Buy Now, We’ll All Pay Later

The whole Buy Now, Pay Later (BNPL) industry has just exploded.  But guess what.  Even if you don’t use it, you are paying for it.

Let’s go to the video tape.  TAFKAS will use AfterPay for illustration – only because it is the most dominant player in the market.  At the moment at least.

The business model of these BNPL is pretty simple and although the proportions vary by provider, they make their revenue from 2 lines:

  • Merchant Fees – they charge the merchant, the seller of the good or service, a fee for funding the transaction.  This fee can be either fixed or variable (a percentage of the transaction) or both.
  • Consumer Fees – they charge the consumer, the buyer of the good or service, a fee which can include establishment, administration or missed/late payments; or a combination.

These BNPL firms have brilliantly identified a regulatory arbitrage in the market by developing a business model that might otherwise be regulated under Australian credit laws, but currently is not.

According to ASIC:

An arrangement would not be regulated under the National Credit Act if the credit is for a term of 62 days or less, fees and charges do not exceed 5% of the amount of credit, and interest charges do not exceed an amount equal to 24% per annum. None of the buy now pay later providers in our review offer these arrangements.

It’s pretty neat to have a 62 day limit to determine whether you have to be regulated.  Works very nice if you get repayments over 4 fortnights or 56 days.

But here is the rub.  Unlike with credit cards and personal loans, BNPL’s don’t have to spend the huge regulatory and compliance costs because they have not found a regulatory arbitrage.

Not picking specifically on AfterPay, according to their recent half year results, they charge an average merchant fee of 3.9% (see page 14 of this).  There is no way in the world that credit card fees are that high.  Plus, for many merchants, they add a credit card fee on top of their sale price.

So what this means is that for merchants to maintain the same margin pre- and post- After Pay, they need to increase their prices across the board to cover the cost of feeding the BNPL machine.  That means we all pay, even if we don’t use BNPL.

Nice business if you can get it.  That’s why it is so smart.

So next time you have a choice to pay now or buy now pay later, be sure to ask for your pay now discount; like consumers used to do when we were allowed to have cash.

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10 Responses to Buy Now, We’ll All Pay Later

  1. Ringos Raiders says:

    Anyone know what the effective interest rate that AfterPay is earning (not that it is a loan – Obviously)?

  2. Bruce of Newcastle says:

    Amazing that Hire-Purchase has been reinvented all over again.
    It was big in the seventies as I recall.
    Humans never learn.

  3. bemused says:

    Whenever I need to buy any big ticket item, I always bargain. That is, I never pay the sticker price, that’s for mugs.

  4. Ben says:

    “pay now discount”

    I like it.

  5. Cynic of Ayr says:

    Ah the Millennials!
    Being robbed, but believing they are getting something for free.

  6. stackja says:

    Bruce of Newcastle
    #2958059, posted on March 14, 2019 at 2:38 pm

    Lay-bye 1940s.

  7. stackja says:

    Lay-by 1940s

  8. Dr Fred Lenin says:

    I remember women buying new clothes on lay by , stores used to have lay by departments , you didnt get to wear the clothes untill after the final payment ,then the started giving things on tick as they used to call credit. You actually got to wear the clothes before you paid for them . Peopke would go into stores wearing the clothes they had not paid for , explaining why they couldnt pay their installments . Bit ass about innit ?

  9. Merry Poster says:

    Ah the Millennials!
    Being robbed, but believing they are getting something for free.

    Except Millenials are not the major users of this nonsense.

  10. DEBORAH says:

    The reality is that merchants find that transactions conducted with Afterpay are larger, on average, than other transactions. Therefore, the gross profit dollars generated by that average transaction are materially higher than any other transaction enjoyed by that business. Further, Afterpay restored lay-by, not only to the consumer, but to the merchant, at a materially lower cost to the merchant than was previously available (valuable floor place is not devoted to storage; systems and staff do not need to maintain the system; no working capital drag; and lay-be is restored, which the consumer clearly wants, thereby aiding sales). As a final comment, it is worth noting that Afterpay has attracted one million consumers in the US in 7 months. That’s not about regulation, that a good product. Why do we beat up a successful Australian fintech?

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