Buy Now, Pay Later Apps vs. Credit Cards: The Pros and Cons | WSJ

Summary

The script explores the rise of 'buy now, pay later' (BNPL) services, comparing them to traditional credit cards. It highlights how BNPL gained popularity during the pandemic, with companies like Affirm experiencing significant revenue growth. BNPL services are praised for their accessibility and instant approval process, but also questioned for their potential to lead to overextension of credit. The lack of some consumer protections and the challenges of profitability are discussed, alongside the competitive landscape with tech giants and credit card companies entering the market.

Takeaways

• 🛒 Buy now, pay later (BNPL) services allow consumers to make purchases and pay in installments, often with no interest.
• 📈 BNPL companies like Affirm, Klarna, and Afterpay have rapidly grown in popularity, especially during the pandemic.
• 🏦 BNPL firms generate revenue primarily through merchant discount rates, fees paid by retailers for each BNPL transaction.
• 💳 BNPL is more accessible than traditional credit cards, making it attractive to consumers with limited or poor credit history.
• ⚖️ BNPL companies perform less formal credit checks compared to credit card issuers, leading to instant approvals for purchases.
• 🚫 There's a risk of consumers overextending themselves with BNPL, potentially leading to debt they cannot repay.
• 🔍 BNPL services are not subject to the Truth in Lending Act, which mandates transparent loan terms for traditional credit products.
• 📉 BNPL companies must balance the risk of customer defaults with the need to approve enough transactions to remain profitable.
• 💰 Rising interest rates can pose a challenge for BNPL firms, increasing their borrowing costs and impacting their profitability.
• 🤝 BNPL firms face growing competition from major players like Apple, PayPal, and traditional credit card companies offering installment plans.

Q & A

What is the primary advantage of using a buy now, pay later (BNPL) service over a credit card when purchasing a product like a pair of Adidas?

The primary advantage of using a BNPL service is that it allows customers to break the full payment into installments with no upfront payment and usually no interest, making it more flexible and accessible compared to traditional credit cards.

How have buy now, pay later services grown in popularity over the last three years?

BNPL services have boomed over the last three years, with companies like PayPal, Apple, and credit card companies joining the trend. The growth has been fueled by increased accessibility and the convenience of installment payments without interest.

What is the main way that buy now, pay later companies generate revenue?

The main way BNPL companies generate revenue is through merchant discount rates, which is a fee that retailers pay to the BNPL company on each purchase made using their service.

How does the accessibility of buy now, pay later services compare to traditional credit cards?

BNPL services are more accessible than credit cards as they can approve purchases on the spot and do not require a deep dive into the customer's credit history, making them more appealing to those with credit difficulties or those who prefer instant approval.

What are some of the risks associated with buy now, pay later services for both the consumer and the issuer?

The risks include the potential for overextension of credit to consumers who may not be able to repay, leading to delinquencies and increased costs for the issuer. Additionally, consumers may not be fully aware of the terms and conditions due to the less formal credit checks performed by BNPL companies.

How do buy now, pay later companies differ in their credit checking process compared to credit card companies?

BNPL companies typically perform a less formal credit check and may look at additional data such as previous usage of their service, whereas credit card companies conduct a deep dive into the customer's credit history, which affects the credit score.

What regulatory safeguards are lacking for buy now, pay later services in the US compared to credit cards?

BNPL services lack some of the regulated safeguards that credit cards have, such as the Truth In Lending Act, which requires lenders to provide all loan information upfront with no hidden costs. This law applies to loans paid in more than four installments, and BNPL often falls just below that threshold.

How do buy now, pay later companies like Affirm and Klarna address the issue of consumers potentially overextending themselves?

Affirm and Klarna have measures in place to ensure they only extend loans to borrowers who can repay. They also restrict the use of their services if a borrower misses a payment and provide disclosures for all credit extensions.

What impact can customer defaults have on the profitability of buy now, pay later companies?

Customer defaults can increase the costs for BNPL companies, as they have to balance the risk of delinquencies with approving enough transactions to cover their operational costs.

How are buy now, pay later companies diversifying their offerings to remain competitive in the market?

Companies like Affirm and Klarna are offering services beyond BNPL, such as other financial products, to diversify their revenue streams and remain competitive against larger companies like Apple and PayPal.

What challenges do buy now, pay later companies face in terms of profitability and competition?

Challenges include struggling to turn a profit as they scale up, facing increasing competition from established financial service providers, and having to manage the risk of delinquencies while maintaining a sufficient transaction volume to cover costs.