On this episode of Industry Focus: Financials, host Jason Moser sits down with Motley Fool contributor Dan Caplinger. Tune in as they discuss why regulators are taking a closer look at the buy now, pay later space. Then they wrap up the show with a listener question on where to put non-stock portfolio cash.

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This video was recorded on Dec. 20, 2021.

Jason Moser: It's Monday, December 20th, I'm your host, Jason Moser and on this week's Financials show, regulators are taking a closer look at the buy now, pay later space and we've got a listener question on where to put non-stock portfolio money. Joining me this week, it's fool.com writer, recovering attorney and financial planner, Mr. Dan Caplinger. Dan, thanks for being here.

Dan Caplinger: Hey Jason, glad to be here. Always good to be here, especially around the holidays and I hope the holiday season is treating you well, too.

Jason Moser: Yes, sir. So far so good. I think we've got close to all of our Christmas shopping done. The weather is still delightful. It's not so frightful yet, so hopefully we're working our way into a nice Christmas week. I hope we could say the same for you.

Dan Caplinger: It's been good here. It's gotten colder, but I have decided to become a ski person this year for the first time so I'm actually enjoying it.

Jason Moser: First time ever?

Dan Caplinger: Well, 20 years ago, I took a free lesson and then I moved away and now I'm back. I've been back for 15 years and I just never did it and so I'm like, "Okay, this is dumb. If I'm shoveling the snow off my driveway, I should be at least enjoying it on the slopes.

Jason Moser: I feel you, there you are because you're up in Massachusetts, right?

Dan Caplinger: Yeah, that's right.

Jason Moser: I feel you there. I grew up skiing. I grew up in South Carolina, but fortunately, had parents that took us out West for some vacations. I had a lot of fun learning how to ski growing up. Fast-forward to today, I feel like I'm the only person in my family who has any interest in skiing, which means that we don't go skiing anymore. [laughs] Maybe that's a blessing in disguise. I'm not getting any younger. Dan last week, the Consumer Financial Protection Bureau announced that it is seeking information from a firm Afterpay (AFTP.F), Klarna, PayPal (PYPL 0.86%), zip on the risks and the benefits of their buy now, pay later products. Now, this buy now pay later, or BNPL, as we'd like to call it space. This is a new space. Yet it doesn't seem so new because it almost seems like just something we're very familiar with but buying another name. There are a lot of different ways to get at this, and I'd love to, first and foremost, just understand your big picture view on this BNPL space. Do you like it? Do you not like it? Why or why not? 

Dan Caplinger: Now it's funny when I first heard of these companies that they are big innovation was, gee, let's take something and it's take purchase that you could make all at once and break it into four payments. I was like, "Okay, that's going to be the big innovation of the world here." It just didn't seem like that big of a deal to me, but that shows you just how Intune IM necessarily with the connection between the real-world and stock prices, because it's a huge deal. People love the opportunity to take something that they can't afford all at once and say, "Hey, I don't have 40 bucks, but I've got ten bucks and I'll probably have ton bucks next month and the month after that and so let's get it on with these buy now, pay later deals." As you alluded to, I'm very familiar with the idea of layaway purchases going way back when if you wanted to buy something big like a lawnmower, tractor or something like that then you could go store and say, "Hey, I don't have enough money to buy it now, but let me start making some payments on it" and eventually you get to the point where it was paid, you get to take the thing home and it was all good. 

Buy now, pay later is even better than that you don't have to wait to take it home you get to take it home right away, so that's a nice deal. But it's been fascinating to me just how quick on the uptake folks have been with this both on the consumer side, especially younger folks, it seems to love it. They love it better than credit cards which it's interesting to me because I'm a big credit card, charge things up, pay it off at the end of the month. I tend to try to get rewards cards that give me something whether it's Air Miles or something like that. That's the 50-year old me that's my way of doing stuff. But for the 2030-year-olds out there, this seems to be the wave of the future that they love so much and that's why we've seen so much interest in a firm. It's why we saw Square (SQ -0.39%). It's now Block by Afterpay and it's been a huge winner for investors who got in on that trend early, even with some of the big stock pullbacks that we've seen in those stocks over the past month two months or so?

Jason Moser: Yes. I hear what you're saying, but I'm with you like I tend to just use credit card products, a couple of credit leaving an American Express (AXP -0.39%) card I had for 20 years. I've got an Amazon Prime Rewards card that I used frequently and I'm with you. I use them, I pay them down, I collect the rewards, it's a nice symbiotic relationship, but just I don't have any problem with it. It feels to me at least like this idea of buy now, pay later perhaps one of the more attractive parts of it and I feel like these companies have done a good job in creating this narrative is that credit cards charge you interest and fees, that's bad. Buy now, pay later you can get what you want now pay for it later and they're not going to be fees, and that's good. Now we know that's not just a writ large statement. Some of these buy-now-pay-later products definitely do have fees, interrelate charges, but depending on the situation. I wonder as time goes on, one of the statistics I've seen is that to this point, you are looking at a considerable number of folks who have missed at least one payment on a buy now, pay later purchase already. They're using multiple buy now, pay later products. In other words, they're not loyal to just the PayPal offering or the Afterpay offering or the Affirm (AFRM -1.30%) offering. It seems like they are using a lot of, they're collecting a lot of credit cards and using a lot of credit card. Debt at the end of the day is debt.

I think that we can all pretty much agree on that. Maybe in the near-term, maybe the hook for a lot of these buy-now-pay-later firms is that they are giving you this new way to use debt without being charged necessarily these extraordinary fees. I also feel like that doesn't last forever. You know that old saying is no free lunch, Dan. Everything comes at a cost and at some point or another, as we see, this interest rate environment start to go up. As we see the cost of doing business start to go up. It's not going to surprise me at all. Particularly if we continue to see customers for consumers missing payments for late on payments. I think as time goes on there, you're going to see those particular individuals being targeted and saying, you know what? You're a bigger credit risk. Therefore, you're going to be charged fees in order to finance this purchase because you've got a track record of not being still reliable and that goes to another point here where we're seeing Equifax wanting to incorporate these buy now, pay later purchases into consumers credit records. Which I think makes a lot of sense because I think again, it is tangible consumer behavior. For me, I wonder how sustainable is. I don't know what do you think?

Dan Caplinger: I agree with all of those points. I'm going to invert a little bit because you focused quite correctly on the consumer aspect of it but there is a big aspect of this that's really between the buy now pay, later companies, and the merchants and their interactions with credit card merchant services and all that. I think that the issue that the Consumer Financial Protection Bureau brought up, it was really helpful. It's a good release to look out because it really does reveal some of the business model that Affirm and Afterpay and these companies are all trying to do. Basically, merchants pay between three percent and six percent upfront to those buy now, pay later companies in order to extend what amounts to that short-term credit. 

Then that might seem like a lot returns out, as the CFPB points out, is very similar to the interchange fees that merchants pay off the top when you use a credit card to pay. Those interchange fees that finance those nice one percent, 1.5 percent, two percent cashback rewards that you and I are getting, Jason, on those credit card purchases. From the merchant perspective, it's not necessarily all that much different. Meanwhile, the merchants are saying they're getting big, increases in the amount of money people spend on products when they go to the services they can offer these buy now pay later products. Since the stores are getting paid, they don't really pay much attention to the customer actually making that payment. That's beyond them, they've gotten their payment upfront, that's all in the buy now pay later company to deal with.

Now, when you hear interviews from the folks at the buy-now-pay-later companies, they're talking about how it's different from a credit card model because at least in theory, every single time that you or I go to a buy now pay later service and try to buy something, whether it's for 40 bucks or 400 bucks or however much it is that's an individual credit decision that the buy now, pay later company can access and they can just basically say, "Well, we gave you this before, but we're not going to give you this one because reasons." I think that's part of what the CFPB is looking at is what are the reasons? How is the past history getting used? How much of this is really more about data collection and the ability for buy now, pay later companies to make lucrative partnerships with big merchants to enhance their businesses and the symbiotic relationship. How much of it is about that, and therefore, how much protection does a consumer need? Both from any individual buy-now-pay-later company and from those broader personal finance issues with regard to get into too much debt because you can use any number of these apps and they're not talking to each other and until Equifax is now trying, but until then, they're not necessarily talking to credit reporting agencies and so it has impacts on credit card companies because credit card company that necessarily know you've got this buy now pay later debt because it's in this different ecosystem. You're right, that as everybody realizes this is a trend that's here to stay, it's going to have to get incorporated into the entire financial system and when that happens, there's big question about, is it going to be able to survive if it has to be on the same playing field as all these other existing payment methods that have been around for so long subject to regulation, all things that it will be interesting to see.

Jason Moser: Yeah, I certainly understand your point there from the merchant's perspective. It's almost, I don't want to say it's zero risk situation, but essentially they're getting a guarantee upfront there and the owner, then the burden is left to the actual buy now pay later firm. That's PayPal, that's one thing because PayPal is an extremely diversified business, you've got PayPal, you've got to Venmo, you've got Zoom, the remittance company dynamic to it. Their buy-now, pay-later offering is just something they built organically, which I thought was the right way to approach it. To me, you build something out like that and you see if it works and if it could become a meaningful driver of the business over time, then that's great. That's a big win. If not, you probably can take some warning from it, but overall, it's not something that really hurts the business too much. To get the other side of the coin there, you look at Block enable, formerly known as Square and I wonder if we're not going to see that name change here soon. You've seen that lawsuit the H&R Block (HRB -3.42%) filed recently on Block. I keep thinking maybe they're going to have to get a cube next, but we'll wait and see, Dan. 

But you look at something like Block and they make that acquisition of Afterpay for $30 billion, which just interesting. Now they are on the hook for that. If buy now pay later space doesn't shake out to the upside, maybe a lot of these folks think it may and it's reasonable to at least question that it would. Then all of a sudden that $30 billion acquisition looks like a lot of goodwill sitting on your balance sheet that you've ultimately at the write-off. Now, Goodwill's goodwill whatever, but it's worth remembering Square issued a lot of shares. Block issued a lot of shares to finance that purchase. Then you see a business like a firm that really is solely buy now pay later. That's their one specialty. You can see a broad spectrum there of risk per workplace in that FinTech space. If you are a believer in buy now pay later versus if you feel you think it's got potential, maybe you invest in something like a PayPal because you see the potential if they succeed, but you can see definitely more risks to something like in firm with maybe a middle-of-the-road risks there with Block. It will be a fascinating space to watch. Shake out here and I agree with you. I think his network's key is they're going to have to be able to communicate with each other because right hand doesn't know what the left hand is doing you get a big problem.

Dan Caplinger: I just believe you though. From a growth standpoint, these businesses have been sensational. Afterpay's revenue, I looked it up, up 36 times between 2017 and now. Our firms revenue almost quadrupled just since 2019, just two years ago.

Jason Moser: Yeah.

Dan Caplinger: It's easy to see why Block is like, yeah, this is the wave of the future, it's got demographics in its favor. But you're right. If it goes well, then it's good. But if it doesn't go well, then it's another one of those historical blunders that you see some companies do and can Block recover from it if that happens? Sure, because they've got the rest of their business. But at least at this point, a firm is the pure play. You get the upside, but you get the downside too.

Jason Moser: Well, we've got a listener question. We get this question a lot, not only from listeners, members, subscribers, and we get this question often, friends, family. [laughs] The interest rate environment that we've witnessed over the last decade plus really has been one that makes you ask, would put their money, maybe your money market savings account, just there's zero return there. I think that's one of the arguments for the stock market these days really is that's where the best opportunity still is. Now, with that said, we're not all at the same stage of life, if you get plenty of investors out there who maybe they're getting a little bit older, maybe they're moving into that protect your wealth stage of life. But we get questions all the time about where to put non-stock portfolio money. People have money out there that they don't necessarily want to commit to the market based on their timeline, based on the risk tolerance, whatever that may be. But what do we do with that non-stock portfolio money, particularly in this interest rate environment today? We were talking a little bit back-and-forth before the show, and this is something that you and Robert Brokamp talk often about. I thought it was really interesting suggestions you had there. But let's go and talk a little bit about this. Where do you suggest investors put that non-stock portfolio money today?

Dan Caplinger: In the past what we've always recommended is looking at high-yield savings accounts and CDEs for bank insured, federally insured money that you would want to have either for retirees, a lot of time we're suggesting 3-5 year cash cushion. If you get an extended stock market downturn, you don't have to sell stocks at a loss, you can draw off of that cash. Unfortunately, they haven't changed the name of high-yield savings account because really it's a low yields [laughs] savings account right now. You're lucky to get a 0.5 percent or something like that. The interesting opportunity right now is an investment that a lot of people don't think of as an investment, and I know that people of a certain age will see this as something that they think of as a grandpa or grandma gift to grandkids. We're talking about US savings bonds and specifically the Series I Savings Bond is linked to the inflation rate. Now a lot of folks have heard about inflation lately. It was a non-starter, it's not on the radar at all for most of the past 40 years. But now inflation is back with a vengeance. Because these Series I Savings Bonds are tied to the inflation rate. If you go out and buy Series I Savings Bond right now, you will get an interest rate guaranteed, federally guaranteed 7.12 percent.

Jason Moser: Wow.

Dan Caplinger: That rate is good for six months. What happens in six months depends on what happens with the inflation rate going forward. If the consumer price index goes up, then the interest rate on that iBond is going to be in line with the amount of that increase. If inflation suddenly reverse its course like the Federal Reserve has been hoping lately, then you will never lose money. The interest rate never goes below zero. There may be six-month periods in the future, because these Series I Savings Bonds, the rate changes every six months. You might go for a six-month period with no interest, but the idea is it's protecting your purchasing power and that's something that traditional fixed-income investments right now, it's just not doing it. When you've got a treasury bond it's yielding two percent and you have CPI up six percent, that's minus four percent. That's four percent of purchasing power has gone away each year. Yes, I don't think that inflation is going to stay at this rate for very much longer, but there is a good possibility we will see some continuing inflation. These Series I Savings Bonds have a lot going for them. They're not cash though. Once you buy them, you have to hold them for a year. If you sell them out before five years, there's a three-month penalty. Then the only other thing is there's a $10,000 limit on the amount of Series I Savings Bonds you can buy. For somebody with a million-dollar portfolio, they're looking to put 10 or 20 percent aside into bonds, this isn't really going to be that much of a needle mover. But for younger folks with smaller portfolios or if you are just looking for some place to put a little extra cash, this is definitely something to think about.

Jason Moser: Not just stocks, folks, always nice to know there are options. Dan Caplinger, thanks so much for taking the time to join the show today.

Dan Caplinger: Glad to be here as always, Jason, and have a good holiday.

Jason Moser: You too. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. Don't buy yourselves stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us, for Dan Caplinger, I'm Jason Moser. Thanks for listening.