By Bill SchmickiBerkshires columnist
When Doesn’t a Loan Look Like a Loan? This is the idea behind one of the most exciting new concepts launched by the FinTech community. It’s an idea that is catching on here in the United States, but it could challenge traditional credit cards over time.
Do you really go into debt when you buy something and pay it back in a certain number of installments? Technically, yes, but it isn’t, especially if you’re paying 0% interest on the installments. That’s obviously what Square, a leading financial services and digital payments companies, thinks when it announced this week that it has acquired Afterpay, an Australian Buy Now Pay Later (BNPL) company as part of of a $ 32 billion deal.
So why so many stories about BNPL?
E-commerce companies are betting that young Americans, who do most of their shopping online, aren’t as excited as their parents and grandparents about the benefits of credit cards. They may be reluctant or unable to open credit card accounts. Instead, many millennials are following the lead of Europeans, who have traditionally avoided credit cards and the debt that comes with them.
In Europe, where BNPL accounted for 7.4% of e-commerce payment methods last year, consumers are more likely to buy an item online, even though they may not have the full amount of l purchase available on their bank account. As long as they stick to the terms of the installment agreement, everything turns out rosy.
Here in the United States, the idea is gaining ground. This holiday season, for example, I bought a new Apple iPad for a loved one through PayPal Holding Inc. The company offered a BNPL program called âPay In 4â (installments) at no cost.
After reading the fine print I realized that like many of these offers, if I missed a payment I would be hit with penalties and fees and could damage my credit score. After studying the problem, I found that almost 40 percent of American consumers who used BNPL missed more than one payment, and 72 percent of them had their credit rating down.
I am one of those people who pay off their credit card debt in full every month. I admit that I was so afraid of forgetting a payment and incurring charges that I ended up paying the charges in two instead of four installments.
However, more and more retail websites are now offering these services. The main suppliers are Affirm Holdings, Inc., which has just joined Apple under a BNPL deal in Canada, PayPal Holdings, Inc, Swedish company Klarna and Afterpay / Twitter. It is estimated that in 2020 BNPL companies facilitated between $ 20 billion and $ 25 billion in transactions in the United States, but that represents only 1.6% of digital payments in the United States. The bet is that BNPL will grow thanks to online shopping and the culture shock around credit cards.
Let’s face it, America’s credit card debt has a bad reputation. Almost half of all Americans have credit card debt. The average household credit card debt is $ 5,315. And while the percentage of guns (those with a debt balance on their cards) declined slightly during the pandemic, it still accounts for 40.1% of all credit card holders.
But that hasn’t stopped us from accumulating more and more credit card debt. Credit card balances rose $ 17 billion in the second quarter of 2021 (to $ 787 billion), according to the New York Federal Reserve’s Household Debt and Credit Report. Although this figure is still lower than the $ 927 billion raised before the start of the pandemic, it continues to grow.
Optimists argue that millennial young Americans don’t want to grapple with this type of debt and fall into the trap of paying only monthly fees forever. Yes, BNPL is still a debt, but only deferred and not forever, so there is little temptation to roll it over. Critics claim that more than 40 percent of BNPL users cannot access traditional credit, either because their credit limit is at its maximum, or because they have a poor or no credit history.