Financial Freedom Insights: Issue 1

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Table of Contents

It’s so tempting. Just click on the “pay in four” option, and you’ve got yourself a trendy $200 Nike jacket for just $50. At least for today. That easy click, however, can be the beginning of a rapid slide down a very slippery buy-now-pay-later slope (BNPL), as many young Americans are experiencing.

Nearly half of American adults have used a BNPL service such as Klarna or Affirm to buy items they otherwise might not have the cash for. And just as many have missed payments contributing to a growing debt problem. Even more soberingly, 60% of BNPL users have multiple active BNPL payment plans racking up their debt.

Keep reading as we dive a bit deeper into the BNPL story, what is going on with everyone involved, and what it could mean for you if you find yourself wrapped up in this predatory scheme.

How Buy Now Pay Later (BNPL) First Entered the Financing Foray

Bursting onto the scene after the financial crisis of 2008, buy now pay later (BNPL) offered a new alternative to credit card financing. Companies like Affirm, founded in 2012; Afterpay, founded in 2014; and Klarna, founded in 2005, offered flexible payment solutions on ecommerce sites.

At that time, credit card approvals were plummeting. People were mired in credit card debt, young people were scared by the debt all around them, and BNPL seemed like a better option with its no-fee, no-interest financing.

Then, the 2020 COVID pandemic hit. People saw their salaries stagnate or even disappear. Rents increased, e-commerce thrived, and the number of people turning to BNPL skyrocketed.

BNPL: A Trap for Young Americans

Recent critics have called BNPL a “trap” for young Americans who consider it free financing and a better option than using a credit card. That is, until they can’t make the payments and face high fees and interest charges.[1]

LendingTree found that nearly half of American adults have used a BNPL service such as Klarna or Affirm. Millennials use it the most, but Gen Z and Gen X are not holding back either.[2]

One of the fundamental premises of Haas Trade is to live within your means. Don’t spend what you don’t have. Clicking on that “pay in four” option at checkout is a huge red flag that you are doing exactly the opposite — living beyond your means, and that’s just not sustainable.

BNPL is not a sustainable option for merchants either. Many find themselves vastly out of pocket when a BNPL provider folds; and they do, quite often.

Manipulating the Consumer Psyche

BNPL didn’t just take advantage of consumers’ need for financing; it influenced their psyche. You want to buy that $200 jacket? With BNPL, you pay $50 today and worry about the other three payments down the road.

The data show that the psychological shift works, and shoppers who use BNPL are likely to spend 17 to 26 percent more.[3]

Now for reality. The Consumer Financial Protection Bureau data shows 43% of BNPL users have missed payments. That’s almost half of everyone using BNPL. Let’s see what that jacket you bought can look like if you are part of this half.

In two weeks’ time, you may have a stylish jacket; however, you might miss the next payment. The BNPL app will try to charge you again, and your account might overdraw. Now, you have to pay a $35 bank fee plus an $8 BNPL fee. That means you're $93 in the hole for what should have been a $50 payment.

That Nike jacket is now a monthly service. Another recurring charge that you owe on top of all your other recurring charges: bills, student loans, credit card debt.

What’s even more sobering is that 60% of BNPL users have multiple active BNPL payment plans.[4]  They’re even financing Door Dash. When you are having to divide your next burrito  order into four easy payments, there’s cause for concern.

If you want to hear a fascinating commentary on the state of BNPL, listen to this YouTube video by BlackLine. According to the video, “When you buy now, pay later. You're not the customer. You are the product.”[5]

The BNPL Bubble

If so many people are falling victim to the allure of BNPL, it must be a thriving space, right? Wrong. The business model is actually failing. BNPL providers are disappearing or being swallowed up at a rapid rate, and this is going to affect you.

Initially, for retailers, the BNPL business model seemed too good to be true. Pay 6% in fees and get 17 to 26% more revenue because consumers will buy more. It was a no brainer …. until it wasn’t.

Within two months in 2024, three BNPL companies collapsed. At the same time, big players like Apple and NatWest quickly exited the space and axed their BNPL services.

·         Laybuy, which served customers in the UK, Australia, and New Zealand entered receivership in June 2024 after failing to find a buyer.[6]

·         Divido wound down in June 2024.[7] 

·         Apple discontinued its "Apple Pay Later" service in June 2024 and consolidated with Affirm.[8]

·         NatWest ceased to offer BNPL in May 2024 and focused on credit cards and loans.[9] 

What happened? The BNPL bubble burst.

Flaws in the BNPL Model

As these providers realized, the problems with the BNPL model are threefold.

First, every BNPL transaction costs retailers four to 8% while credit card transactions cost retailers around 1.5 to 3%.[10] Less than half as much. Additionally, the BNPL fee is around $6 compared to $2.50 charged by credit card issuers. In short, retailers lose $3.50 more on every BNPL transaction compared to a credit card transaction. That’s huge.

Second, smaller retailers face even bigger problems. BNPL companies take three to five business days to process payments while credit card companies take 48 hours at the most. This wrecks cashflow and can mean missing payroll or not being able to pay suppliers.

Lastly, BNPL companies are not insured by the FDIC (Federal Deposit Insurance Company), so merchants have no recourse. When a BNPL provider fails, the merchant is left with unpaid BNPL accounts and is forced to eat the losses.

Regulation and Consolidation

In 2024, the Consumer Financial Protection Bureau ruled that BNPL must follow the same rules as credit cards. That means full disclosure of all fees and terms, dispute resolution processes, and refund protections for retailers already losing about $3 on every transaction.

The banks are fighting back too by creating their own BNPL schemes.  It’s hard for a BNPL provider to compete with banks that have the advantages of millions of clients, existing revenue streams, and business models that work.

Consolidation is rife too. The bigger BNPLs are buying up the smaller BNPLS. For example, Square bought Afterpay for $29 billion.

What All This Could Mean for You

When BNPLs fail, retailers are not paid for products already delivered, and the taxpayer might end up paying for a bailout. If a BNPL fails, your payment obligations to a BNPL could be sold to aggressive collection agencies. If you owe BNPL money, you could face huge fees and a damaged credit score.

Bottom Line: With the new regulations and new, bigger providers, BNPL financing is likely to become just as expensive as using a credit card. It was never a viable business model to begin with and has become a trap for people living from paycheck to paycheck.

BNPL might morph into some other type of accessible financing, but the best path is to avoid financing in the first place and live within your means.

Tips for Living Within Your Means

-  Be smart with your money and create a budget

-  Set up auto savings, so you don’t have to think about putting money away every month

-  Avoid impulse buying - buy a $200 jacket tomorrow, not a $50 jacket today!

You can read more about living within your means in our Personal Finance 101 Lesson: “Learning Financial Discipline.” [Link to “Live Within Your Means – A Recipe for Less Financial Stress and Better Relationships’]

Had a Financial win since our last newsletter that you would like to share with the community? Hit reply or send an email to [email protected] to let us know!

Your Story’s of success, no matter how small they may seem, can be enough encouragement to someone else to help them on their journey! We are all in this together.

Proverbs 13:11 (ESV)

“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.”

Thanks for reading!

Haas Trade Financial Freedom Insights

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