Enjoyed the article, but the author was correctly questioned in the substack comments how is this any different than a credit card for the borrower and what justifies the "interest-free" myth here, since the BNPL payoff period largely overlaps with the CC grace period. To which the author responds:
> Credit card float only lasts if you pay the full statement balance by the due date
but that is identical to BNPL, it's only interest free if you pay it off, just like a credit card past grace period. So why repeat the "interest free" marketing slogan? yes, initially it is, and so is the CC grace period.
> consumers have to only forecast the next six weeks of their life
yeah, good luck managing timing on the payments if you have 12+ of these, and it's not uncommon to have that many! Especially if, as author mentioned, you are living paycheck-to-paycheck.
I guess a marginal benefit for consumer is soft-forcing them to pay it off instead of revolving. Another one, correctly, was less hit to the credit score unless and until the bureaus get their hands on all BNPL data at some point in the future. But there is really no magic here for the consumer.
Assuming one has access to a credit card and is financially literate, I agree that using BNPL is a hard sell (never having used it myself). But there is a large population--the unbanked--that lacks access to credit cards. For that population, the choice is not between credit card and BNPL, but BNPL and cash.
I found the article's description of how BNPL structurally differs from credit cards interesting, as it is a reasonable explanation for how BNPL can serve the unbanked and still have functioning credit risk models:
> Even with adverse selection for BNPL, the underwriting is for each transaction, not for all monthly spending like that in credit cards; so if a consumer misses a payment, the BNPL provider can stop lending immediately, as opposed to the credit card company which has to underwrite the person’s full ability and willingness to repay their debts. This tech-enabled granularity allows for legibility and hence greater precision and predictability.
> But there is a large population--the unbanked--that lacks access to credit cards. For that population, the choice is not between credit card and BNPL, but BNPL and cash.
Which is an indication that the status quo will not last.
The median person who cannot get a bank account and a credit card, is in that state due to a history of either fraud or nonpayment.
Sooner or later, that preponderance of risk will catch up to BNPL and it will either become less accessible, like credit cards, or it will become more like services that already service that population segment, like check cashing locations and payday loans.
Them having better technology and granularity like you say won't save them. At best it can delay the inevitable.
Yes, that's a good point. However, how much of this finer-grain lending flexibility translates into more favorable underwriting (to help cover the unbanked) is not clear. The author did not mention any data to that effect.
You can pay the BNPL with a credit card to take advantage of both interest-free periods and get credit card points. There is really no reason not to use BNPL, even if you can pay cash.
Yes, there is. You take on a risk of forgetting to pay or that there is missing cash on your account so that the payment does not get done. Now you all of a sudden have to pay interest. And for what benefit, just to lend the cash for free for a month? What would you do with that cash for one month which is so profitable and risk free to compensate for the quite high risk of missing one of those BNPL invoices?
> What would you do with that cash for one month which is so profitable and risk free to compensate for the quite high risk of missing one of those BNPL invoices?
Not arguing for this credit scheme but in my personal case I use my credit card for everything and pay it off in full on the due date. The money sits in my savings account making a minuscule, but not zero, amount of interest while the card gives "cash back on purchases". Making a completely wild guess this nets me around $50 a month in "free" money.
Don't get me wrong, this isn't some plan to "hack the system" just my debit card expired and I never got around to getting a replacement so the credit card is all I have. But, free money is free money...
Yeah, as long as you pay reliably (ideally automatically) so you never get hit with any fees, it's fine.
But if everyone did that, these companies would go out of business. So they're clearly counting on a significant percentage of users failing to do that, and sticking themselves with the fees in the fine print. And those tend to be the folks who can less afford it and are less equipped to reliably handle such things, making the enterprise feel predatory.
Would they go out of business? They make a % of every transaction too.
What % of a credit card companies income is transaction fees vs account interest?
I would argue that a credit card company could probably operate on transaction fees alone. Sure they might need to downsize, but I think the transaction fee would be enough to pay for the minimum infrastructure to run such a company providing the service they provide.
> ...while the card gives "cash back on purchases".
Sure, but cash back is a kind of marketing trick which makes the card user more willing to spend and use their card. It's this little extra which pushes you over to buy something because, hey, I get my cash back.
There is no free lunch. Someone has to pay the cash back and we like to think it is the merchant, but in the end it is the consumer who pays for all these cash backs and card fees.
> Someone has to pay the cash back and we like to think it is the merchant, but in the end it is the consumer who pays for all these cash backs and card fees.
Well, specifically, it is the other consumers who frequent that merchant and pay in cash/debit. In the US anyway, at any business that does not charge CC fees, people who do not pay with a CC are subsidizing people who do.
Businesses generally are happy to pay the CC fees, because in the local minimum in which we exist, that is the price to pay to access a large segment of the population's purchasing power. Businesses are not required to accept CCs, and some do not, but those that do do so because the income brought in by the people with CCs who would not show up to a cash-only location outweighs the price of the CC fee.
That's just a fancy way of saying you take on record keeping overhead. If you're not willing to do that then you probably shouldn't even have credit cards so the discussion of pairing CCs and BNPL is irrelevant.
I don't see how the BNPL interest free period helps you here. It basically just delays your withdrawal so you get 6wk (or whatever) more return on the few grand financed. And if you maintain a constant balance the effect is going to stay the same, not increase or decrease, so it's basically the same overall effect as a one time contribution of the financed amount, which is probably very small relative to portfolio size for anyone who ought to be doing this.
The way you can use CC points is well documented but it stands on it's own separately and I don't think it adds anything but confusion to this example.
> Credit card float only lasts if you pay the full statement balance by the due date
but that is identical to BNPL, it's only interest free if you pay it off, just like a credit card past grace period. So why repeat the "interest free" marketing slogan? yes, initially it is, and so is the CC grace period.
> consumers have to only forecast the next six weeks of their life
yeah, good luck managing timing on the payments if you have 12+ of these, and it's not uncommon to have that many! Especially if, as author mentioned, you are living paycheck-to-paycheck.
I guess a marginal benefit for consumer is soft-forcing them to pay it off instead of revolving. Another one, correctly, was less hit to the credit score unless and until the bureaus get their hands on all BNPL data at some point in the future. But there is really no magic here for the consumer.