The BNPL market is run by a small consortium of companies we’ve seen on our web browsers: PayPal, Affirm, Klarna, Afterpay, and a few others. Their goal, as stated at least, is to compete with credit card companies for consumer adoption and upend the “revolving line of credit” model of consumption. In other words, they want to replace the credit cards in your wallet, not work alongside them. Their traditional model is four-part installments over six weeks, as opposed to putting down the full price up front. If you miss those payments, that’s when you pay interest – but unlike credit cards, the terms are often more forgiving, some even offering a 0 percent annual percentage rate. And these interest payments, when they do get paid, don’t meaningfully add to the BNPLs’ bottom line.
BNPL companies make their money charging merchants for using their services, usually around 3 percent on top of the normal 3 percent for credit card swipes. In essence, these are software companies in the payments flow industry, not credit suppliers. Each individual transaction goes through an automated process, with no hard credit check, and is approved as such. BNPL companies recreated an old system of financing but off-loaded the risk from the merchant in the traditional point-of-sale system.
The loans are financed in a few different ways by banks and non-depository financial institutions (NDFIs), or private credit. For example, a BNPL can open up a warehouse line with a credit fund, and your purchase will be paid for by their capital up front. Your repayments (receivables) then get bundled up into risk tranches with tens of thousands of others. The private credit fund might sell that bundle to a pension fund or insurance company in search of short-term yield. It’s in the sale of these asset-backed securities (ABS) that the fund’s capital is recouped for the next round of buyers. And the merchants are willing to pay a premium to the BNPLs because the transaction, for them, is over when the customer clicks “Place Your Order.” Estimates by the American Marketing Association found that adding a BNPL option to an e-commerce site increases sales by 10 percent, and basket size by the same amount. We buy more things at once and buy them more often when the price we pay today looks small.
What’s striking about all this is the fact that Americans’ credit card balances are peaking today at more than $1.25 trillion, and this figure doesn’t include the BNPL market share. Over 13 percent of all credit card accounts are over ninety-days delinquent. About a quarter of these have a balance of over $10,000. Americans are carrying these credit card balances over month to month at record levels, amid record-breaking interest rates of 22 percent. Since the Great Recession, Americans have paid over $2 trillion in credit card interest payments alone. The relationship between credit cards and BNPL use often looks like one of two things: either consumers with low credit scores are choosing BNPL to accomplish a similar end; or credit card users who maxed out, or are close to it, use BNPL as a lender of last resort.
We are all, somehow, both barely surviving and living beyond our means — a fact so rarely stated — on funny money. The real victory of capital over us today is the seeming incomprehensibility of the question, “Can I afford this?” If our answer is yes, whether or not that’s true, then capital wins. But when we overconsume, we lose track of what we are foregoing in the process. One glaring and sadly routine example is that bimonthly article in the New York Times or the Wall Street Journal profiling an urban couple earning north of $200,000, yet somehow “feeling behind.” They all say the same thing: we want kids, but we just can’t seem to afford it.
We talk a lot about inflation, or corporate “greedflation,” and the way it is stealing our hard-earned money; we talk less about consumer seduction. It is said that we live, post-pandemic, in an era of “deservingness”; but the discourse is a godsend for the bourgeoisie. In the K-shaped economy, what brings elements of both things together is the use of BNPL for groceries, credit cards for car notes and Christmas presents, airline miles to travel, and points systems to purchase Amazon items we end up returning (about $1 trillion in returned goods last year). What separates them is not so much structural as it is a relationship to vulnerability and purchase volume.
In our current cultural and political doldrums, capital thrives on none of us truly understanding the terms of our own spending. How many times have you heard the refrain, repeated by Affirm CEO Max Levchin the other week: “The American consumer is incredibly resilient.” They say it like it’s a Purple Heart. On the other hand, the CNBC Squawk Box hosts will say we are “tapped out.” The economy, in either case, can’t escape the fact that, even after having rebuilt its risk system following the Great Recession, it is still linked to the question of whether an average American, from the bartender to the lawyer, can continue to make payments on old items as they purchase new ones.
It seems that we’ve outrun the liberal economists and sociologists who insist that Americans living on the edge (most of us) understand their own budgets and so act rationally. They say this when discussing why, for instance, low-income workers use check cashing stores instead of traditional banks, because they’ve calculated the spread between overdraft fees and cash-out rates. True or otherwise, it’s a form of false empowerment — and a way to avoid addressing the fact that most of us don’t know what the hell is happening with our money most of the time. This leaves people across the income spectrum in danger of overextension and the BNPL companies’ false promises that one plus one is somehow less than two.