Buy Now, Pain Later: EZ Credit and a Broken Economy
A couple of stories about the ever-expanding short-term credit product known as Buy Now, Pay Later demonstrate some underlying problems in the current state of our economy.
One story offers more detail on the use of BNPL for things like groceries, dining, and even coffee.
As Rocco Pendola notes:
BNPL company Zip has experienced 95% growth in grocery purchases. More than half of the items Zip users finance are in the grocery or household category.
Another BNPL player, Zilch, says groceries and dining out account for 38% of its transactions.
This tracks with other reports around the increase in use of BNPL for groceries.
The problem, of course, is that borrowers then end up in a cycle of BNPL loans.
It’s like kicking the can down the road — but the end never comes.
The use of BNPL for things like groceries and other necessities is concerning in and of itself. However, when you also note that BNPL users sometimes end up unable to pay other bills in order to meet their short-term credit loan obligations, it’s a significant concern.
The results of one recent survey suggest:
32% of Buy Now Pay Later plan users have had to skip paying an essential bill such as rent, utilities or child support in order to make their payments. Even after that, 30% report that they’ve struggled to make their payments.
This is just one more sign that the economy is not working for a large number of Americans.
It could also be pointing to an eventual economic crash with catastrophic impacts.
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The ubiquity of BNPL also explains why large retailers like Walmart are building a buy now, pay later product.
Sure, it’s about capturing revenue.
Here’s more on how BNPL eats into retail profit margins:
In short, these companies — Affirm, Afterpay, Sezzle, Klarna, and others — charge merchants a fee in order to facilitate purchases.
A customer may not have all $200 for an item (or may not want to spend $200 right now) — so, instead of leaving the store or website without the product, BNPL offers merchants a sale. The BNPL company pays the merchant now and the customer pays the BNPL company over time.
This means 25% of the total purchase price up front and the remainder paid every two weeks over a six-week period.
The customer gets the product now, the merchant gets paid now, and the BNPL provider services the process — getting paid by the merchant for providing convenience.
But as Kim Rowley notes, all that convenience comes at a cost.
According to this article, the typical merchant fee for Affirm is 5.99% + 30¢ per transaction. Compare that to the typical processing fees for Square, which I personally use to process payments, which is 2.6% + 10¢ per transaction.
So, we’ve established that Affirm charges the merchant roughly 6% to process transactions. And according to a 2021 publisher media kit, Affirm was asking for at least 8% commission to even integrate a merchant. For 10% commission, the merchant would get a dedicated merchant page and optimized premium placement across their homepage or categories. And for 12%, Affirm would offer 0% financing, dedicated page and placements on homepage and categories.
Add in the average 2% network fees and another 2% for program manager fees, and merchants are paying out over 20% of their revenue to Affirm which makes it hard to maintain a healthy profit margin.
No wonder Walmart wants to develop a BNPL platform.
Giant retailers like Walmart can likely afford to handle these steep fees charged by BNPL operators — but they’d rather not.
Will be interesting to see if Walmart boots out the other providers and if Walmart offers its BNPL platform to other retailers. This way, even if you aren’t shopping at Walmart, the big blue discount retailer is still collecting some cash.