Spinning Straw: The Rise of Buy Now, Pay Later.
Ava Govanstone investigates the social and economic consequences of the buy-now pay-later industry, and what the future holds for the embattled sector.
The story of Rumplestiltskin endures in our cultural consciousness as an odd cautionary tale about debt and promises. The cautionary tale of a young woman in a sticky situation, saved three times by a mysterious stranger who extracts promises from her, and then one day, he comes to collect on what he’s owed. Naturally, our plucky heroine manages to outsmart him by saying his name. Of course, fairytales of baby stealing demons may seem inapplicable to our modern world, but it's warnings of desire, debt and ‘deliverance’ are very relevant today.
Similarly, I remember the first time I heard about Afterpay.
I was working in retail, and at an event, a colleague whispered to me with the feverish eyes of the believer that she’d recently bought about $700 worth of clothing for only a quarter of the cost upfront. As the night went on, I got the sense many of the young women in the room had tried it. Some months later, my friend, Milo* shared a screenshot from her phone screen, with the ubiquitous laughter/crying emoji. She had seven texts from Afterpay, all informing her of upcoming deductions to be made the next day for different orders. And now, years later, the Australian Securities and Investment Commission (ASIC) claims that as of June 2019, there are over 6.1 million open ‘buy now, pay later,’ (BNPL) accounts across Australia, representing 30% of the adult population. In 2018-2019 the amount of total BNPL transactions increased by 90%.
Image from Pexels
The surge of BNPL in Australia has been an interesting phenomenon over the last five years. Though slightly varied between providers, BNPL can be described as an interest free short-term loan with a down payment of 25% at purchase provided by you. The BNPL company pays the retailer the remaining owed amount, and you pay the BNPL provider back in a fixed repayment schedule, usually over a course of 6 weeks.
The key point here is ‘interest free.’ Unlike the traditional credit card model, BNPL companies do not charge interest. This is the bit that made me, at that work event, cock my head. ‘How do they make money?’ I mused. Merchant fees comprise significant amounts of the profit margin for these companies, but other than this, the answer lies in the fact that 1 in 5 BNPL customers have missed a payment in the previous 12 months. Many of these providers charge late fees, a cost that has brought these companies over $43 million in the 2018-2019 financial year. In fact, Afterpay makes almost 10% of their income on late fees from customers that don’t make their payments.
And here we find the first problem.
The model of BNPL, with little to no credit checks, means that provided the initial 25% is in your account and the purchase is under $2000, you have a green light. Consumers rated this fact, the ease and efficiency, to be one of the strongest reasons they use BNPL, rivalled only by the lack of interest. However, when shoppers such as Milo begin to lose track of what they’ve bought and when payments are withdrawn, it starts to get complicated. They may realise that combined, the value of all the purchases are more than what they have, particularly as research shows that 55% of these consumers use more than one BNPL provider. The result? 20% of BNPL consumers claim they’ve gone without essentials to make BNPL payments, a further 15% claiming they took out additional loans in order to pay the original debt. Research by Financial Counsellors Australia found that 84% of clients receiving financial counselling had BNPL debts. Perhaps most worryingly of all, women aged 18-25 are the most likely to be caught in these situations.
Young women fuel the BNPL industry, with most BNPL purchases being used on clothes and makeup. It is an interesting symbiotic partnership here, between the flourish of microtrends, clothing hauls and maximalism splayed out on social media, and the increase in the use of these services. The seductive messaging that we should have exactly what we want, when we want, to treat ourselves, is exactly what keeps this rather overflooded market afloat. BNPL is the epitome of instant gratification; gone are months of layby. Now, you get the item before you can even prove you can pay for it. In this way, it is a violation of intertemporal choice, a behaviourist principle that revolves around the decisions we make between smaller, sooner or later, larger rewards. Humans are notoriously bad at this, favouring sooner, smaller rewards. But with BNPL, it enables individuals to have immediate, larger rewards with detrimental effects. This theory supports the fact that the amount consumers are willing to spend with BNPL has increased since 2019, with 36% of consumers in the UK willing to use BNPL on purchases over $1500. 24% of those surveyed in this research claimed they had no upper limit on how much they would spend with BNPL.
At this point in my research, I swivelled in my chair and fixed a beady, journalistic eye on Milo, who is now my roommate. I asked how much she thought she would have paid to Afterpay in late fees. She gave a sigh and stared at the ceiling.
‘I have no idea,’ she replied eventually. ‘Honestly.’ We ended up looking through the deluge of texts from the BNPL company, which was recently acquired by Square. We calculated she would have paid at least $300 in late fees alone, though she admitted it was probably more. When I asked her thoughts as to why, she shrugged.
Image from Pexels
‘You make the purchase when you have the money to pay for a quarter of it, you feel good about it, and then suddenly you haven’t gotten your second paycheque, you’ve forgotten about it, you need petrol, food, whatever, and you can’t make the rest of the payments. They send you reminders, but you can just not pay it for ages, accumulating fees, and then they’ll put their foot down eventually with an accumulative amount and tell you to call them.’
Fortunately, Milo managed to escape the cycle she was caught in.
‘It took a very long time but I got out of the habit, I don’t need to do this to myself. It took a lot of weeks of having $10 for food for the week before I realised I shouldn’t do it. It’s very tempting when you think you need an outfit immediately, the whole “I want to fit in, I want to compete” thing.’
Image from Pexels
My ears pricked up at this. The rise of the microtrend and fast fashion seem inextricably linked to BNPL, as young people feel pressured to update their wardrobe nearly every week. Research by Lending Tree in the United States shows that having the option of BNPL causes consumers to overspend, and the service is commonly used to buy designer items that the individual wouldn’t normally be able to afford. Given that BNPL is currently self-regulated through a code of conduct (which only eight providers have signed onto) and does not mandate credit checks above $2000, these overspends are easy. As such, increased pressure has built up to improve regulation on the BNPL industry, which currently resembles the wild west. Considering it is a product that provides loans, they have only a fraction of the regulations on more traditional banks and credit providers. However, the BNPL industry seems to be arriving at their own troubled times.
The Australian Stock Exchange tends to be only interested in banks, or companies that blow holes in the Pilbara. BNPL is a relatively new category that is remarkably overrepresented, with 12 providers listed on the exchange. The sector may be valued at more than 14.2 billion, but the market is oversaturated. And as interest rates rise, and calls for regulations increase, the road ahead for most BNPL providers seems rocky, particularly as some banks begin to launch BNPL products of their own. Economic forecasts are rocky across the world, with interest rates and consumer debt rising. Klarna racked up $700 million in losses last year, a significant portion of which was due to credit defaults. The BNPL business model depends on customers currently struggling with the rising cost of living, continuing to make payments whilst also buying more. Indeed, this model, ironically, revolves around the companies buying now, and paying later.
“Slowly, we are recognising the issues with these companies. We’re naming them too, the words they’d managed to escape through clever marketing (debt, loans, fees). The days of spinning straw might be over.”
GRAPHIC BY CBINSIGHTS
Further resources
Disclaimer*names have been changed.
WORDS: AVA GOVANSTONE
GRAPHICS: PEXELS & CBINSIGHTS
GRAPHICS: PEXELS & CBINSIGHTS
