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The Pitfalls of Buy Now Pay Later Apps

Revenue & Finances

Isadora Teich wrote this article

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You have likely seen them all over the internet already.

When you go to pay for an online purchase, many sites have integrated options like paying via Afterpay or Klarna, which let you pay for something in installments. This has become widespread and is only likely to get more popular.

Digital Payments platform Square Inc has taken notice of this and will acquire Afterpay.

While there are definitely benefits to such apps, nothing is perfect. Let’s take a look at some of the current issues with them.

So Many Apps

There are so many apps out there like this that many sites have published guides to navigating them. Investopedia has an article where they tell you which one is the best overall.  They also explore which buy now pay later app has the most flexible payment plans and which are best for small or large purchases. It also tells you which are best for people with bad credit and even students.

For one thing, all of them have different rules, payment schedules, and penalties. As different vendors associate with different apps, you could potentially end up in a big mess with many different bills coming due at different times.

Afterpay, for example, caps late fees at 25% of a purchase.

Other apps are far less kind. You could potentially end up in a lot of debt and paying high fees over something small.

Also, losing track of payment schedules can be especially damaging when they are linked to a debit card. Users can potentially trigger overdraft fees. Then they end up owing money to both their bank and the app.

It Gets Complicated

These apps have people asking some questions. For one, is it particularly ethical to push buy now pay later apps onto students or those with bad credit specifically? You could say that giving young people and those already in financial trouble new ways to accrue debt is not exactly a gift.

However, the argument could also be made that the cost of living is so high in the US, and general wages so low, that these apps were kind of inevitable.

After all, companies are not creating these apps for no reason. People want and need things. If they can’t afford them and do not buy them, both consumers and businesses who depend on consumers suffer. It makes sense that a whole industry has emerged to try to solve this problem.

It is undeniable that these apps are solving a problem for vendors. They have high retention, inspire people to shop more, and mean that consumers are less likely to wait for sales. However, the argument could be made that they are not as kind to their users.

The Numbers

The average living wage in the US is about $55,000 a year.

However, when it comes to figuring out what the average American actually makes, and if they can meet this number, things get complicated. In 2019, the median US household income was $68,703. This looks promising and implies that most people make more than a living wage.

However, this number is skewed by a small number of high earners and a large impoverished population. The top 1% of wage earners are responsible for 20% of all of the income earned in the US. At the same time, more than 12% of the US population lives below the poverty line. This is likely only to increase as a result of the pandemic.

All of this means that when you look at the average income in the US, it really doesn’t tell you much about the lived experiences of many actual people. The rise of these apps reflects the reality of American life better.

After all, if most people were making a living wage, there would likely not be a thriving market dedicating to financing online shopping. In a country where nearly half of the population has no savings at all, so they can’t financially plan or save up for purchases, it makes sense that this has happened.

Consumers Don’t Really Know What They Are Getting Into

As Investopedia noted, some apps are geared toward large purchases and others toward small purchases. Some charge interest and others offer a number of interest-free installments over a period of time. Some will report you to credit bureaus or debt collectors for delinquent payments and others will not.

Most of these things are not inherently bad. After all, it is the right of a company to adopt policies that work for them. The main problem here is that consumers are not aware of a lot of these policies due to how these apps are integrated into eCommerce sites.

Some may think that these apps are no different from getting a credit card, which is super common.

At the end of 2020, 365 million American consumers had a credit card account. One big way that these apps differ is that credit cards are not casually integrated into eCommerce sites. You can’t sign up for and use a credit card in a second without thinking about it.

If you want a credit card, you have to apply for it. Also, all of the rules of that account, including APR, fees, and rewards, are made explicitly available to you. Depending on your account, you may be able to look at them any time via an app. Even with all of this available, many Americans still end up in trouble. Collectively, Americans owe more than $800 billion in credit card debt.

Now, in some cases, these apps are actually a better deal than using your credit card, because they don’t charge APR.

You only pay for what you bought, rather than fees on top of that over time. However, there is something to be said for the fact that consumers are encouraged to pay via whatever app a site has partnered with without knowing most of that app’s policies.

Do These Apps Encourage Overspending?

Studies indicate that these types of apps encourage people to spend more. A recent survey by Lending Tree shows that people who use these apps spend more on non-essential items. Two-thirds of shoppers said that they buy more and half said that they wouldn’t have bought something at all if it wasn’t an option.

62% of respondents have used buy now pay later apps five times or more.

Also, they don’t really appear to be using these apps for essentials. The most popular purchase according to those surveyed was designer items. Some claim that these apps essentially target a generation of people who are already drowning in student debt.

Many of these apps do this with celebrity endorsements and by claiming to be a more transparent option to traditional credit. However, they may be even less transparent.

A Credit Karma Survey found that about 40% of users have missed at least one payment. Many of them definitely had no idea what the consequences of that would have been beforehand.

They Give You No Credit

Building good credit is a key factor in anyone’s financial health and life.

Your credit can control whether or not you can get a mortgage or even rent an apartment. While these apps give people who may have bad credit or no credit options for making purchases, those that report you to credit bureaus can harm your credit. Also, when you use traditional credit, you get rewarded for good behavior when you pay off your balance, and your credit score goes up. With many of these apps, users don’t see those benefits.

Also, when you use a traditional credit card, you have a lot of protections. For example, say you bought $700 airline tickets and the company folded, so you can’t even contact them for a refund. If you bought them via credit card, you can report that to your company and likely be refunded.

If you bought them with a debit card, you are likely out of luck.

Credit card companies are also well established and have a series of rules they have to follow.

Unless you personally lose control of your spending or get hacked, you are unlikely to be in for any nasty surprises. With these apps, it’s a different story. On Facebook, you can find a group dedicated to trying to unravel the mysteries of the super-popular buy now pay later app Klarna. People come together to try and solve issues like inconsistent customer service and battling with Klarna for refunds.

Final Thoughts

Buy now pay later apps could be quite useful for people with bad credit or no credit who need to make purchases. They also can give people another option when it comes to financing big purchases, like a sofa or fridge for example.

However, there are a lot of problems with how they are marketed and incorporated into eCommerce.

The argument could be made that they normalize overspending and getting into debt, two things that are not actually good for anyone. Also, as they don’t offer any consumer protections and their rules are not transparent. Perhaps those who can are better off just using their credit cards for large purchases anyway.

What do you think? Are you for or against these apps? Comment below. 

About ChopDawg.com: Since 2009, we have helped create 350+ next-generation apps for startups, Fortune 500s, growing businesses, and non-profits from around the globe. Think Partner, Not Agency.

 

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