The Buy Now Pay Later Takeover | Fake Money | 3

0:07I'm David Brown and this is Business Wars.

0:30Buy Now Pay Later services have reshaped the way we purchase things. They've turned big-ticket items into little treats. Instead of throwing that new jacket on a credit card, you can make four small interest-free payments. And that's not debt. That's a budgeting hack. Yeah, right. These payments may be minor. They may seem small at first. But the debt can really start to snowball. More than 60 % of Buy Now, Pay Later customers have multiple loans out at once. Luxury purchases are still the most common application, but a growing number of people are also using these apps to fund necessities, like groceries and medical bills, as prices for everyday goods continue to climb.

1:16And now the credit scoring company FICO has announced that it will factor Buy Now, Pay Later loans into its models. That could have big consequences for regular users of those apps who might have considered them safer than credit cards Financial technology or fintech became popular over the past decade and a half Because it made banking more accessible and convenient But have we started putting too much trust into apps like Chime, Cash App, and Klarna? Or have these services come full circle, proving to be no better or safer than the traditional banks they sought to replace? Adam Clark Estes is a senior technology correspondent for Vox, and he's written about fintech and tried out a lot of services for himself.

2:00He's sharing what he learned, like which ones to trust and when, and how these apps affect our growing affordability crisis. Later, Annie Joy Williams of The Atlantic talks with us about a pattern she noticed in the marketing of these buy-now-pay-later apps. Some campaigns contained a whole lot of pink plus cute colorful murals and collaborations with Y2K divas. It looked to her like the apps were targeting young women, so she started to dig. Annie Joy explains what she found in her reporting and how she was also pulled into the buy now, pay later cycle as a young college student. We'll look at the future of these services in a world where more and more young people claim that money is fake, despite the very real consequences of debt.

2:45All that's coming up.

2:57Adam Clark-Estes, welcome to Business Wars. Hey, thanks for having me. Hey, what got you interested in covering fintech in the first place? You know, it's a great question because fintech, I don't think, is the most exciting sector in technology for a lot of people. But for me, of all things, I think that it was probably the Great Recession. It was when I was getting started as a journalist. And there were a lot of stories about sort of what caused the financial crisis and the role that big banks were playing in our lives. And I just kind of got curious if like, you know, tech had an answer to this.

3:30I was covering technology at the time. And I started stumbling across these little startups that were doing things that were adjacent to banking, but in a very user-friendly way. Now, I've heard you describe yourself as a collector of debit cards. You got to explain what that's about. This was years ago. I've since whittled down my collection. But in the early teens, there were a lot of companies starting up. The first one that I signed up for was called Simple. It was a bank that has since been acquired and emerged into a bigger bank. You've probably heard of Chime. Yeah, sure. And it was around this time that fintech companies like Chime were partnering up with chartered banks.

4:12Chime is not a bank. It's partnered with a chartered bank, which is a more regulated entity and offering banking services. So you could kind of like sign up for an online account and set up a bank account really easily and they would send you a debit card. So that's what you did? You literally collect debit cards. I did it for like 10 different banks like this, just because I was curious about like what each one was doing different. And some of this was for work and I was writing about it at the time. But before I knew it, I had like a Venmo debit card and I had a cash app debit card. And a lot of people have these now, but at the time it was very novel.

4:46What led to the rise of all of this? I think that it was a combination of demand and just the technology that made it more possible. I don't think any of these companies would be around if it weren't for smartphones and the apps that we put on them. A company called Digit set up an app that you could connect to your bank account that would take a small amount from every transaction and put it in a savings account. But there was also like a ton of demand there because big banks, your banks of America, your Chase banks out there, they weren't doing things like this. And their online banking portals were just sort of horrible to use.

5:27So I think that early fintech companies realized that they could create these very consumer friendly products and people would come and use them and have a great experience. What about buy now, pay later? Is that distinct from some of these other fintech services? Does it have a distinctive sort of fingerprint? If we're talking about the companies involved in sort of the genesis of buy now, pay later, I would say that it's distinct, but I think that I'd still describe those companies as fintech companies. And I would still say that they are fulfilling the same kinds of demands that led people to set up bank accounts with Chime.

6:04You know, one of Chime's early sales pitches was that it would help you get paid a few days before you actually got your paycheck. See, that's interesting that you would say that because I think of buy now, pay later almost as the modern day style of layaway. Whereas it used to be if, you know, back in the day, layaway, you couldn't touch your goodie until you had actually finished paying for it. But at least you knew it was sitting in the warehouse back there with your name on it. Buy now, pay later sort of satisfied that craving to get it now, you know, that credit cards give you. but at the same time, you didn't have to apply for a credit card and you could do it all right there while you were sort of late night shopping.

6:44Oh, it's absolutely like a modern reverse layaway. And I think you do a good job describing it as a way to kind of skirt around needing to apply for anything or qualify for anything, but being able to get that thing you want, whether it's a new pair of shoes or a new TV right away and kind of pay for it later. But I do compare it to those other fintech companies in this sort of rise of fintech 10, 15 years ago because it's taking advantage of technology and of that consumer demand for people to have better financial products. And it's giving them something that, you know, there's a real upside for them and there's downsides too.

7:21I'm sure we'll get to that. Have you ever tried one of these buy now, pay later offers yourself? I've tried buy now, pay later a couple of times. I'm actually paying off a buy now, pay later loan right now. I thought a lot about it and I looked at all my options and it turns out the buy now, pay later option was the best. I bought a new mattress. They're expensive. And every single company offers the ability to pay with after pay or a firm or whatever. And it just made more sense to me to have what for me was a zero interest loan to pay off this big purchase over time instead of pulling out a savings or putting it on a credit card.

8:00It was a good proposition. But it could have been a much worse proposition if I were doing this often or if I wasn't doing my research and didn't know the consequences if I didn't pay it back every month. See, now you're touching on something that has always gotten me wondering about how they are profitable or how they avoid the enormous risk that comes along with what I would imagine to be the back end of buy now, pay later. because it seems like there's this one company that I shop at almost consistently, and it has a buy now, pay later option, and it seems to be offered to just about everyone.

8:33Lord knows they haven't checked my credit rating. So I go ahead and check out, use the buy now, pay later option, and I'm thinking, okay, but if I were to default on this, who's holding the bag? Is it buy now, pay later? Is it some other bank? Is it the retailer that I'm purchasing from? Because it seems to me that wherever the buck stops is going to be holding a lot of bad debt. That would seem to me to be pretty big. How does this even work from an economic standpoint? I think it's a great question who is holding the bag. It could be that the whole economy is because the companies like Affirm and Afterpay, they're actually bundling up this debt and selling it off as securities and trading it.

9:12And if that sounds kind of familiar, it's because that's sort of, well, that's exactly how the housing crisis started and ended. It was securities full of risky debt, and people didn't really know what was in them, but were buying and selling them. And if you've seen the big short or if you live through life in the United States in the late aughts, you know what happened next. It's a tough comparison to say that the housing market and the buy now, pay later market are the same thing, but the same kinds of things are going on. Yeah, I would imagine much bigger debt and stakes being considerably higher when it comes to mortgages.

9:43But still, there's a lot of consumer debt and our economy is driven by the action of consumers, as we all know. But I'm now curious if that's happening, whether regulators or lawmakers are starting to turn their attention at what's going on here with the trading of effectively debt securities. Regulators were. During the Biden administration, the CFPB, the Consumer Financial Protection Bureau, actually passed some rules that would treat buy now, pay later loans more like credit cards. And that seemed to be a step in the right direction because, you know, there are some protections you have as a consumer when you use a credit card.

10:20And there are reasons why you can't keep getting new credit cards if you're maxing out and not paying off your old ones. But those rules were paused when the second Trump administration took over last year. And so where do the buy now, pay later stand? Is it back to business as usual prior to the whistle being blown by the Biden administration or where are we? I think as far as I know from a regulatory point of view, it is back to business as usual. But I do think that the movement like FICO stepping in and starting to keep track of this debt is a step in the right direction. I don't think that everybody in the industry wants to be living in the Wild West.

11:01Yeah. Well, let's talk about the consumers, though, because it seems to me that given the way that these buy now, pay later offers work, there's nobody really sort of holding up their hand and saying, well, there, you've already done three of these in the past three months. You got you got to cool it. I'm not seeing any sort of guardrails, I suppose. I mean, isn't there a point where these apps really do start becoming too good to be true for consumers? I guess we have to define too good to be true, because I think that the real risk that people find themselves in is when they sign up for a buy now, pay later loan and they don't realize the fees and penalties that are attached to it.

11:45And it gets a lot worse if they're signing up for multiple ones. And this is what's called stacking. So you might go to a firm and sign up for a zero interest buy now, pay later loan and buy a mattress. That's that's great. and that kind of pulls you in with like a too good to be true offer. But then you know what happens next, your laptop crashes. And so you're going to need a new laptop, right? Yeah. And you think, oh, I'll do that buy now, pay later thing. That was great. And you can, except this time a firm wants to charge you a 10 % interest rate. And those interest rates can keep going up as you take on more and more of these loans and kind of become a riskier proposition for the company.

12:27And they can get pretty high. Most of these interest rates top out at, I think, 35 percent or so, which you're like, you're not getting into loan shark territory, but it's higher than a credit card probably would be. And at the same time, it's it seems to me it's really easy to lose track if your credit card's getting pinged and you're not really in communication with buy now, pay later. Oh, you might get an email, but you don't have that regular contact that would remind you, hey, you've already got a couple of these going, you know. And for instance, in the past when I've used this, I wasn't sure exactly where I was with my buy now, pay later.

13:02I knew that my checking account was getting pinged every month or so. But am I done with that? Have I paid that off? I'm not sure, you know. And a lot of folks aren't going to go to the trouble of digging through and trying to trace it all the way back. You know what I mean? Absolutely. And there's nobody keeping track of all these. The buy now, pay later space is largely unregulated and nobody really knows how much debt is out there. And while you can go and find out what all your credit card debt is, there are tools and regulations that make that possible. It doesn't necessarily exist on the buy now, pay later side of things.

13:39Hey, it's time for a break. My guest is Adam Clark Estes. He's senior technology correspondent at Vox. And when we come back, we're going to look at how fintech shows up in an affordability crisis. Stay with us.

14:01Welcome back to Business Wars. My guest is Adam Clark Estes. He is senior technology correspondent for Vox and, as it turns out, a fintech consumer himself. Adam, what about the banking apps that you've tried? You know, the ones with all the debit cards? When do those start to become more dangerous? You know, danger is such a fun word to use to describe anything. And you wouldn't think to use it to describe a bank account typically because, you know, we've been sort of socialized to believe that banks are safe. They're the buildings with the big vaults and they keep our money safe. And when we put our money there, we have a sense of security.

14:42There's a whole charter system set up that keeps banks in line, makes sure they're following the rules and won't lose your money. There have been plenty of panics in the past that have led to these regulations. But in the world of fintech in the 21st century, we're kind of in a new Wild West where it's a lot easier to offer banking services. And the way the rules are set up, you don't actually need to be a chartered bank to offer those services. When you say chartered bank, these are more like the classic banks that we think of that have brick and mortar operations, perhaps they have ATM access, federal deposit insurance protection, that sort of thing.

15:16Yes. So if you think about a chartered bank, this is a bank that will have FDIC insurance. It will have gone through a lengthy process to get that designation of chartered bank, both on the federal level and the state level. And because of that, its customers have some guarantees that their money is safe in this bank's vault. Take a fintech company like Chime. Chime is not a chartered bank, but it has partnered with a chartered bank in order to provide its financial services. and because it has that partnership, it can say that your money is FDIC insured, but it's not insured by time. It's kind of complicated, but I think that's kind of the point.

15:55Tell us about one of these worst case scenarios. What happened with this savings app called Yada? So Yada was one of the kinds of apps that I used to download just to try out. It was an app that sort of gamified savings and had like kind of giveaways where you could enter a lottery and earn money, but it was just an app and it had to partner with another company in order to move your money. The company is called Synapse. And Synapse ultimately went bankrupt and people who had their money in savings accounts with Yotta no longer had access to their money. Holy cow. They were just frozen out of their accounts?

16:32Yeah, these are like, for some people, it was their life savings and they could not get access to that money for months and months and months. Have you had any experience trying to get ahold of someone when things go wrong or has that ever popped up for you? My first fintech experience was with a bank called Simple. And one of their sort of guiding principles was that it would strip down everything that your big bank messed up in its online banking portal and make everything super simple. Right. If you needed to talk to someone, there was just a phone number you would call and a person would pick up on the other line.

17:06And it was true and it worked. the customer service was amazing but as more and more companies like this popped up customer service was was something that fell by the wayside for a lot of them and because there are no brick and mortar locations for a lot of these fintech companies you can't just walk into the lobby like I can do at my local Chase Bank you might be sending emails off to an inbox somewhere not knowing what's going to happen to it or talking to a chat bot but the lack of customer service can be a really tough thing when, say, you're frozen out at your savings, for instance. Yeah.

17:40I've heard others complain that poor customer service seems to be something of a hallmark of some of these services. Would you say, Adam, that you are part of these apps' typical user base, or who do you see is using these services the most? When it comes to any app, I don't think that I'm normal. I'm a tech journalist, and half the time I'm downloading an app to see what it does and how it's different and what's knew about it. But a lot of these apps are appealing and a lot of these companies are successful because there's a huge population of unbanked people in the United States and actually making it easier for people to get access to financial services is something that the fintech industry has allowed.

18:18And I think that's a great thing. But a lot of the people that are unbanked are also the people that, you know, might not have the same financial literacy to know how to stay away from fees or to get roped into offers that are too good to be true. I think for some people, when they hear a lack of financial education, we're often talking about people who may not have had just real world experience or much life experience, maybe younger people, maybe college grads, maybe someone who hasn't had the chance to do much of their own money management. And I'm wondering if what's happening, what we're seeing with some of these services points to this huge yawning gap that nobody is standing around ready to fill.

19:00This gap in education, financial education. That's a great point. And, you know, I kind of got into the idea of fintech and learning about banking at a time when banking really let down the young people of America and actually people of all ages. So I sort of had to learn about a lot of the principles of personal finance for myself, myself, yeah, and for survival for a while. So I think that some young people, Gen Z, might not have the same base level of knowledge that my generation, millennials, has. And I think you could also say that some of these fintech companies, some of these buy now, pay later companies are taking advantage of that.

19:37If you look at the marketing for buy now, pay later, it is very clearly marketed to young people, to people who might not be able to afford a$200 purchase today, but could afford to part with$50. Do you think it's reached the level of almost predatory or not quite yet? I see what I'm wondering is if young people haven't experienced, say, what you went through and what others went through, it seems like there's always a generational moment where it's like a wake up call. Look what's happened. And how did this happen? How did I not see it coming? You know what I mean? And I wonder if in a way what's happening with buy now pay later is sort of a setup for that experience to hit this younger generation.

20:19If there's not some sort of intervention, of course. You know, when I wrote about buy now, pay later, most recently, I did put the word dangerous in my headline because after doing the research and sort of finding out how fast the industry has grown and what's happening with the securitization of this debt and with how many companies and how much money is at stake, it did feel dangerous. It's all dangerous, not just for individual consumers, but also for the economy. I don't want to call the companies predatory per se, but I think that something dangerous is going on and they appear to be leading it.

20:55Yeah, it almost seems like buy now, pay later in some of the fintech advances, if we want to call it that, sort of herald back to the birth of even the credit card. And there seemed to be a lot of parallels to me because when credit cards started being popularized, they were advertised on television. They were advertised everywhere. People having, you know, scads of plastic sitting around and sort of getting lured into carrying more and more plastic before debt was considered to be the kind of consumer problem that it would become. There was that learning curve. And, you know, I think on the one hand, fintech apps and that sort of thing can make banking more accessible for those who otherwise couldn't get an account.

21:37But it does seem to be opening a door to something that will be awfully familiar to anyone who has read history, especially as it sort of does seem at least to me to have parallels with with credit cards. What about to you? Oh, I think it's a great comparison. And I even remember when credit card companies could just send you a card in the mail. Yeah, right. You fire it right up and start spending. That was the whole idea. In effect, that's exactly what a buy now pay later loan is. And you're not getting it in the mail. You're getting it on the checkout page of your favorite online store. Dang, I had not thought about that.

22:15That is a perfect comparison. and I'd forgotten about when credit cards were just being sent to people in the mail. And it was like, sure, why not? They're offering it to me. Let's go. And you think about what's happening with affordability these days. Some people are using buy now, pay later to pay for their groceries. What does that tell us about what's happening in the economy sort of writ large? Or is it fair to look at it from that perspective, do you think? It's absolutely fair to tie the boom in the buy now, pay later industry with the affordability crisis. Generally, the fact that people are using these products, which are advertised to be, you know, sort of like, oh, treat yourself, like get the handbag you always wanted, but can't afford right now.

23:00The fact that a lot of people are using these loans to buy groceries speaks to a much bigger problem. And I think also the ubiquity of the Buy Now, Pay Later products. It used to be just certain stores had it. They started out, companies like Afterpay and Affirm started out at like kind of luxury goods companies. But now you can use Buy Now, Pay Later virtually anywhere and to pay for anything. Any advice for folks who are contemplating or using these apps or services? Is there a way to use it responsibly and safely? The basic advice that I would offer people when it comes to Buy Now, Pay Later, I think also applies to just sort of like tech in general.

23:40It's something I write about a lot at Vox, and it's this idea of being intentional about what you're doing. So much of the tech out there, especially apps and software, is designed to keep us using it. It's, you know, ChatGPT is designed to be sycophantic. It's designed to make you like it in order for you to keep using it. And the same is true of TikTok and your Instagram feed. all this tech is designed to be used more and more and buy now pay later is no different it wants you to make a quick decision because it wants you to use that product so what i would recommend to people is to slow down to be intentional to read the fine print to to know what you're getting into i don't think that buy now pay later has to be a bad thing like i've said i've used it myself i'm paying off a buy now pay later loan right now but before i made that purchase.

24:31I did a lot of research and I looked at my other options to make that purchase. And it turns out Buy Now Pay Later had the best offer. So that's the one I took. So I think slowing down and being intentional in a world that's constantly trying to make you move faster and consume more is just basic advice, but I think it can take you a long way. Adam Clark Estes is a senior technology correspondent for Vox, where he covers AI, fintech and Silicon Valley. You can check out his reporting at Vox.com. Adam, thanks so much for joining us on Business Wars. That's some solid advice and some terrific insight.