Should businesses approach the buy now, pay later with caution?

The phenomenon of buy now, pay later technology has taken businesses and consumers by storm, and the popularity of this method of paying for goods and services is growing. But are there bigger and potentially more serious ramifications that could accompany the wider use of the buy now, pay later trend? In this segment of Backstage Pass, registered on December 17, 2021, Fool contributors Jason Hall, Toby Bordelon and Rachel Warren discuss.

Jason Hall: I think what really worries me, just to get to the bottom of this, is saving. What is happening now in broader terms, in the state of the economy? The economy is hot. There are 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 many people have ever had in their entire lives. Especially the Youngs.

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

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

Rachel Warren: Sometimes it’s instead of.

Room: In other words, are people just racking up this type of debt or are they always racking up regular credit card debt for garbage that they don’t need anyway?

That’s the other thing I’m not sure about. The other thing also is that I think a lot of people don’t realize that you can sign up for these installment loans is buy now, pay stuff later and pay another 30% interest. It is not guaranteed that they will give you a low rate. It comes back and it’s like when you buy a car. Your best consumer reports tell you not to buy a car on a pay-as-you-go basis.

This is what the seller will do. They’re going to sell you for payment, then they’re going to sell you a more expensive car and they’re going to stick with an extra year on the term, so people will decide what payment they can afford and then they’re ‘I’ll find out. a term that makes sense for the thing they bought. This is another big problem with this broad thinking. But I don’t think it’s like buying now, paying later.

Because I think people have been doing this for as long as there’s someone willing to give them money to buy things they don’t need, that’s just the reality. But that tells us, to me, where we are in the economy and where we are in the credit cycle.

I think the reality of this as a tool, of this as a profit center for a lot of businesses, we’re going to find out business by business, on their ability to manage and make good loans based on the risk decisions. Just as we have done with all other banks or financial institutions in the history of this sector as a public investment.

We’ll find out when we get into the next recession, the next period of economic weakness whenever that happens and people suddenly can’t afford to pay those bills and then defaults will increase. 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 business that I’m going to throw out there, is To block that I just want to keep calling Square. It really makes me worry about them was it After payment they bought? Did they pay $ 28 billion, $ 29 billion?

If you are going to pay that much to buy from one of these specific niche lenders, how well are you going to keep your credit quality under control? When you expect a certain level of return, which part of the tail will the dog wag?

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

I think a lot more that they are going to make better credit risk decisions because they haven’t made a huge investment and they expect big returns. That’s what I think.

Toby Bordelon: I think one of the reasons we see this, isn’t it. I do not know. What am I saying here?

Room: Well, traders profit more from it, like the Visa, they get better data, and there’s all that too, right?

Bordeaux: Yeah. This is part of my concern. I’m not going to say that it’s not going to be of use to people, is it, and on one level, everything you talked about Jason with credit cards, that they spend more on it, and less for credit cards, what does it really do is change? We don’t know it would be nice to have information on that. My concern comes with, I think from the corporate side, could you see all of this? I know you saw it.

If you go to any website, you can see it. To assert, pay by Affirm, 0%, pay no interest. You see it and that’s how they do it. They offer little or no interest. They claim they can do it, in part because they charge traders a fee to get the sale.

Room: Let me show you what’s going on AmazonIt’s when you actually dig into the details of their Affirm.

Warren: Yes, read the terms and conditions. [laughs]

Room: Yeah. Now they say it in plain English, but you have to really dig into it to get there.

Warren: Let’s go.

Bordeaux: 10 to 30%, yes.

Room: There are offers, on certain things and it depends on the merchant, depends on the product and the manufacturer as there are offers. But usually, and that’s what happens, people buy TV, it’s 0% and then they assume everything else is the same. But don’t read the label.

Bordeaux: However, I wonder about these large purchases that they attribute with 0%. What if you go through a tough time or an economic downturn driven by consumer spending, consumers can’t afford those prices. Does it explode dramatically for some of these companies that can end up with these loans that, oh, they’re in default and they haven’t charged enough interest to cover that risk.

They did not assess them properly. I do not know. I think it reminds me in a way of a very different business model. But do you remember guys Loan Club? The loan between individuals which was important a few years ago?

Room: Yeah.

Bordeaux: My concern about this was letting me see what happens when you go through a full credit cycle including a downturn, but I want to see how your model handles this, I want to see how the systems work with that. I’m a bit of the same with buy now pay later.

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

But it’s hot right now and we’ve had a bunch of deals with these companies, Square buying Afterpay, Affirm logging in, not vested but making deals with Amazon, with Shopify. People want to be here. We will see how it evolves.

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