Why Buy Now Pay Later Sucks
3 Apr, 2022
Why am I writing a blog about “buy now pay later” (BNPL) schemes?
I don’t like them. And I don’t use them.
I thought I’d get that out of the way nice and early in case you thought this was about to become an advert for them. No product names are mentioned in the following blog post because I don’t want anyone to be under the impression that I think they are a reasonable idea.
Many do use BNPL.
The schemes are prolific here in Aotearoa, and there is not a day that I’m not hearing/seeing from at least one of them as I go about my usual business. I was tempted to sign up and use a couple as I researched this blog post, but you know what, I knew that the second I showed a little too much interest by following a link and signing up, I’d be bombarded with advertising and pressure to buy more. So, instead, I have reached out to friends who use them (who say they ARE bombarded by marketing), and I learned a bit about their experiences.
As luck would have it, Seven Sharp (on 30th March) ran a very short piece about BNPL, and they covered the problems of people not associating them with debt and getting in over their heads. The Kiwi podcast When The Facts Change also created an interesting episode. It’s not hard to find extreme cases where people take on too many BNPL to cover daily expenses or just buy consumer items, but I think this overuse/misuse is well covered. I am by no means discounting the fact that there are ballooning living costs and hardships out there, and some people use BNPL as a lender of last resort. But it’s easy to look at the extreme end and think it does not relate to your use of BNPL. But it does.
You don’t need BNPL at all.
I’m interested in helping the casual users of BNPL realise that you don’t need any of these schemes in the first place. While there will be many who ‘safely’ use them, many more start with good intentions but find themselves on a slippery slope of having just too many payments coming out of their bank account to pay for things they bought weeks and months ago.
For those whose self-restraint is crumbling under pressure the marketing departments of every BNPL scheme are putting on you, pushing you to spend up large all over town/the internet, I want to quickly teach you that you don’t need BNPL to buy stuff.
There is nothing new under the sun.
There is nothing new under the sun, and BNPL schemes are just the latest iteration of debt dressed up in a more palatable form. They encourage us to get what we want whenever we want and enable us to overspend. And even worse is that it’s like they have hijacked all the best lines from any decent budgeting website when I read the following on BNPL sites:
“Take control of how you spend”.
“Have transparency across every aspect of your spending”.
“Empower your financial wellbeing”.
“Live your best financial life”.
Sheesh, somebody needs to remind them that they are just peddling debt! This is just bulldust!!!
When touting their product to prospective retailers, they say that businesses who use BNPL see an increase in sales and an increase in the value of the order. People spend more when they can defer payment. I don’t know about you, but by doing so, I don’t feel that as a customer, I wouldn’t be “living my best financial life” by spending more than I intended?
Nowhere on any glitzy BNPL website does it mention the big ugly word DEBT.
But let’s be honest here; that’s all it is.
Debt = money that you owe someone else
They are extending you credit to buy an item and take it home with you right now. Initially, you’ll pay 25% on the day and 25% a fortnight for the next three fortnights. Each scheme has a variation on similar terms. They pride themselves on saying that they will not credit check you, meaning that you could sign up to a handful of BNPL schemes, and each would never know. They make it far too easy to shop on impulse and overstretch yourself. And while you, the person reading this, might feel immune, how savvy are your teenage kids and young adults at assessing the risks of debt?
No time for buyer's remorse.
It used to be that you went shopping, found a fabulous pair of boots you wanted, put down a deposit, made weekly payments, and when you had paid in full, you took the boots home. Today, all that has happened is that they have sped up the process, cut out the paperwork, cut out the credit checks and got you committed to a purchase before common sense kicked in and made you back out.
If buyers remorse kicks in later that day, BNPL doesn’t give a toss; the sale has been made.
As quick as anything, you are now indebted. You’ve just signed up to forgo a part of the next six-plus weeks of your income to pay for something you may have already used up. You just gave a company control over your income.
If you are looking to become financially independent, you might want to avoid doing this!
Instead of making you feel in control of your money - which they want you to think you are doing - you should feel like you have just been had - because you have.
But “they are interest-free”, I hear you say.
So is cash. Last week I bought some paving stones for my garden; I paid cash, that too was interest-free. I’ve been reading deep into the backend of these websites, and why would they charge you interest on your $100 purchase when they can charge you late fees for missing a payment instead? That is where their profits lay. “Interest-free” is just a marketing tagline in this situation.
But, “you can spread out your payments”, I hear you say.
Last week, I bought some clothes for my daughter. In the two months leading up to this, I put $30 a week into a bank account. I ‘spread out my savings’, meaning I could pay with cash. BNPL is just budgeting (poorly done) and in reverse.
Who pays for this service?
I found it hard to find information about BNPL from the retailer's point of view, so I called up my friend Anna owns the clothing store Lily & Esther in Clyde. She feels she has to offer a service, but it cuts into her profits to use it. She can cover her BNPL costs on full-priced items, but on discounted items, she can’t. When a customer uses BNPL, the transaction is processed, and about two days later, the money from the sale is passed onto Anna less the BNPL fee, which is typically somewhere between 4%-6% of the purchase price. The other day she sold a dress for $649; two days later, $616 arrived in her bank account. Their fee was $33 or 5.2%. The designers she sells have fixed pricing on their clothing, so she can’t adjust pricing across the board to cover the people who use BNPL.
But you can be pretty sure that if the cost of doing business rises, then IF they can, retailers will pass on those costs. So, who pays for this service? The retailers have to give up a percentage of every single sale. And eventually, YOU will pay, via increased costs of the goods.
BNPL links to your credit or debit card.
The fortnightly payments come from either your credit or debit card. If you then fail to pay your credit card in full, you are now being charged interest on your BNPL transactions. If you miss a debit card payment because of a lack of funds in your account, you will now get slapped with a BNPL late/missed payment charge. What a mess!
Easy Peasy
I was looking into whether using BNPL would lessen your chances of borrowing money from a bank. This is where I really felt the irresponsible and relaxed approach to other people's finances by BNPL providers. In a Q+A section of one of the websites where they asked the question about whether banks care about your BNPL debts when you want a mortgage, their answer was to “close your BNPL account, get your lending in place from your bank, then sign up to BNPL again. EASY PEASY”. That is so irresponsible it annoys me! And it tells me that, yes, banks do care that you are making payments all over town.
BNPL does not teach financial literacy.
People don’t “feel” the total cost of the purchase when they use BNPL. Perhaps someone buys something for $60. But they only see the individual payments of $20 a fortnight. In their mind, it feels like they are only spending $20. The trouble with these schemes is that with a lack of financial education in the home, people are being preyed upon with slick advertising and incorrectly educated that using BNPL is a “normal” way to handle your money by breaking it up into chunks.
Engaging with BNPL early in life sets up some terrible financial habits, namely a reliance on debt and paying things off. You then take these habits with you into later life. If you jump onto any of these providers' websites, they shout at you to have whatever you want RIGHT NOW, and you can sort out the money stuff later.
But, as the friends I have spoken with this week have pointed out, things can escalate very quickly. Your $600 limit on sign up is extended rapidly simply by you meeting the payments on time. For one friend, the 25% downpayment when you buy the product was waived by their third purchase. By the fourth purchase, their limit was extended to $1,700. The barrage of marketing emails is endless too. That’s mighty tempting if you are only 20 years old. And it’s mighty surprising to many that each “small” repayment collectively makes one BIG repayment.
With no credit checks required, you can quickly sign up for several different schemes and just keep on shopping. Which I’m sure feels fun during the moment, but when the payments start to be drawn from your bank account, that’s when the pain begins to set in.
You are pre-committing future income.
If you were unable to budget your income in the first place and set up systems to set aside money BEFORE you bought something, well, you don’t have a hope of budgeting your income to make sure there is enough in your account for the BNPL scheme to pull your money out bit by bit over the next few months. It is easy to miss a payment and get charged extra fees.
My part-time office job, where I handle customer payments, gives me some insight into how people are falling behind financially. I’ll see people chop up a $200 invoice into $25 weekly payments with no prior arrangement - treating us like a BNPL service! This tells me they don’t have enough income to go around because they have pre-committed future income to several different companies.
SO, what to do? Here are some solutions.
Jonny and I don’t do debt. Not even a credit card, using just a debit card instead.
Put simply: “If we don’t have the money, we don’t get to buy the thing.”
This philosophy is a bit old fashioned, but what do you know? It works!
But there are things that we want and need. Some we can plan for, some are a surprise, so how do we buy them without debt?
PocketSmith dashboard showing different bank accounts, each serving a particular purpose.
I currently have 12 bank accounts (and I pay $0 fees) and then I manage them using PocketSmith. Each serves a particular purpose. One is just for everyday income/expenses, one holds our emergency fund of 4-6 months of expenses, and two are for insurance and taxes. But the rest are named for particular purposes and are all things that we are saving up for. I add and remove accounts as required. Once a week, I automatically transfer the following amounts of putea into each account:
Pets - $10
Car Repairs - $10
Fun Stuff - $20
Kids Expenses - $30
Health and Wellbeing - $40
Electricity - $45
Holidays - $100
Investments - $200
These are called Sinking Funds, and I’ve blogged about them before.
Another hack for you is if you feel that by preloading bank accounts, you might not be able to keep your sticky mitts off your moolah, then you can preload elsewhere. For example, a handful of clients at my work have a weekly $5-$25 direct debit payment that I credit their customer account with, so they can build up their account for the day they need to use it. I think these customers are genius, and I can see the sense of accomplishment when they know the bill is paid in full on the day!
Save now, buy later!
This is why we NEVER, NEVER, EVER NEED TO USE BNPL.
I’ve just flipped the script; we save up before we shop, instead of paying it off after shopping. If you explained this to your grandparent, they would say, “duh, it’s obvious!”
We set money aside well before we ever need to use it, and we plan our purchases. Then, if we want to book a holiday, we pay using the money in the “Holidays” bank account. I can only think of one thing worse than putting a holiday on a credit card that you need to work out how to pay off long after the suntan has faded. And that is putting a holiday on a BNPL scheme and working out how to pay it off long after the jetlag has passed.
If we teach ourselves and our tamariki that the default way of shopping is to pay stuff off, we are setting ourselves and others up for a life of mounting debt obligations and handing over a large chunk of every future paycheque. And the problems of this poor money management just compound over time.
Reset your money and your mindset
I’ll often say to people during my Phone A Friend calls that our finances often need a complete reset. As we grow, we all cobble together a banking system, and we just keep tacking more parts onto it. I know I did.
We start with a piggy bank, transition to a single bank account, get an overdraft, and then a credit card. Or two. A store card or two sure does come in handy as well. We take on a car loan, perhaps a student loan. Chuck in a heap of BNPL and the putea you borrowed from your parents. Then maybe we might get a partner and combine their haphazard collection of banking products with your own.
Each new addition appears logical when you signed up for it, but when you stand back and take a look at it, it’s a right freaking MESS!
BNPL is just the latest add on.
And I’m pretty sure the marketing departments of lenders are working furiously to come up with the next scheme to make you part with your money before you have even earned it.
Just keep it simple, for goodness sake.
All that to say, apply the K.I.S.S. principle to your finances. Just keep it simple.
If you don’t have the cash to pay for an item, you can’t afford it.
I can’t stress this enough: If you don’t have the cash to pay for an item, you can’t afford it!
Save up until you do.
People who use cash to shop spend less because there is something to be said for watching your bank account drop right at the time of purchase. You FEEL the transaction. BNPL simply tries to put distance between you and your purchase, so you feel less pain and are more likely to keep shopping.
Also, if you have several BNPL payments coming out of your account, it reduces your disposable income. SO, stop using them and just save up and pay cash for the things you want.
Momentary discomfort for long term happiness
Setting up sinking funds can be a little hard going in the first couple of weeks because you are setting money aside and deliberately NOT shopping. But once they get cranking, they become the gift that keeps on giving as they magically replenish themselves. For example, just looking at my car repairs account, it currently has $470 and growing. The next service, WOF and rego, are taken care of already! That gives me immense peace of mind.
I will let you in on a little secret too. This year Christmas will be on the 25th of December. If you find you are always overextending yourself and maxing out the BNPL or credit card. Open up a bank account TODAY, call it “Santa’s little helper”, and start putting money aside. How much money will you need? Go back and look at how much you spent last year and divide that by the number of weeks you have until you begin to shop for gifts. Then start a transfer of that amount of money each week into your new account. It’s automated, it just happens, and you don’t even have to think about it.
Keep off the slippery slope.
While I appreciate that some people use BNPL with no issues, many don’t. BNPL has little legislation around its use (unlike credit cards and banks), and all I’m saying is that it is a slippery slope. The process of signing up to any BNPL is exceptionally slick, and although you might consent to a credit check being undertaken, from what I understand, credit checks are rare. So, whereas a bank might say “no” to your lending and perhaps help you address your overspending, it’s not in the interests of these schemes to do so. Because they are so straightforward to use, the big issue is people not understanding that they are getting into debt, and by the time they have twigged to what they’ve done, it might be too late.
So, my advice is that you don’t need any form of buy now pay later; it’s just yet another financial product I have no use for, so be like me and just stay away.
