, then, hints at an old—if a bit simplistic—adage: if it looks too good to be true, it probably is.
A lot of the criticism against layaway, hire purchase, and other forms of payment plans are aimed at their supposed ineffectiveness. Case in point: Alex Tabarrok, a professor of economics at George Mason University, takes a censuring view of the matter, suggesting in Marginal Revolution that is it wiser to save the slow and steady way for a given item, rather than risk entering into opaque, long-term plans with businesses.
Much of the opinions boil down to the consumers’ perceived lack of responsibility. “Over three-quarters of Millennials want to have the same clothes, cars and technological gadgets as their friends," an American Institute of Certified Public Accountants survey recently declared. It explains any potentially incurred debt in a way that frames consumers as frivolous, and covetous. But the reality is that for an already cash-strapped individual, even a small and innocent purchase can snowball into a major one when interests and fees become involved, let alone when the purchase is bigger and/or more important.
Because the economic landscape is already inhospitable to the demographic these newer BNPL businesses overwhelmingly target, it is even more urgent for their financial literacy to catch up to the money decisions they make. Wood Jr, who recalls being taught, very early on, the value of financial planning, asserts that “education is the key to solving the lack of financial literacy, and the earlier we can teach it, the better our nation can be because of it.” It is an alarming fact that “a mere 17 states require high school students to take a course on financial literacy,” when companies are finding more sophisticated ways of concealing their caveats and hidden clauses every day.
Despite businesses like Afterpay touting Responsible Spending on their website, says Robin Eveleigh for VICE: “You’d barely guess from its sleek website and glossy TV adverts, but Klarna is actually a licensed bank – yet you won’t find language like ‘debt’ or ‘loan’ used by any of these schemes when you complete a purchase.”
That is not to say that the future of shopping necessarily rhymes with impossible price tags and liabilities. Alternatives to BNPL have steadily cropped up over the years and/or made successful transitions to the web, in the form of thrift stores, coupon-oriented companies, and rent-to-own shops. Some, like author and journalist Elizabeth Cline, advocate for a return to slow fashion and sustainability, echoing familiar calls for minimalism. Others put forth an even more radical solution: step away from the phone, and from online shopping altogether.
Kevin Drum states, in Mother Jones, “Frankly, if layaway really does provide a psychological prod to make the payments, it’s not a bad deal at all.” The same mindset could apply to those who would pick up what BNPL is putting down: an incentive to be financially vigilant, provided that one has done one’s homework, and has the means to see the commitment through.
The safest alternative, however, is to be wary of the too-easy way that BNPL skewers our perception of control when it comes to big purchases camouflaged as smaller ones. It may sting momentarily, but it's better than an enticing, would-be attainable purchase coming to haunt us in the long term. This, especially in light of more pressing matters like the coronavirus pandemic that reminds us that we need to be more frugal, more prudent—not less.
And if we cannot stop disassociating the aforementioned notions of buying versus paying, perhaps it is long overdue that we rethink our relationship to ownership altogether.
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