What's Behind the Boom in Buy Now Pay Later

SPEAKER_2 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, I have a confession to make.

Joe Weisenthal (0:25)

Yeah.

Tracy Alloway (0:26)

I do a lot of online shopping. Like a lot.

Joe Weisenthal (0:30)

Really?

Tracy Alloway (0:30)

More than is healthy, probably.

Joe Weisenthal (0:32)

More than I realized from looking over your shoulder in the office and asking you what you're looking up. Cause I do do that, and you never like it, but I still do it.

Tracy Alloway (0:39)

No, because sometimes I am in fact shopping online in the office. But a few years ago, I noticed a phenomenon, a change when it came to online shopping. You know what that was?

Joe Weisenthal (0:50)

I can guess.

Tracy Alloway (0:51)

Yeah. All right. All of a sudden, whenever I was checking out, you would get an offer, a little button usually, that would say, do you want to take a buy now, pay later option? And usually it's with a company like Klarna or a firm or something like that. They're everywhere now.

Joe Weisenthal (1:08)

So like I've certainly seen all these buttons. I've never used it. I don't really know why I haven't, because like, why shouldn't I spread out? Why shouldn't I? Like, for real, like my understanding is that the core of the business model works, is that there's no like formal interest, right? So if you make $100 purchase, you get to spread it out, say, in four payments of $25. And so whether it's $100 right now or $100 in four months, it's the same from the end buyer, which of course, in theory, because there's a time value of money is not intuitive. But the idea is that the retailer implicitly pays the interest because it's a form of customer acquisition. And so the retailer is implicitly willing to take $100 or whatever over x period of time, rather than all at once in exchange for essentially making it easier for customers to buy. But from the customer perspective, like you and me, who presumably have the money to make, to buy what we're purchasing, I still don't get why we don't all use Buy Now Pay Later, because why not spread out our purchases further out into the future?

Tracy Alloway (2:10)

You know how Rebel Wilson described it in a firm commercial.

Joe Weisenthal (2:14)

I don't. I haven't seen it.

Tracy Alloway (2:16)

Like eating a tub of ice cream, but spreading out the calories over four weeks.

Joe Weisenthal (2:19)

Exactly. Why don't we?

Tracy Alloway (2:21)

It's still 600 calories, right? That's the issue. But I think, okay, so this is obviously a nuanced subject.

Joe Weisenthal (2:28)

Yes.

Tracy Alloway (2:29)

So clearly, zero percent interest doesn't sound like a problem. But obviously, if you fail to pay, you pay a penalty fee.

Joe Weisenthal (2:37)

Then the penalties are building up.

Tracy Alloway (2:38)

Right. So there's that. But the other issue with some of these Buy Now Pay Later items, and it's really interesting, I kind of think about this as a parallel to the private market and credit. So this idea that there's this whole world of additional credit or leverage that we don't actually have very good data on and that is growing, right? I think that is the key.

Joe Weisenthal (3:00)

So here's how I see the issue, which is that if I could have a tub of ice cream and spread out the calories over four months, I would certainly do that. That sounds pretty great because I burn a certain number of calories in a day. And so if I had four months to burn them, that would be far more efficient. But the flip side is, well, I would eat more ice cream. So I would eat four times as many tubs of ice cream in that given day, knowing that I have this four-month calorie budget. And so then you still get the question of like, okay, maybe there's not a formal interest or maybe there's penalties, but I'm buying a lot more with today's buying power. And that may still yet prove to be unsustainable to the end consumer, even if it doesn't formally clock as what we measure as consumer debt.

Tracy Alloway (3:44)

Here's the added layer. Let's say you're trying to lose weight or trying to be healthy and you have like a dietician. Imagine eating the ice cream, but him never knowing that you're eating the ice cream. Right? Like this is...

Joe Weisenthal (3:56)

Well, I lie to my doctors all the time. I mean, I'm used to that.