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Should Companies Approach the Buy Now, Pay Later Craze With Caution?

By Rachel Warren, Jason Hall, and Toby Bordelon – Jan 13, 2022 at 10:21AM

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Some consumers think that buy now, pay later options could eventually replace their credit cards.

The phenomenon of buy now, pay later technology has taken companies and consumers by storm, and the popularity of this method of paying for goods and services is only growing. But, are there larger and potentially graver ramifications that could accompany the broader usage of the buy now, pay later trend? In this segment of Backstage Pass, recorded on Dec. 17, 2021, Fool contributors Jason Hall, Toby Bordelon, and Rachel Warren discuss.

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Jason Hall: I think what I'm really worried about just to get to the core of it is, let's backup. What's happening right now in broader terms, in the state of the economy? The economy's hot. There's tons of pent-up demand. The average person's balance sheet is in better shape. People have more money saved and better job prospects than a lot of people have ever had their entire lives. Particularly young people.

But in general, if you want a job, you can get a job. If you want to income, you can get income. All of those things so yeah, we should see more credit being deployed because it's an economic boom happening right now.

All of that makes sense. What I don't know, frankly, I haven't looked at the metrics to see, is how much is buy now, pay later being used instead of traditional credit cards? Or is it also--

Rachel Warren: Sometimes, it's instead of.

Hall: In other words, are people just accruing this type of debt or they're also still accruing the regular credit card debt for junk they don't need anyway?

That's the other thing that I'm not sure. The other thing too is I think a lot of people don't realize, you can sign up for these installment loans is buy now, pay later stuff and still pay like 30% interest. It's not guaranteed that they're going to give you a low rate. It gets back and it's just like when you buy a car. Your top consumer reports tells you, don't buy a car based on the payment.

That's what the salesperson is going to do. They're going to sell you into a payment and then they're going to sell you a more expensive car and they're going to stick an extra year on the term, so people will decide the payment they can afford and then they'll figure out a term that makes sense for the thing that they bought. That's another big issue with this thinking broadly. But I don't think this is like a buy now, pay later thing.

Because I think people have been doing this as long as there has been somebody willing to give them money to buy stuff they don't need, that's just the reality. But it does tell us, to me where we are like in the economic and where we are in the credit cycle.

I think the reality about this as a tool, about this as a profit center for a lot of companies, we're going to find out on a company-by-company basis, on their ability to manage and make good risk-based lending decisions. Just like we have with every other bank or financial institution in the history of that sector as a public investment.

We will find that out when we go into the next recession, the next weak economic period whenever that happens and then people all of a sudden can't afford to pay those bills and then defaults go up. That's when we're really going to get the answer. That's when we're really going to find out.

My biggest fear, a company I'm going to throw out there, is Block which I want to just keep calling Square. It really makes me worry about their was it Afterpay that they bought? Did they pay like $28 billion, $29 billion for?

If you're going to pay that much for basically buying one of these specific niche lenders, how good are you going to be a keeping credit quality in check? When you're expecting a certain level of return, how much of the tail is going to be wagging the dog?

That is my biggest worry about Block, about Square right now. I think about other companies like PayPal we talked about earlier today on another show, made a much smaller investment in the same space.

I feel much more likely that they're going to have better credit risk decisions there because they didn't make a huge investment and they are expecting big returns. That's what I think.

Toby Bordelon: I think one reason we're seeing this, right. I don't know. What am I saying here?

Hall: Well, the merchants get more out of it, like the Visa, they get better data, and there's like all of that stuff too, right?

Bordelon: Yeah. That's part of my concern. I not going to say it's not going to be useful to people, right, and on one level, everything you talked about Jason with the credit cards, that they're spending more on this, and less on credit cards, what does it really doing is this a shift? We don't know that will be nice to have some information on that. My concern comes with, I think on the company side, could you see all these? I know you've seen it.

If you go to any website, you can see this. Affirm, pay by Affirm, 0%, don't pay any interest. You see that and so that's how they're doing this. They're offering low or no interest. They claim they can do that, in part because they're charging the merchants a fee to get the sale.

Hall: Let me show you happens on Amazon's website when you actually dig into the details on their Affirm.

Warren: Yeah, read terms and conditions. [laughs]

Hall: Yeah. Now they do put it in plain English but you have to really dig in to get to it.

Warren: There we go.

Bordelon: 10% to 30%, yeah.

Hall: There are deals, on certain things and that depends on the merchant, depends on the product and the manufacturer like there's deals. But in general, and that's what happens, people will buy the TV, that's 0% and then they just assume everything else is the same way. But don't read the label.

Bordelon: I'm wondering though about those big purchase they assign with 0%. What happens when you go through a rough patch or an economic downturn that's driven by consumer spending, consumers can't pay these prices. Does this blowup in a spectacular way for some of these businesses that may find themselves with these loans that, oh, they're going in the default and they did not charge enough interest to cover that risk.

They didn't price them properly. I don't know. I think it reminds me in a way, very different business model. But do you guys remember LendingClub? The peer-to-peer lending thing that was big a couple years ago?

Hall: Yeah.

Bordelon: My concern with that was let me see what happens when you go through a full credit cycle, including a downturn, but I want to see how your model deals with that, I want to see how the systems works with that. I'm a little of the same way with buy now pay later.

I want to see what this industry looks like in a downturn before I get too terribly excited about it.

But it's hot right now and we've had a bunch of deals with these companies, Square buying Afterpay, Affirm hooking up, not being acquired but cutting deals with Amazon, with Shopify. People want to be here. We'll see how it develops. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Hall owns Block, Inc., Shopify, and Visa. Rachel Warren owns Amazon and Shopify. Toby Bordelon owns Amazon, Block, Inc., PayPal Holdings, Shopify, and Visa. The Motley Fool owns and recommends Affirm Holdings, Inc., Afterpay Limited, Amazon, Block, Inc., PayPal Holdings, Shopify, and Visa. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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