BiggerPockets Money Podcast - 312: Buy Now, Pay Later: Consumer Convenience or Predatory Pricing Scheme?

Episode Date: June 24, 2022

“Buy now, pay later” companies have been around for decades, but not in the form they take today. You may have noticed that when you check out from an online store, a little prompt asks you if you want to purchase your goods for just “four easy payments of…” It seems like a good deal, doesn’t it? You can buy the same goods, for less, today, with no interest payments! Before you add those shoes to your cart, think twice before selecting the “buy now, pay later” option. Alexi Horowitz-Ghazi, NPR reporter and host of Planet Money, was interested in how this type of interest-free internet shopping is affecting consumers. Through his research, he found numerous examples of online shoppers overspending, getting into debt, and not knowing their total purchase price. The ease of paying just a fourth of a product’s price and getting it delivered in days became too much for many consumers to resist. And now, they’re paying the price. If you don’t want to fall prey to this type of split-up pricing, you’ll want to hear what Alexi, David, and Mindy have to say. Using this type of “interest-free” credit could put your financial freedom in jeopardy—and no one wants to trade early retirement for a new swimsuit. In This Episode We Cover The “buy now, pay later” programs and how they target online shoppers How buying now and paying later could affect your credit score in the long run What happens when shoppers can’t pay their future installment loans? Why US legislators are taking “buy now, pay later” companies to court  The marketing tactics used by these companies to get you to spend more at checkout Why saving now and buying later will help your future finances And So Much More! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums Finance Review Guest Onboarding Mindy's Twitter Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Subscribe to The “On The Market” YouTube Channel Listen to The “On The Market” Podcast: Spotify, Apple Podcasts, BiggerPockets Check Out Mindy’s 2022 Live Spending Tracker and Budget Interested in learning more about today's sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast, show number 312, Finance Friday edition, where we talked to Alexi Horowitz-Gazi about the Buy Now, Pay Later program. In the early years of credit cards, that led to problems with overconsumption and spending, problems with fraud, that then led to kind of the regulatory framework that now is just kind of normal to us. And so this feels like a new type of consumer technology that's also started with individual businesses, targeting individual demographics and is now expanding. And now the traditional financial institutions are like, all right, we're going to start offering versions of this to compete.

But there hasn't been a kind of full regulatory reckoning. So we're still in that leading edge moment of a new technology. Hello, hello, hello. My name is Mindy Jensen. And joining me today is my military millionaire co-host, David Peret. What's it? I know. I'm supposed to say something super profound.

That's okay. You don't have to. Sky is blue because science. Wow, that's not why sky is blue at all. David and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, even the ones that I don't love, because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. Yeah, whether you want to retire early and travel the world or go on to make big time investments

in assets like real estate or start your own business, we'll help you reach your financial goals, get money out of the way so that you can launch yourself towards your dreams. David, today we are speaking to Alexi Horowitz Ghazi from the NPR podcast Planet Money. He recently released an episode about the Buy Now Pay Later program, which is also called the point of sale loan program. And holy canoli, I'm going to give you a spoiler right now. I don't like this program. And I want to talk to Alexi about it because I think he's got to.

a lot of great insights into this concept. And he was the first person to introduce me to this particular idea. I didn't even know it existed until I listened to his episode. And I was like, whoa, that sounds like trouble. Yeah, it definitely feels like it's targeting people who are, you know, I don't want to say less well off. But it's not a, it's not something that billionaires are running around using. Right. So it's, it, I feel like it's targeting people. who are a little bit less financially educated, and they see it as like, you know, psychologically as an easy, easy out, you know, an easy way to purchase something that they want. And it's very, it seems like it would be very easy to fall into the trap of doing this too much and then being

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dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code pockets at Monarch.com for half off your first year. That's 50% off at Monarch.com code pockets. I love Matt, said no one ever. Nobody starts a business thinking, you know what would make this more fun, calculating quarterly estimated taxes?

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fell into. She discovered that she could buy this item and it wasn't this giant price. It was this small price a bunch of times. She's like, oh, well, that's practically nothing. It felt like monopoly money. So then she goes and does it again and again and again. And at the end of the month, she's like, oh, I've made a big mistake. What is that quote from Arrissa Development? I've made a huge mistake. So it just feels like that's going to be, it feels like people who are, use the Buy Now Pay Later program are going to be quoting Joe Bluth a lot. Hopefully not, but... Please tell me that you got that.

Of course. Alexei Horowitz-Gazi is a host and reporter for NPR's Planet Money and is drawn to tales of unintended consequences. He recently released an episode about the Buy Now Pay Later companies, which are also known as point-of-sale loans. This is a special episode of Finance Friday because I think this is a crisis in the making. and people who are using the service aren't educated on the downsides. Alexi, welcome to the Bigger Pockets Money podcast.

I'm so excited to talk to you about this. Hi, Mindy. Hi, David. Thank you for having me. It's a pleasure to be here. I want to thank you for bringing up this topic because until I listened to your episode, I had no idea that this thing even existed. I am definitely not the target market for the buy now, pay later companies.

So let's just give an overview about this again. What is the buy now pay later program? Okay. So buy now pay later is. a relatively new kind of consumer credit. They're basically installment loans that are offered to consumers at the point of sale. So at the checkout, if you're buying clothes or an increasing number of things, airline tickets, even like gas in IRL. It started out as an internet phenomenon, but it's growing to more and more parts of the economy, including at the real life checkout. Oh, oh, that's

even works. Yeah, that's very interesting. I didn't, I can't imagine the idea of like, oh, I can't afford gas. So let me stretch the payment out for three months. Yeah, yeah. It's it's grown to all sorts of different services and products that you can buy. I mean, initially, um, it was pretty, these companies were, were relatively narrowly targeted at kind of, um, retail sites for people who either had thin credit histories or bad credit or otherwise couldn't gain access to other forms of consumer credit potentially. And so it's kind of pitched as a as a democratizing way to get people the money they needed now and give them this new way of buying, of paying it back later.

Generally, the way that works is they say they'll front you the money for whatever you're buying and then you pay it back in four interest-free installments through whatever their platform is, depending on what the company is. There are other types of loans, there are longer loans with different kind of terms and conditions, but that's the basic model, is paying for interest-free payments. Okay, in your episode, you spoke with Amelia, who started down the buy now, pay later path by buying a brown and white tie-dye bikini, and I can see this in my head. Oh, that's so cute, but it was a $200 bikini, which makes my frugal heart break. She noticed when she went to check out that there was this buy now pay later

option and she clicked it and she now had the option of paying in four installments of $41.99. And she's like, well, I can do that. I can get $41.99. It's no big deal. And I can see, I instantly thought of layaway. Alexi, I'm not sure how old you are, but I'm very old and we had layaway. We didn't have this, you know, this fancy internet thing when I was growing up. We had layaway. But we didn't get the items with layaway. You go to the store. You give them all the things you want in the special layaway department and they put it away for you and you make payments. I remember I bought a pair of peach overalls that were very hot in 1987 on layaway. And it took me, I had to drive to the store every week for like four or five weeks to write out a check or pay cash,

you know, $20 a week for this. But now it's this easy click and it's not as real. I mean, online purchases already don't seem real because it's just, you know, my credit card is already in the system. All I have to do is, you know, put my fingerprint on my little fingerprint sensor on my keyboard. and now I just made a payment. That's even less real than having to type in my credit card number at the site. It's so easy to make a payment now. And now I don't even have to pay the whole amount. I can pay it in four easy installments.

This just seems like this is where, to me, the crisis is in the making because this isn't regulated, right? It does. I mean, the services kind of fall into a, few different regulatory schemes depending on whether they are run by banks. Banks and regular credit card companies have basically been responding to this new wave of buy now pay later services, which started kind of taking customers from them, taking credit card transaction money from them. And they responded and said, we have to, we can't leave all of this money on the table, leave this whole consumer group without an option from us if they're, if they're going

out and spending money this way. But. So bank, ones that are run by banks fall under a different set of regulatory laws. The kind of distinct buy now, pay later companies interact in various ways with like credit card regulatory systems. But it's still not clear which of those they're meeting. And so there's now been this wave of calls for at least investigation from regulators. So the Consumer Financial Protection Bureau started an inquiry last year into how these companies fit into the existing regulatory structures, if there are any rules that they aren't

meeting, if there are new kind of regulations that need to, or rules that need to be devised to make them safer for consumers. And the House Financial Services Committee also held a hearing on this question last year, last fall, I believe, looking into that question. So it's still a bit opaque, honestly, what regulations do or don't apply to them in which they're hitting, which is kind of part of the reason that this is, you know, of concern to a lot of consumer advocates. Yeah, absolutely. Is there any data as far as like how this is going to or is impacting different, like, people from different economic backgrounds?

As far as I've seen, I don't have like a kind of demographic breakdown. Definitely the kind of pitch to businesses as to why they should accept this type of payment type is because they've seen a large, large adoption by millennials and zoomer consumers. Millennials, you know, for a while there were kind of seen as less interested, a little more reluctant to use traditional consumer credit products like credit cards. You know, people raise kind of in the wake of the financial crisis. And so this is, this is, was pitched as an alternative that doesn't quite a way to get credit. that doesn't quite interact with the existing credit system.

So you don't need necessarily very high credit scores to get access to these services. And whatever you do on them for the most part, up until now, whatever loans you're taking out at the point of sale are not being reported to credit bureaus. It's not necessarily, it's not designed to impact or relate to your credit score. So it's kind of like credit without the baggage of the current credit system is how it's pitched. And so the kind of initial uptake in these products were amongst those demographics. But that's expanded as they've kind of gone mainstream in places like Walmart and Target and, you know, a lot of major airlines are now offering these buy now, pay later payment systems at checkout. Is there anything predatory or detrimental about this practice?

I mean, to me, I am, I don't know if you could tell, but I'm not a fan. I think this plan, this program is, you know, I'm the host of the Bigger Pockets Money podcast. I have my financial stuff together. I can see that a zero percent interest loan would be awesome. Why would I pay now when I could pay later and it doesn't cost me anything? But I'm also responsible with my credit. I can see that this would be really awful for somebody who doesn't understand the negative consequences of their misactions. I, in the past, have missed a credit card payment. I remember

missing one credit card payment because the statement didn't come. This was back. I'm really old. This was back when we didn't have the internet and they would just send it to you in the mail and things would get lost in the mail. And I remember like six years later, I was getting a mortgage. And the mortgage person was like, well, what about this missed payment? I'm like, what are you talking about? I never miss a payment. But there are people who don't understand. understand how this affects you. And you mentioned that it's not necessarily set up with the credit system, but they are reporting the negatives. When you miss a payment, that's being reported in many cases. You're just not being reported when you're making the payments. So in that regard,

it kind of seems predatory on people who don't know what they're doing. I don't know. I don't know how to phrase that. I mean, I think it's a hugely mixed bag at this point, right? Like, I think consumer credit technologies, including credit cards, are in part, you know, the point is that it enables people to spend money. Like, the problem comes when people are out, are spending too much money or get into kind of cycles of spending and revolving debt that make it kind of impossible to dig themselves out of. That's been true of credit cards and other forms of consumer credit as much as it is of by pay later. Of course, with credit cards, that stuff happened in the 50s and 60s, and in the 70s, a whole, you know, series of kind of consumer protection laws were passed that has kind of curtailed

some of the, some of the, like, outrageous spending and fraud that came about in the wake of credit cards being this new technology for people to buy whatever they want with the idea that they would pay for it later. So it's kind of a similar thing. We're like in an earlier stage of this technology, and we're kind of watching it play out. In terms of the credit reporting, it is true that for the most part, the way a credit bureau would hear about what you've been doing using Buy Now Pay Later Services would be if you have, you know, been unable to meet multiple payments and then, you know, defaulted on your payments.

Some of those are sent to credit bureaus. So it is easier for, for there to be a negative effect from these products on your credit score than for there to be any sort of positive. There is one and maybe there's at least one by now pay later company that is kind of to differentiate themselves. They're offering a way to report your positive payments, making your payments on time to the credit bureau. So there definitely is like a niche in this space to do that. in terms of the kind of predatoryness or not, it's hard to make a call about that.

There are like, there are particular parts of the design that worry consumer advocates. And like, you know, our protagonist in our story is an example of this. Part of the, the pitch from by now, pay later companies to merchants when they're saying use our payment service is that it'll, it causes this kind of like psychological trick.

by by making the purchase price of something look a bit lower or feel a little bit lower when you kind of you know it's something that you see in like late late night infomercials or whatever like four payments of 1999 there's something about seeing a lower ticket uh even though it's attached to installment payments and it will be following you in the future that makes it feel um a little bit cheaper or like at least you're not depleting your all of your your income right in the moment and so you feel like you feel like you you can make those payments as they come up. One of the big problems that people point to is that because this isn't being reported systematically to the credit bureaus and these individual buy now pay later companies are not telling each other about your loans with them. There's no communication here. So each of these, you could take out a buy now pay later loan from four or five different companies and all of a sudden you have,

you're keeping track of four or five different individual payments or maybe if you did multiple purchases with each of those, it can kind of turn into this very confusing rotation of various payments that are coming in at different times. And there's no kind of, you know, there's no credit scoring net that's going to keep you from spending more and more. There is a kind of internal system within each of the companies that presumably, you know, kind of limits the amount that you're spending. When you apply to buy for, you know, to buy something through buy now, pay later, generally they will, you know, they'll often run a soft credit check. So they'll, they'll, they'll look and see what your credit history is. But a soft credit check means that it won't

impact your credit score. Then they have different kind of like algorithmic or algorithms that they use to also determine whether they should give you a loan. And then they'll set a kind of initial spending limit. So they'll say like, you can only spend $200 with us. And once you have proven yourself through that purchase to be kind of dependable, they'll, you know, by making three or four of your installment payments, they'll up your limit. So there's kind of like an internal credit system within each of the companies. But because they don't communicate, you can easily get into trouble if you're going on a shopping spree like our character did. It's like the exact opposite of asymmetric returns. It's like, you know, you're investing and

you're like, oh, my risk could tolerate, like I might lose 10% on this, but my upside is up to 200%. So that's a win. This is like the exact opposite where it's like, hey, they don't record report anything if I'm doing great. But if I mess anything up, it's going to bite me. So there's not an upside for your credit score, but there's definitely a downside. Yeah. I will also say, like generally, it doesn't seem like the, like the kind of standard model is based around like nailing you on late fees or or kind of getting you into a fee trap structure from what I found and from what researchers I saw found. The main thing about this business model and this may shift as more and more companies take it up and the kind of larger economics change. But right now,

they're able to do this because they're convincing enough people to buy more stuff that it actually makes sense for merchants to pay higher fees to adopt these services, to offer these services. That was going to lead into my next question. The consumer, when they're using this program correctly, essentially gets an interest-free loan. But in your episode, you mentioned that it costs the retailer like four to nine percent, which is almost double the going rate of credit card charges, which sounds like it would be a negative program all around. But the result, when the consumer is spending less in their monthly payment, is that they're buying more. They're spending more overall. So the hero of your story is Amelia. She bought a $200 bikini, but it was really only $41.

And then the next day she went out shopping again and she bought sneakers and jeans and sweatpants. And her total bill was going to be like $20 or something. And she's like, well, that's practically free. Like that's, you know, it feels like monopoly money, I think is the quote that I got from her. And it's, you know, one time is, okay, no big deal. Like let's say she used this and paid $200 for a bikini. and made her four payments and then she was done. And this was like the bikini of her dreams and whatever.

That's, I don't want to say no big deal. I don't want to say understandable, but that's like not a financial detriment. And then, I mean, I think in the story you even asked her, you know, did you learn your lesson? And she's like, I still spend. I still buy stuff online. And I think that it's going to be, I mean,

we're talking about people who often. aren't my age. We're talking about people who have grown up with the internet. They grew up with your life being online all the time. And, you know, when I was growing up, the phrase was keeping up with the Joneses. That's just a phrase. But we have a TV show called Keeping Up with the Kardashians. And you see their big, beautiful, glamorous life where they have all this amazing stuff. And you're like, wow, they must be happy because they have all this stuff. So if I have all this stuff, then I'll be happy too. And, you know, spoiler alert, they have problems just like everybody else. Money doesn't buy happiness. But when you're 19 or 25 and you've been living in

COVID for two years and you're not going anywhere, seeing anything, and all you see is this like fake life that people are showing you online, you can think, oh, well, if I just had that brown and white bikini, then my life would be perfect, you know, and that's just, you're not going to be happy. You're when you have a brown and white bikini because that's not the thing that's missing from your life. So don't go out there and I'm not a reporter. I am definitely biased and I hate this program so much because I just think it's awful for people who don't know what they're doing. And that's exactly who they're aiming at.

I asked you kind of a leading question. Is there anything predatory or detrimental about this practice? Is there anything not predatory or good about this practice? Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going, and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your

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Anyone can call or text for free confidential support from a train responder anytime. 988 suicide crisis helpline is funded by the government in Canada. Well, I was going to just say on the kind of first point, like, one of the things that feels a little bit dastardly is the way that these have been so, uh, kind of seamlessly interwoven with different with like kind of social media and influencer culture in a way. Like our protagonist Amelia found out about this because a lot of the influencers who she follows and aspires to become, you know, we're kind of plugging this new technology from a few different companies in their videos. They would do these hall videos, which are when they try on a bunch of

different outfits, they order a bunch of different clothes, tell you which ones they like, how they fit, you know, these kind of shopping videos essentially. And then they like provide a list of where you can buy the things. And now they offer this new payment system there, which is a big part of the strategy of kind of targeting people in this, in this demographic. So they're, there definitely is something to be said for like, this is targeted for people who have not, you know, generally don't have a high degree of financial literacy.

And so there is like an even higher potential for problems there. That said, I think, you know, it's not, as far as I can tell, like there is definitely promise here, right?

Like if you're somebody who doesn't have access to other forms of credit, and you use these things according to their terms and conditions, there's a way that you can use this to kind of smooth your your consumption if you, you know, in a way, like if you were to use pay, instead of using payday loans and taking on extremely high interest rates that get you into a debt cycle to make a purchase for, you know, when you're waiting for your check to come in. If this is an alternative to that, it is pretty promising in that like you're going to buy one thing. If you follow the terms and conditions, you can pay for it and you'll get the money later down the line and be able to kind of like make the purchase even. though you didn't have the immediate amount to spend. So as an alternative to other forms of consumer credit, I think there is definitely a promise here. There's going to be a tradeoff when it is kind of integrated into the kind of existing consumer credit scoring system, I think. Because like

the way it's designed right now, if you were, if you were just to straight up report these types of purchases to a credit bureau, there are all sorts of things that would make it problematic, right? Because each time you're making a purchase with a buy now pay later service, you're essentially taking out a new little loan and you're taking out the maximum you possibly could take out on that line of credit. So what that would look like on a credit reporter to a credit bureau is like a ton of new loans all the time that are maxed out. There's maybe a benefit if you're paying them off consistently, but basically the credit bureaus need to figure out a way to actually make sense of this data and make it so it's not like entirely detrimental immediately if it's reported to them. And as far as I can tell, that that sort of stuff is in motion, this kind of movement of the broader financial system to try to make sense of this new product. But yeah, my takeaway was there are definitely a ton of pitfalls. Like, there are easy ways to get into trouble with this. As there were with credit cards, as there still are with credit cards, if you're deciding to charge everything and don't have the means to pay it back. With credit cards, you're paying interest, it will negatively affect your credit score as well, which will impact.

your ability to, you know, get a car or get a house or whatever else. So there are other consequences to going on this type of spending spree with other forms of consumer credit as well. But you get points. That's true. So, so, okay, so we mentioned if you, if you miss a payment, you know, then it'll get reported and it can hurt your credit. But are there, is there any other kind of recourse? Like, let's say I, let's say I bought myself a $200 brown bikini because, you know, why not? And I made the first $4199 payment and then I didn't make another payment.

But I already got the bikini and, you know, I look wonderful in it. So who eats? I mean, I can't imagine that the company calls and says, hey, please send that back. Is there, you know, I wonder what like, what's, what's the recourse look like? Does the merchant eat it? Does the pay, by now, pay later company eat it. Like someone, someone's getting hosed in that scenario. Yeah.

I mean, so, I mean, one of the appeals to merchants also of the. of the buy now pay later service pitch is that they're basically being bought out at the moment that the customer buys the bikini right they're like they are out if the person had used a credit card instead that person would the consumer would have charge back protections and other consumer protections that come specifically with credit cards because of some of the regulations that were put in place in the 70s which means that if they didn't like it they could initiate a charge back and that money would be pulled back from the merchants. So there are kind of like financial risks to the merchants and annoyances that come with credit cards and some other payment things

that make by now pay later a little more attractive. Well, basically, we spoke to a few other of our listeners. We did a wide call out. We talked to people on TikTok about the kind of their experiences with this. From the people that we spoke to, it seemed like if they missed a payment for kind of like organizational reasons. Like they just, first of all, most of these payments are automatic. So you put in either a bank account number

or a debit card number or a checking number. And they auto draw every two weeks or whatever the kind of payment cycle terms are. So generally, it's not like, oh, it slipped to my mind is not the reason you're going to miss a payment. If you don't have funds in your bank account, from the folks we talked to,

it seemed like the, also that a lot of these services will send you payment reminders kind of the week of through text and other forms. And then if you're unable to pay a few of the people we spoke to said, they set a new deadline basically. And they said, all right, you miss this payment. We're going to charge you a late fee unless you can pay within what I don't remember what it was, maybe seven days or ten days or something like that. If you do that, we'll waive the fee. So they're not even necessarily charging the fee at the first time the payment is dropped. Because like their model is not really about getting you into a cycle of fees, right?

They want you to just be consuming more to be boosting the merchant number so the merchants keep paying the fees, right? So, like, that's not really like the predatory angle of the model as far as I can tell. But there is a point at which they will send your payments to collections and, you know, potentially sell the debt. So these companies are on the hook as far as I can tell for kind of that, if it were really dropped. and then they can go through the traditional kind of like trying to recoup their their costs methods,

which would be collections, which is how it would potentially impact your credit score. Cool. I mean, realistically, the, like, I, I'm torn on this. I like the way that their, their business model is charging the merchant for the service rather than the consumer. And there's not an interest rate. And there's not, you know, it's essentially the same.

as swiping your debit card. It's the same cost, just, you know, spread out. And so in some ways, I could see it makes sense that the downside I see is, you know, it's like we talked about before the show. It's a tool, right? And if you realistically, from like basic personal finance stuff, if you can't afford to buy the item right now, then you probably should just wait to buy it rather than doing this because, you know, what's going to happen is you do five or ten of these things and then for the next three you know the next quarter your monthly expenses have shot up and if something comes up now you're kind of and it's kind of that kind of brings up a weird situation which is like let's say let's say I got crazy and I bought a thousand dollars a month worth of bikinis

and so now I'm on the hook for you know a thousand dollars a month for the next quarter and then it'll go away whatever but if I'm applying for like a mortgage that's not going to show on my credit report so it won't show on my debt to income so they may be like, oh yeah, totally qualified for the mortgage and then I can't afford the mortgage. So it's kind of a weird, like, exactly like what you were saying. It's because it's not regulated and they don't really haven't figured out what to do with it. That it's like there's some weird like ways to fall through the cracks on this that could help you in some regard. But if you overdo it, next thing you know, you're not even living paycheck to paycheck.

You're like, oh my gosh, I need this next paycheck so that I can pay all this back to zero. which is just not a fun spot to be. I mean, as you say, it's a tool, it is a tool designed to get people to consume more than they would otherwise. And like a big part of the appeal is that they've, they've targeted this demographic of people who might not have been buying stuff on credit before at all. So it's a tool, but it's a tool that preys on people's desire to consume things, which is like maybe a broader problem in society and with credit as a kind of larger engine for our economy. But it's the same psychological tool as why on Sunday when I was in Walmart getting a toy for my five-year-old as we're doing grocery shopping.

And I'm like, you've got, you know, whatever. I don't know, $10. We'll say $15. And he points at something and he goes, oh, well, that one's only 14. So can I get something that's a dollar? And it's like, well, that's $14.99. And that's a psychological game. So it's the same thing as like a course being $197 instead of $200 or, you know.

And the funny thing is that stuff works. That works on me. That works on you. That works on all of us. I bet it works on Alexi too. Alexi, I don't want to speak for you. But I bet it works on you too because you see the one. You don't see the 97. You don't round up. You see one. With one, you round down. It's practically free because it's only one. You round a zero. So, you know, and I've used things like this. I do a lot of home improvements. And I go to Home Depot, I swipe my card and if you use the Home Depot credit card and you spend X amount of dollars, you get no interest for 6, 12, 18, or 24 months. And I make sure that I pay that off before the end of the promotional period because if I don't, then I owe the entire amount of interest on the entire purchase for the entire time, even if I only have like $5 left at the end of the thing. So I make sure that I definitely pay that off before it's due. But that's an interest-free loan.

I would much rather spend $2,000 over the course of 24 months than right now, because I can then go spend $2,000 at lows as well and buy more stuff. So I can identify with what they're doing, but also I can afford to buy the $2,000. I'm just choosing the interest-free loan. And I think that's kind of the difference between the way that I'm using it, which is in a more responsible way than this, like this girl, I don't believe could have afforded the $200 bikini. Or maybe she could have paid $200 for the bikini. But then if she had to, she would not have also bought the shoes and the jeans and the

sweatpants and all of the other things because, you know, so, I mean, it's set up. And in that way, I think it is very predatory. You're tricking people into paying later, these little tiny amounts. I found an article on SFGate.com about this same concept because like I said, until I listened to your episode, I didn't even know this thing existed. Celesta from the Bay Area, she's a fashion influencer on TikTok, said people almost like brag or joke, oh, it was only 24 payments of $20 or I got it with afterpay. so it's technically free. No, it's not free. Even if you're paying $1 for, you know, 47 payments,

that's still $1 for 47 payments. It's only free if it costs you $0 forever. And it doesn't cost you $0 forever. And I just, I wanted to do this episode and talk to you more about this because I think there's a lot of people out there who have no idea that this program even exists. And I can see a lot of people,

who, because they don't know what exists, they don't talk to their children about it, I have not talked to my children about this because I didn't know what existed until very recently. And now this is another thing I have to teach my kids not to do because, you know, unless they can use it in the way that it, you know, will benefit them. And that is to buy things that you were already going to buy and then just spread out the payments, but only if you do it all the way through. And, you know, it's, I just don't see a lot of upside for most people with this program. Yeah, the other, the other thing to mention is that a lot of these companies now become kind of like marketplace platforms. So you can actually go shopping or they'll send you kind of like,

you can go shopping through their platforms, essentially. So it makes another kind of avenue, another app on your phone through which you can, uh, go and find deals and use their, use their service. Um, so that's another thing people should be aware of if they're like, thinking about downloading any of these apps. And also that also brings up one other thing. The CFPB is also looking into what type of data is being harvested from people's phones and whether and how that's being sold and packaged. So that's not clear yet, but because it's such a kind of digital technology, because it potentially interacts with other apps on your phone, like what is tracked is not exactly clear yet. So that's another thing kind of regulators are concerned about and looking

into. Well, and it's not all wine and roses for these companies right now. I noted that Klarna just announced that they're laying off 10% of their workforce, and a firm has lost nearly three quarters of its stock value since the beginning of the year. And not like, I mean, we're recording this at the end of May where everybody's lost a ton of their stock value. So I can't really say that that's all due to this. But some of these companies are being sued. And in California saying that they're acting like lenders. So they should be registering as lenders and then being regulated as lenders. So I think there's a lot of, what is it?

It's a learning time and an exploratory time to try and figure out, you know, because I think it's kind of funny. The Silicon Valley moves so fast. And then the stodgy lawmakers have to like scramble and, catch up. Do you remember when Mark Zuckerberg was in front of Congress? And one of the Congress people is like, can you tell me why my iPhone does this? And he was like, I don't work for Apple.

Those are my competitors, sir. Yeah, they don't understand what's going on. And because they don't understand what's going on, they don't know how to regulate it. And so it's this like, I'm so flustered because I'm so flustered because I'm so frustrated because we don't have financial education in school. My daughter is a freshman. She's just tomorrow's her last day of freshman year of high school. And with her entering class, her high school class is the first class in Colorado that is required to take financial education before she graduates. And she has to take a whopping half semester. And I'm like,

oh, well, you know, don't put yourself out. I don't even know what they teach. teach in this whopping half semester, which doesn't come until her junior year. And by that time, she could have already gotten herself into a whole bunch of debt with this stupid clarna and a firm and after pay. There'll be four new buy now, pay later and other types of financial technologies we haven't heard of yet. Exactly. Exactly.

So, okay. So the moral of this story is talk to your children about credit and how buy now, pay later and all this online shopping and all this craziness because you can get yourself into a world of financial hurt, even when you think that it's, you know, monopoly money. And I had no idea that I had to pay this. And it's technically free because it's only a dollar. And it's not only anything unless it's only zero. Yeah, interest free does not mean free. They should make like a net worth requirement for teaching that financial class. Because it's kind of ironic that you know that whoever's teaching it probably, you know, they took a class in college and they may or may not actually

know anything about finances. But at least they're trying, which is cool. It's interesting. You mentioned something, Mindy, the idea that I was trying to figure out how to word this, but like the idea that they should be regulated as lenders is interesting when you consider that like they're not lending you funds, they're not charging you interest and they're not charging you fees. Well, what about a mortgage?

When I go and buy a house, the mortgage company doesn't hand me $500,000 and say, okay, go give that to the title company. They send it directly to the title company who gives it to the person who pays off their mortgage. This is the same thing. That's true. They charge points in interest and fees and, you know, so it's like, yeah. It's still loaning you the money. She's like, it's like this weird like loophole that's just like hanging out over here like,

oh, I hope no one sees us. Like, please don't regulate us, Mr. C, CFPD. Well, but their point of sale loans. Buy Now Pay Later is a. point of sale loan. And just because they're not charging interest doesn't mean it's not a loan. They are giving somebody money on your behalf so that you can buy something that you don't have enough money to pay for outright or that you're choosing not to pay for outright. So that, that, yes. Could you say that again? I didn't hear that. My mic suddenly stopped working. I don't

know what's happening. I mean, buy now, pay later is a way of describing any loan also. I mean, whether you're buying the house now and paying for it later or a car or anything else, it's kind of baked into the, baked into the concept. Yes, but this is, now we're kind of splitting hairs, but I see what you're saying. Yes, credit cards are by now, pay later in installments. And I don't have to pay the whole thing all at once, but it's different. Yeah, it's revolving instead of installment, basically. And one is kind of like, they both use fees.

One depends. but credit cards depend on those interest payments as well to be profitable, whereas this just gets the money for the moment from a different place for the most part. Even though by now pay later companies do offer longer installment payments for interest, so they act a little bit closer to what a traditional credit card. I wonder how they would act if they were regulated like lenders are. If they had to follow all the same rules, would they change their tune?

Would they change the way that they behave? I mean, they would have to change the way that they behave. I wonder if they would still exist as many of them. Right. And that, well, the other thing we didn't mention, too, is that it's actually even gone beyond kind of personal finance consumer. Or it's beyond like kind of consumerism or like, you know, shopping or something. Like now, now it's spread to you can pay for some types of, you know, medical bills or

dental bills or small business financing or house, you know, house at home improvement. like you could take out a kind of buy now pay later loan to do some of the work you were describing, you know, going and doing yourself at Home Depot. So it's expanding to become a model for other types of act of commerce, basically. I think it could have its place, but I think we need to enact more regulations around it. And I really am hesitant to say that because, you know, the government's really good at screwing things up. But I think that they need to do something so that there's more laws in place so that you have to follow all the same guys. guidelines. So there's not just this like loosey-goosey whatever. Yeah. Well, one last thing I'll say is that to me, it felt really reminiscent of kind of the way that credit cards spread and were ultimately

adopted and then regulated to some degree. Like credit cards started as, you know, maybe in department stores or like very particular to particular business. You had credit within one business. And then eventually a few of these networks came together to make cards that they could convince merchants across the economy to use and become interchangeable to make universal cards. And then there were all sorts of like preposterous ways they tried to get people to use them. You know, they like mass gave out credit cards in people's mailboxes. And there were just like there was all sorts of ridiculous shenanigans in the early years of credit cards that led to problems with overconsumption and spending, problems with fraud,

that then led to kind of the regulatory framework that we now, that now is just kind of normal to us. And so this feels like a new type of consumer technology that's also started with individual businesses targeting individual demographics and is now expanding. And now the traditional financial institutions are like, all right, we're going to start offering versions of this to compete. But there hasn't been a kind of full regulatory reckoning. So we're still in that leading edge moment of kind of new technology. Wow. Yeah. I think that's a really good point.

That's a really good comparison that you're making. I can see the parallels. That's very interesting. Well, I'm excited to see how this goes. I'm excited to see some regulation coming, and I don't really think that that's going to come anytime soon. So if this is something you're planning on using at the Buy Now Pay Later, just do it with extreme caution and read the fine print.

Oh, my goodness, read the fine print of the thing that you're doing before you do it. You know, put it in the cart and then walk away and think about your purchase. Do you really need that brown bikini? David, you would look smashing it and it goes with your beard, but, you know, do you really need 20 of them? No, no, just two or three. Okay, Alexi, this was so much fun. I really appreciate your time today, sharing your thoughts about this program with us, and I appreciate you bringing this up just in general because this episode was really, really, really helpful to keep me informed of all the new crazy financial shenanigans that Silicon Valley is coming up with. wait to see what else they come up with. It's an exciting new world. Thank you guys so much for having me.

It's been a pleasure. Okay, we'll talk to you soon. All right, David, that was Alexi Horowitz-Gasie from NPI's Planet Money. I really enjoyed talking to him, but I do not like this program, this buy now, play later. I think there's a lot of potential upside where people could use it responsibly, but, you know, like credit cards, like other loans, people are going to use it negatively. And I just think that there's not enough regulation around it, and it's targeting people who don't have enough education. But then even as I say that, I'm thinking, well, yeah, but what about credit cards? People get themselves into problems with credit cards. Why don't I have such a problem with credit cards or other types of loans? And I don't know what it is about this particular program,

maybe because it's in its infancy and there's no regulation around it, but I just, I don't like this nearly as much as I'm okay with credit cards and other things. Because points. Yeah, the lack of regulation is definitely something to, you know, I don't want to say worry about, but to be aware of. And then I think the other thing that that got me got me on this as far as just not being a fan is the fact that if you use it, there's absolutely no upside to your credit or your credit history or anything of the sort. But if you fail to make a payment, then there is a downside. And so I, you know, it's, it's the exact opposite of what you want as an investor. You want very minimal risk, massive upside potential. This is very little gain other than whatever item you want

and massive downside potential. Whereas, you know, so not to say that it's a terrible, I mean, they're not charging you fees. They're not charging points or interest. So like, there are worse options out there. But I would say if you're looking at doing this, maybe the better bet is to just put that $45 away for four months and then buy it at once. And then you don't have to run the risk of someone, you know, messing with your credit because of a missed payment or whatever. And then, hey, if you, you know, three months, four months down the road, if you still want it, then, you know, cool, go buy it.

And if you don't, then you've got $200 so you can now invest. What a great idea, save for the purchase instead of making the purchase and scramble to make the payments later. I love it. That was a good point, David. Okay. Should we get out of here? We should.

From episode 312 of the Bigger Pockets Money podcast, he is David Paray, and I am Mindy Jensen saying, Take Care, Polar Bear.