#bnpl

On June 20, I'm keynoting the LOCUS AWARDS in OAKLAND.

Let's take a sec here and notice something genuinely great happening in the US government: the Consumer Finance Protection Bureau's stunning, unbroken streak of major, muscular victories over the forces of corporate corruption, with the backing of the Supreme Court (yes, that Supreme Court), and which is only speeding up!

A little background. The CFPB was created in 2010. It was Elizabeth Warren's brainchild, an institution that was supposed to regulate finance from the perspective of the American public, not the American finance sector. Rather than fighting to "stabilize" the financial sector (the mission that led to Obama taking his advisor Timothy Geithner's advice to permit the foreclosure crisis to continue in order to "foam the runways" for the banks), the Bureau would fight to defend us from bankers.

The CFPB got off to a rocky start, with challenges to the unique system of long-term leadership appointments meant to depoliticize the office, as well as the sudden resignation of its inaugural boss, who broke his promise to see his term through in order to launch an unsuccessful bid for political office.

But after the 2020 election, the Bureau came into its own, when Biden poached Rohit Chopra from the FTC and put him in charge. Chopra went on a tear, taking on landlords who violated the covid eviction moratorium:

https://pluralistic.net/2021/04/20/euthanize-rentier-enablers/#cfpb

Then banning payday lenders' scummiest tactics:

https://pluralistic.net/2022/01/29/planned-obsolescence/#academic-fraud

Then striking at one of fintech's most predatory grifts, the "earned wage access" hustle:

https://pluralistic.net/2023/05/01/usury/#tech-exceptionalism

Then closing the loophole that let credit reporting bureaus (like Equifax, who doxed every single American in a spectacular 2019 breach) avoid regulation by creating data brokerage divisions and claiming they weren't part of the regulated activity of credit reporting:

https://pluralistic.net/2023/08/16/the-second-best-time-is-now/#the-point-of-a-system-is-what-it-does

Chopra went on to promise to ban data-brokers altogether:

https://pluralistic.net/2024/04/13/goulash/#material-misstatement

Then he banned comparison shopping sites where you go to find the best bank accounts and credit cards from accepting bribes and putting more expensive options at the top of the list. Instead, he's requiring banks to send the CFPB regular, accurate lists of all their charges, and standing up a federal operated comparison shopping site that gives only accurate and honest rankings. Finally, he's made an interoperability rule requiring banks to let you transfer to another institution with one click, just like you change phone carriers. That means you can search an honest site to find the best deal on your banking, and then, with a single click, transfer your accounts, your account history, your payees, and all your other banking data to that new bank:

https://pluralistic.net/2023/10/21/let-my-dollars-go/#personal-financial-data-rights

Somewhere in there, big business got scared. They cooked up a legal theory declaring the CFPB's funding mechanism to be unconstitutional and got the case fast-tracked to the Supreme Court, in a bid to put Chopra and the CFPB permanently out of business. Instead, the Supremes – these Supremes! – upheld the CFPB's funding mechanism in a 7-2 ruling:

https://www.scotusblog.com/2024/05/supreme-court-lets-cfpb-funding-stand/

No, it's not ok to use. But the reasons are complicated, which is why we wrote this about Pay In 4 and similar buy-now-pay-later apps:

Buy Now Pay Later Apps: That Old Predatory Lending by a Crappy New Name 

PayPal brings its ‘buy now, pay later’ offer to Australia

PayPal Holdings will launch its “buy now, pay later” (BNPL) option in Australia this June, the US payments giant said on Wednesday, muscling in further on Afterpay Ltd and others for share in the booming industry. So far PayPal’s new BNPL option has been rolled out in the United States and Britain where by the end of the December quarter it said it had handled more than $750 million of…

Buy Now Pay Later Apps: That Old Predatory Lending by a Crappy New Name

When money is tight (so... now) it can be really tempting to turn to buy-now-pay-later apps like Klarna and Affirm to buy what you need or even just want. But we looked into BNPL, and the results are not pretty...

Buy Now Pay Later Apps: That Old Predatory Lending by a Crappy New Name

Buy Now Pay Later Apps: That Old Predatory Lending by a Crappy New Name

Years ago Kitty and I did an interview with Glen James from My Millennial Money, a podcast out of Australia that answers the question “Will I ever get tired of listening to men with Australian accents talk about everything from true crime to investing?” (And that answer, to be clear, is a resounding haaayl nah.) You should listen to it! It’s great!

At the end of our conversation, Glen hit us with a curveball. “What do you think of Afterpay?”

“I don’t know her,” said we. And Glen, who is clearly gifted with The Sight, answered cryptically, “Ah. So it hasn’t made it to the States yet. Good luck, mates.” And then we asked him to say “1999” and giggled incessantly.

Flash forward to the present. Not only have we now heard of buy now pay later apps like Afterpay… we fucking hate them. Which means it’s time for another installment of Piggy Rails Against a Financial Outrage for 2,000 Words Or So.

Keep reading.

More like buy now pain later, amirite?

Here are some of the ways BNPL isn’t just kinda shifty and gross, but verifiably predatory, empirically evil, and absolutely nothing new. (Coincidentally, Verifiably Predatory, Empirically Evil, and Absolutely Nothing New was the alternate title for our podcast.)

BNPL sneaks around regulatory agencies

Most forms of consumer lending in the United States are regulated by state and federal laws of one form or another. But the extent to which BNPL is regulated is kind of up in the air.

For example, the Truth In Lending Act (TILA) handles almost all traditional loans. Its purpose is to protect you against “inaccurate and unfair credit billing and credit card practices.”

Yet TILA only kicks in for loans of five installments or more. Remember how I said almost all buy now pay later loans are broken into four installments? Yeah. That’s intentional.

BNPL mostly operates just below the threshold of regulatory scrutiny. That way BNPL customers are left with little legal recourse to fight back against their shittier business practices. Which brings me to…

BNPL comes with exorbitant fees

On its surface, buy now pay later looks like a generous interest-free loan. But make one misstep and they’ll slap you with ALL THE FEES.

Late fees! Return payment fees! Missed payment fees! Account reactivation fees! Rescheduling fees! Prepayment penalty fees—is there no justice?!?! Some late fees are at least $20, and others charge an interest rate of 30% on late payments. Others offer long-term payment plans at 25% APR! Which really kind of negates the frugal benefits of buying now and paying later.

And lest you think it’ll be easy to avoid fees, Lending Tree found that 42% of all BNPL customers make at least one late payment… and are penalized accordingly.

But that’s not even where most of the buy now pay later apps get their profits.

BNPL is better for merchants than consumers

Buy now pay later apps make most of their money from charging merchants to include them on their checkout pages—a cost of 2-8% of customers’ purchases (for context, credit card companies charge a merchant fee of 1.3-3.5%). And retailers are happy to share a cut with BNPL apps! Because customers buy more when they use BNPL.

In addition, the retailer’s problem of “cart abandonment” (when you fill an online shopping cart then get spooked by the total price and just decide to buy nothing instead) is reduced with BNPL. It’s a devil’s bargain between vendors and BNPL apps to get people to buy more, spend more, and stop abandoning carts. Which leads me to…

BNPL makes you more likely to overspend and overdraft

Studies show people are easily seduced by smaller dollar amounts. Four payments of $25 each just looks cheaper than $100, y’know?

When you make multiple purchases with BNPL, it can be hard to keep all those payments straight. That’s why BNPL users are more likely to overspend, paying money they don’t have in their bank accounts, which leads to expensive bank overdraft fees. In fact, 70% of BNPL customers admitted they have spent more than they otherwise would if they paid for everything upfront.

Which sucks, but at least all these lil’ BNPL loans are helping to bulk up your credit score, right? … right?

BNPL is more likely to hurt your credit than help it

Far from helping you build credit, buy now pay later is actually more likely to hurt your credit score.

Recall our lesson on the recipe for a good credit score. Three of the ingredients are 1) a low utilization rate (don’t max out your credit card limit), 2) credit accounts that have aged like a fine wine (the older the better), and 3) not opening too many accounts too quickly.

Let’s say you make a $100 purchase with BNPL and pay it off over four months. To the credit reporting bureaus, that’s basically the equivalent of opening a credit card with a $100 limit, maxing it out immediately, and then canceling it four months later. And if you frequently use BNPL, the bean counters behind your credit score interpret that as you doing this credit-risky thing over and over again!

And you best believe the credit reporting bureaus know the instant you miss a payment.