Scott Galloway shared a post last week about a topic I’d been curious about – “Buy Now Pay Later.” It’s been fascinating to see firms like AfterPay featured prominently in checkout flows. I was curious about how these firms are different from a loan or from plain old credit card debt.
Turns out they aren’t. The whole post is worth reading in full. I’ve copied a few excerpts below.
The stale product formerly known as a loan has been rebranded as “Buy Now Pay Later,” or BNPL. The premise is simple: Buy a product for a fraction of its cost at checkout and pay the rest of it off over a few weeks or months. The good news: Debt is not as bad as cancer. Though it can trigger depression and even revolution. But that’s another post.
BNPL is one of the hottest trends in finance: 1 in 5 Americans used one of these services in the past year, with U.S. spending on BNPL increasing 230% since 2020. By 2025 global BNPL spending is projected to double to $680 billion. In August, Square acquired BNPL pioneer Afterpay for $29 billion in the largest-ever acquisition of an Australian firm. (We had the Founder/CEO of Afterpay on the Prof G Pod, and he’s an impressive young man.) Swedish BNPL giant Klarna is getting ready for a $50-billion-plus IPO, with a current valuation on par with ING or Lloyds Banking Group.
The target market is young people. Klarna’s frontman is rapper A$AP Rocky (who was paid in equity, not debt) — many BNPL brands rely on social media influencer campaigns. In the U.S., three-quarters of users are Gen Zers or millennials; it’s projected that nearly half of Gen Z will be using BNPL services by 2022. Their attraction to BNPL coincides with an aversion to banks and the credit they offer. This is a generation that came of age just before or in the wake of the Great Recession, a global economic crisis precipitated by … way too much credit. Young people love BNPL because, according to the former director of Afterpay, the vast majority of them “don’t want to be on credit.”
He’s not wrong. As Klarna reported in an investor factsheet, 1 in 3 millennials’ biggest fear is credit card debt. That’s more than name death or war. Deployment to Afghanistan is bad, but an unpaid balance on your Discover Card is (apparently) worse.
There’s one problem: Buy Now Pay Later is (wait for it) credit.
Hiding in Plain Sight
By most measures, BNPL services aren’t even good credit offerings. With a traditional credit card, you pay nothing up front, then you’ve got, on average, five weeks to pay without incurring any fees or interest. Closer to two months if you manage your billing cycles carefully. Carrying a balance will cost you, though, 1%-2% in interest per month. Miss a payment, and you get a late fee, about $30 — on which you’ll also pay interest.
In the short term at least, BNPL terms are worse. Take Afterpay. When you buy your new jeans, you have to come up with 25% of the money at purchase, then the lender gives you six weeks to pay off the remainder, in three installments. Miss an installment, and Afterpay hits you with a late fee. Continue in arrears, and the late fees increase, up to a cap of 25% of the purchase price. Also, you need a debit or credit card to make payments to Afterpay. Other providers have different fee and interest structures, but the basic model is the same. It’s credit.
BNPL companies market these limitations as features, not bugs. Because credit cards let you roll over your balance for a low monthly interest charge, you can rack up an insurmountable debt, which is harder to do with BNPL. Afterpay further limits customers’ risk by cutting them off once they start missing payments. It’s credit with training wheels, really. But it’s still credit.
BNPL marketing is Don Draper in Allbirds and a Patagonia vest, messaging for a modern age that generates irrational margins for the brand. Afterpay promotes that it charges “no interest!” However, miss one installment and you’re likely paying more, whether it’s called interest or a late fee. Afterpay competitor Affirm advertises the opposite: “Simple interest and no fees.” It then reiterates the message: “We don’t charge fees of any kind — not even late fees.” Bottom line, they’re all charging you the same thing: money.
So what’s the harm? Why not have a credit card with training wheels to ease young people into their journey toward a lifetime of debt? Especially as some of the costs are borne by the retailer in exchange for the consumer buying more sooner. Might Buy Now Pay Later even be training consumers to develop better purchase habits?
Here’s a good reason to be skeptical. (Let’s be honest, I’m skeptical about pretty much everything.) Pretending to be debit when you’re credit is an awesome business. BNPL firms take a larger cut of merchant sales than any other credit card company. Even AmEx — which charges merchants high interchange fees because its wealthy clientele are likely to spend more — gets a smaller share than Klarna, Affirm, and the like. Why would retailers do this? Because this technology/branding/sleight of hand convinces people to spend more than they would otherwise … full stop.
The business model is predicated on this fact: BNPL customers spend more money. Klarna boosts the average consumer basket size by 45%. Affirm increases it by 85%. Afterpay reports a 17% larger shopping cart, as well as a 12% uplift in overall sales. This is the psychological masterpiece at the heart of BNPL’s success: While fear of debt draws consumers toward Buy Now Pay Later, the model inspires them to spend more.
BNPL marketing teams are careful not to emphasize this with consumers. But on the merchant side, it’s the main event. More and more retailers are installing BNPL offerings at checkout, because they know consumers will load up their shopping carts. As a result, Afterpay’s merchant network has grown 500%+ since 2018.
Buy Now Pay Later firms are quick to tell you that this is where they make most of their money — off merchants, not millennials. That’s true. But the business model only works by capitalizing on the instinct for immediate gratification. And younger neurons are more vulnerable to this marketing than older ones. The prefrontal cortex — the part of the brain linked to dopamine control and release — only finishes maturing at around 25 years old. As a result, younger people are far more likely to engage in risky behavior in search of instant gratification and quick dopa-hits. This is what makes trades on Robinhood, likes on Instagram, and purchases on BNPL so much more rewarding to young adults: They’re engineered to satisfy their neurocognitive architecture.
The problem is the companies are putting these people in debt. (Something I do every day: “NYU Professor of Marketing”. But I digress.) Australia’s financial regulator found 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 had to cut down spending on essentials to make them. In 2019, Australian BNPL providers raked in $43 million in revenue from late fees, up 38% from the previous year. At a major U.K. bank, 10% of customers making BNPL payments overdrew their checking accounts in the same month. The authors of one study dubbed BNPL users “Generation Debt Trap.”
Scott Galloway’s posts often make me think. This one definitely spurred thought.
There’s a profound moment in Episode V of Star Wars in the midst of Luke Skywalker’s jedi training. After trying to get his ship out of the water with the force, Luke gives up (“It’s too big!”). He just moves to the side – dejected and frustrated.
Master Yoda then does it for him.
Seeing his ship out of the water, he goes to Yoda and says – “I don’t believe it.”
To this, Yoda says – “Yes. That is why you fail.”
It is one of those profound lessons that I find myself revisiting in times when I feel stuck (i.e., often :-)). Progress and belief reinforce each other. But, of the two, belief is in our control.
So, every time we find ourselves stuck dealing with an ambiguous product problem with far too many open questions (which problem to solve? which hypothesis? which metric?), I think the way out is to shut out the noise, take the time to build conviction in a direction, and move in the direction of those convictions till we have evidence that tells us otherwise.
We may still be wrong. But, at least, it won’t be a lack of wholehearted effort.
Realization: There can never be too many reminders for product managers and product teams to focus on problems vs. products.
And, the three highest leverage things we can do to make these reminders a part of our daily schedule are: (1) Organize/name teams based on problems (or audiences) vs. products (2) Ensure every document starts with the problem statement (who it is for, what’s the need/job to be done, why now) (3) Start every conversation about the products we build by talking about the problem statement.
The upside of a problem-focus isn’t just a focus on what matters (there’s that for sure).
Problem areas are way bigger in scope by definition. They also require us to build products across organizational boundaries. So, it is a LOT more interesting and inspiring for everyone involved.
As a member of the satisficer club, I love a great product recommendations website. And, my favorite recommendation website thus far has been Wirecutter.
However, another place I’ve begun to love over the years is Switchback Travel. They are exclusively focused on outdoor sports gear and their aggregation is fantastic. Here are examples for bike racks or hiking shoes.
I love the breadth of their coverage, detail, and personality. They’ve become my go-to for all outdoor gear.
Thank you, Switchback Travel team, for the excellent work.
“I think 2022 will be the final year of the COVID-19 pandemic in most countries. With anti-viral pills on the way, health officials won’t need to work on vaccine adoption curves as hard as they do right now. It is futile. If data from over 3B fully vaccinated people doesn’t help, nothing will. :-) When people land up in a hospital next year, they’ll just get the anti-viral pill.” | from my post 3 days ago.
I was feeling particularly optimistic about 2022 being the final year of the COVID-19 pandemic 3 days ago. After spending some time learning about the Omicron variant, I feel less sure.
First, let’s get the obvious out of the way – the mutation pattern of the Omicron variant (21K) makes Delta look like a light appetizer.
Second, we don’t know much as it is still very early. So, we don’t know (a) how contagious it is, (b) how likely it is to evade immunity from vaccines/past variants, (c) how deadly it is.
But, thanks to some incredible work by healthcare officials, doctors, and healthcare workers in South Africa, we have a very early warning. This is huge. I am hopeful it will not be squandered.
Third, there are reasons to be both optimistic and pessimistic. Optimism makes sense because we should have variant-specific booster shots ready within 100 days. That’s awesome. We’ve come a long way since March 2020.
But, there are reasons to be pessimistic as well. The key in handling a new variant is acting quickly. This means ensuring the some restrictions are brought back (masking indoors, sadly) without going down the path of restrictions that clearly don’t work (travel bans, lockdowns – which have lost support and thus effectiveness). On that note, I thought this graphic about the ineffectiveness of selective travel bans was on point.
Fourth, spare a thought for executives working on “return-to-office” plans. Every new variant is a punch in the gut for these plans. Normalcy may be delayed again.
Finally, this development is one that illustrates just how quickly our world can change. Probabilistic thinking and agility when faced by change are among the most important skills we can develop.
There are two ideas that help me when things go wrong.
The first is a reminder that things could always be worse. The more I spend time in worse possibilities (and they exist in plenty), the more grateful I feel.
The second is an old-time belief/superstition that my mom passed on ages ago. I was told that every time something bad happens, it is a gift because it is a sign that something much worse has been averted.
It is a wonderfully optimistic superstition. :-)
Gratitude and optimism tend to be (the most?) powerful tools we have to battle challenges in this life. They help us keep perspective and ensure we’re focused on what lies ahead of us.
And, when we’re dealing with difficult situations, that perspective and focus on the future goes a long way.
The Our World in Data team put together a well explained visualization (here) of COVID data post-vaccines in the past 6 months.
It starts by explaining the importance of understanding death rates vs. the raw number of deaths to understand vaccine effectiveness.
Once we have that out of the way, we can now look at how the stats have trended. Vaccine performance has been similar to trials – J&J has a higher death rate than the Pfizer/Moderna vaccine. And, the vaccines – on average – reduce the mortality rate between 400%-800%.
It is fascinating to see an even higher delta between the vaccinated and the unvaccinated in the UK. This is a combination of the Pfizer and the Oxford-AstraZeneca vaccine. I wonder if it is driven by more severe waves driven by a more urban population.
And, finally, we only see a 200% delta in Chile where the vaccinations were done with the Sinovac vaccine (lower effectiveness).
This combination of explainer + chart is a great example of well explained data. It captures the nuance (mortality rate vs. mortality) while still keeping it simple.
If you do enjoy a more complex data visualization, Nassim Taleb had a good one. He explained that COVID isn’t an old person problem. It just acts as a multiplier on existing mortality rates. It is just that the mortality rate for older folks is higher by default.
I think 2022 will be the final year of the COVID-19 pandemic in most countries. With anti-viral pills on the way, health officials won’t need to work on vaccine adoption curves as hard as they do right now. It is futile. If data from over 3B fully vaccinated people doesn’t help, nothing will. :-) When people land up in a hospital next year, they’ll just get the anti-viral pill.
It’ll be interesting to see how long masking lives on though. As an example, folks who traveled a 16 hour flight recently were understandably complaining about feeling suffocated. But, airlines are all about the theatre (security checks, etc.) – so, some effects may linger longer than most of us hope.
Finally, as we head into the thanksgiving long weekend, I got my booster shot yesterday. I walked into a Costco, asked if it was available, filled up a form, and got my shot for free.