The idea is simple. The consumer agrees to pay a bill over a few months rather than immediately. The merchant gets their money upfront. There’s no interest charge, just a bigger discount (up to 8%) to the merchant, plus more big orders. Everyone is happy, right?
What it means is that the BNPL provider, whether it’s Afterpay or Affirm, Klarna or Sezzle, is stepping in for the credit card bank, where interest rates can be 20% or more. If you’re buying stock in Affirm right now, you’re buying a consumer finance company.
There are protections for the BNPL guys, but they’re limited. They could hammer the credit ratings of consumers who don’t pay. They could raise discounts on merchants. Since the field is new both sides need to read their contracts closely. They won’t.
It’s also easy to commit fraud against BNPL. The crook first makes a small BNPL purchase, which since it’s small gets them treated as honest by the BNPL company. Then they use a stolen credit card and make a big purchase, which they renege on.
The real problem is that several years ago credit card companies put a “liability shift” on merchants. The processors like Visa said that because they’d figured out fraud with chip-based cards they were transferring the risk on transactions from consumers’ banks to merchants’ banks. You get robbed now, they said, and it’s your own fault.
BNPL offers the promise of more big-ticket sales, and merchants think the BNPL provider is taking on their risk, but they're not. Regulation is coming to the space but not fast enough to save some merchants.
We’re in a go-go market right now. Things like BNPL look like easy money. We won’t always be in a go-go market. Crooks are also very creative, especially the online ones. I’m guessing a lot of stores, especially online stores, are going to crash. Visa and their processors, which know how to handle consumer loan deals, are in the process of getting into BNPL, but everyone’s buying companies like Affirm because they’re new.
New can also mean naïve.