Dearest readers, have you at any point in your life tried to order pizza for yourself and maybe a small group of friends but pay for it in weekly installments interest free with penalty fees only if you miss a payment? Me neither! :p However, this is the new reality at least here in North America, and something tells me it has yet to reveal everything it has in store for us. Oh yes, I am talking about the buy now, pay later wildfire that is engulfing wallets everywhere. Companies like Affirm in USA or Paybright in Canada (Paybright was acquired by Affirm) are deep in this business and they seem to generate crazy amounts of money off of payment plans for those who will not or cannot pay by cash, debit or credit. While the pros of this are pretty obvious, I would like to point out from my modest research that this may be the next huge bubble everyone should know about.
While I cannot confirm this for sure, it seems to me that companies offering buy now pay later are using profiling based off data mining and qualitative analysis and keep coming up with the idea that they are on to something great. For example, one of these companies partnered with a discount brick and mortar retail chain in Canada that also has an online component and they often feature good deals on refurbished electronics. So, for illustrative purposes, let us say that you buy something that, tax included, can be had for 4 bi-weekly payments of $80 each. Apparently, all you need to provide is your credit or debit card information, a copy of your ID, pay the first $80 when getting the item and boom, it is all set up. The fine print does say that a missed payment will cost you $10. if you do not miss a payment, you only pay the total amount with zero interest. However, these businesses know that, more than likely, you will miss on average one payment per item. Naturally, if you get used to buying items like this and you buy, say, $2,000 worth of stuff in a year and use the same company for everything, and then you do not pay on time 5 times, you only pay $50 worth of penalty fees, or 2.5% which most customers in this scenario would see as something akin to 2.5% interest on their annual total of $2,000 worth of purchases which makes them happy because their credit card probably has a 19-25 percent annual interest rate. However, for the company, it calculates how much penalty it is collecting on money handed out and this money can come in on a weekly, bi-weekly basis or in other time frames and it can compound in insane ways, thus bringing crazy profit to that company.
Seems like a win win, until you remember that you participate in this society and you are more likely than not to sink or swim with it. As this is not a typical type of loan, it turns out that the vast majority of the buy now pay later companies do not check your credit rating and do not report the loan to any credit bureau. This, dearest readers, has begun to scare some politicians and many regulators in USA, perhaps some in Canada as well and rightly so. Indirect analysis has confirmed that there are billions upon billions of dollars worth of these quasi-loans out in the wild and people are using them even for groceries! The very real danger is that big banks and other traditional loan issuing financial institutions have no idea if a client applying for a line of credit, a car loan or a mortgage can truly afford it or not because they have zero insight as to how much buy now, pay later debt this client might have! You can have someone with way too much of this type of hidden debt that cannot be shrugged off as easily as a loan from a family member or a friend might be (tsk tsk). Worse yet, it may make it impossible for that client to afford a car loan or a mortgage, yet they will still get approved and now you have a client at a high risk of default! So, if we are talking mortgages, again you have a situation where many people who cannot afford their mortgages may have those mortgages put into "high rating" mortgage bonds by financial institutions and here we go again with 2008 (potentially). Whether I am exaggerating or not, this is not good at all. Now, as a final remark you may say hey, if buy now pay later is being used by people who are maxxed out on credit cards and lines of credit and maybe have a bad credit rating, then surely they would not be a danger to the banks and the economic system because they would not be applying for a car loan or mortgage. To that I answer this. While there is a typical profile of a person who would use buy now pay later, in truth anyone can overdo it with this payment option because it is very, very attractive to more and more people. For example, successful small home based businesses that need to update some of their equipment and are maxxed out on their credit cards and time is of the essence for the purchases they have to make.
So there you have it, dearest readers. I hope this was as interesting and as important to read and think about as I promised it would be. :)
While I cannot confirm this for sure, it seems to me that companies offering buy now pay later are using profiling based off data mining and qualitative analysis and keep coming up with the idea that they are on to something great. For example, one of these companies partnered with a discount brick and mortar retail chain in Canada that also has an online component and they often feature good deals on refurbished electronics. So, for illustrative purposes, let us say that you buy something that, tax included, can be had for 4 bi-weekly payments of $80 each. Apparently, all you need to provide is your credit or debit card information, a copy of your ID, pay the first $80 when getting the item and boom, it is all set up. The fine print does say that a missed payment will cost you $10. if you do not miss a payment, you only pay the total amount with zero interest. However, these businesses know that, more than likely, you will miss on average one payment per item. Naturally, if you get used to buying items like this and you buy, say, $2,000 worth of stuff in a year and use the same company for everything, and then you do not pay on time 5 times, you only pay $50 worth of penalty fees, or 2.5% which most customers in this scenario would see as something akin to 2.5% interest on their annual total of $2,000 worth of purchases which makes them happy because their credit card probably has a 19-25 percent annual interest rate. However, for the company, it calculates how much penalty it is collecting on money handed out and this money can come in on a weekly, bi-weekly basis or in other time frames and it can compound in insane ways, thus bringing crazy profit to that company.
Seems like a win win, until you remember that you participate in this society and you are more likely than not to sink or swim with it. As this is not a typical type of loan, it turns out that the vast majority of the buy now pay later companies do not check your credit rating and do not report the loan to any credit bureau. This, dearest readers, has begun to scare some politicians and many regulators in USA, perhaps some in Canada as well and rightly so. Indirect analysis has confirmed that there are billions upon billions of dollars worth of these quasi-loans out in the wild and people are using them even for groceries! The very real danger is that big banks and other traditional loan issuing financial institutions have no idea if a client applying for a line of credit, a car loan or a mortgage can truly afford it or not because they have zero insight as to how much buy now, pay later debt this client might have! You can have someone with way too much of this type of hidden debt that cannot be shrugged off as easily as a loan from a family member or a friend might be (tsk tsk). Worse yet, it may make it impossible for that client to afford a car loan or a mortgage, yet they will still get approved and now you have a client at a high risk of default! So, if we are talking mortgages, again you have a situation where many people who cannot afford their mortgages may have those mortgages put into "high rating" mortgage bonds by financial institutions and here we go again with 2008 (potentially). Whether I am exaggerating or not, this is not good at all. Now, as a final remark you may say hey, if buy now pay later is being used by people who are maxxed out on credit cards and lines of credit and maybe have a bad credit rating, then surely they would not be a danger to the banks and the economic system because they would not be applying for a car loan or mortgage. To that I answer this. While there is a typical profile of a person who would use buy now pay later, in truth anyone can overdo it with this payment option because it is very, very attractive to more and more people. For example, successful small home based businesses that need to update some of their equipment and are maxxed out on their credit cards and time is of the essence for the purchases they have to make.
So there you have it, dearest readers. I hope this was as interesting and as important to read and think about as I promised it would be. :)