CHERYL W. THOMPSON, HOST:
If you’ve shopped online lately, you might have seen an option that allows you to pay a little now and pay the rest later with no interest. Buy now, pay later Businesses have grown in popularity during the pandemic. Klarna, Afterpay and Affirm are just a few of them. This is where Apple comes in with Pay Later. So what is behind this trend, how does it work and who actually pays? So we called Alexi Horowitz-Ghazi from Planet Money. He covered Buy Now, Pay Later services on a recent episode of Planet Money. Alexi, welcome.
ALEXI HOROWITZ-GHAZI, BYLINE: Thank you for inviting me.
THOMPSON: So buy now, pay later sounds easy, 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 we’ve seen – but it’s kind of a new form. So the way this works is that you shop online or increasingly in more and more stores in IRL and instead of paying the total price with a credit card or a debit card or something you are offered a purchase now. Pay later option. It’s usually this pay-in-four model, which means they charge for installments. You pay the first installment immediately using the bank account or credit or debit card of your choice. You take that initial payment and then you pay it back in regular installments. And all without interest. It works a bit like old-fashioned layaway, except you buy now, pay later, and get what you buy right away.
THOMPSON: How do companies make money from this if there’s no interest? Someone gets paid.
HOROWITZ-GHAZI: Right. Therefore, lending money is usually profitable because of a combination of interest and fees, or perhaps collateral. There are no guarantees with these things. They will not repossess your Nike sneakers and try to resell them to recoup your missed payments or anything. And there is no interest like you said. And the fees, while there are late fees and interest that comes with failing to pay repeatedly, the fees really aren’t that high. And that’s not the core of the business model. The way these companies make their money is that they actually collect fees from the merchants — which are the companies that sell you the goods you buy online or in person. And they charge anywhere from 4% to 9.5%, which can be a lot higher than what credit cards usually charge, which is anywhere from 2% to 4%.
THOMPSON: If the retailer has to pay those fees, do the retailers then pass those fees on to the consumer through higher prices?
HOROWITZ-GHAZI: That’s probably happening to a certain extent, but this model is still in its infancy. And for the most part, the model actually seems to be working for everyone involved, because what the buy-now, pay-later companies are offering these merchants is the promise of many more sales. So you’re bringing in a lot of new customers, people who might not have used credit cards or who might be allergic to the idea of using credit at all – so a lot of Zoomers and millennials who grew up in the US who just didn’t use credit cards after the financial crisis want – and people who, as you know, may have a poor credit history or bad credit score and otherwise cannot access things like credit cards and other forms of credit. So they bring in new people, and then there’s also something about the psychology of splitting the total price up into those installments – into these smaller installments that make people a little less reluctant to complete their order – you know, click buy, when they are at the end of their shopping, when they are at the checkout.
THOMPSON: So you know the old saying – 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, that’s it — these payments are interest-free, which means it can be pretty cheap money, you know, if you comply with all the terms of the loans. The problem with these is kind of a downside to being outside of the normal credit reporting system. It means it’s easier to buy these loans now and pay them off later in the beginning. But it also means that not every one of those loans is reported to any central repository, which means you can take out, you know, five or six different loans from five or six different companies without any of them knowing about it. That means you can get caught up in this whole maelstrom of payments and get into trouble pretty quickly.
And that’s one of the things that has raised alarms among consumer groups and regulators. Last fall, the House of Commons Financial Services Committee held a hearing examining all of this. And right now, the Consumer Financial Protection Bureau has an open investigation into the “buy now, pay later” industry. They examine the risk for consumers of becoming overwhelmed, what types of data are collected by these companies and how they are used, and how these services fit into existing regulations for other types of credit products.
THOMPSON: Alexi, why do you think this practice has decreased during the pandemic?
HOROWITZ-GHAZI: Well, buy now, pay later. Businesses started in countries like Australia and Scandinavia, and they’ve gained momentum over the years. They mostly came to the US around 2015, and they were in that critical mass moment, so to speak, just as the pandemic was starting. They were picked up by bigger and bigger companies, eventually places like Amazon and Walmart and Target, exposing them to a lot more people. And this happened just as lockdowns were raging and many people were turning to the internet and online shopping as a form of retail therapy or just as a place to find essentials while struggling to figure out how to work from home could work . And it’s weathered this huge explosion of online shopping that’s happened over the years since the pandemic began. It just became a new, increasingly convenient way for people to do their shopping online.
THOMPSON: So a random explosion.
HOROWITZ-GHAZI: Yes. I would say it was good timing and many business strategies that came to a head at just the right moment.
THOMPSON: That was Alexi Horowitz-Ghazi, host and reporter for NPR’s Planet Money. Thank you Alexi
HOROWITZ-GHAZI: Thank you.
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