There’s still a lot to learn about buying now and paying later

There’s been a surge in the buy now, pay later space, which is exactly what it sounds like. Get something you maybe can’t quite afford. Pay it off in installments. You might not even need to have your credit checked.

By some counts, more than half of Americans have used it.

There are concerns that this new method of payment could be confusing us about what we want versus what we need.

And now Affirm, a leader in this space, is partnering with Amazon. That’ll allow some Amazon shoppers who buy things that cost more than $50 to pay in monthly installments.

Max Levchin is CEO of Affirm. He believes the new model of buying is necessary. The following is an edited transcript of our conversation.

Max Levchin: I really do think that revolving credit and credit cards are kind of a power tool with safety permanently off. I think they’re not designed well enough to keep you out of trouble. And when we started the company, my theory was always, credit cards are [the] Neanderthal version of what really needs to happen, and that is much more consumer transparency, much more consumer control, [a] really clear sense for what things cost, and when you’re done paying for them, even if you are paying over time. And one day, it’ll just be the new way. That’ll be the 21st century tool for buying things.

Jed Kim: Buy now, pay later is growing, but it’s still unfamiliar to a lot of people. What kind of education or financial literacy are you providing?

Levchin: What we focus on is making sure that it’s really, really, really clear to you as you decide to use Affirm what the costs will be, what the term will be, that there are no late fees, that you don’t need to be scared about missing a payment. It’s our job to remind you. And the education there is primarily in the form of delight, of going, “Oh, wow, I missed a payment, and all I got is a text message saying, ‘Hey, please get current.'” The good news is that BNPL is growing very quickly. Four years ago, I think, when I last spoke with Marketplace, I struggled to describe it because there just wasn’t that many people that knew what we were and what we did. These days, I think it’s everywhere. We just surveyed a standard American Gen pop — it’s about 50% of the people who plan to use a product like Affirm for their holiday shopping, so the awareness is going up quite significantly.

Kim: What if I decided I want to start selling things on Amazon? I mean, I’m not a big business. Do I have to accept Affirm?

Levchin: You know, the Amazon partnership is in its test phase. So one, I couldn’t tell you exactly what every part of it looks like, and probably shouldn’t, either. That’s an out-of-bounds question for the moment.

Kim: I mean, I did check earlier today, and I saw that I could purchase both an Oculus Rift and a backpack using Affirm. Who doesn’t have access to it at this point?

Levchin: I’m actually quite pleased that you’re able to see it. It’s not about, it’s not available to 100% general population, so you are in one of the many segments who is testing the product.

Kim: Credit cards and, and loans, they’re federally regulated to protect consumers from getting into too much debt. Buy now and pay later doesn’t really have those same protections. Should it?

Levchin: So it may sound somewhat odd, coming from a Silicon Valley-type person. But I’ve actually, generally speaking, [been] very pro-financial service regulation. I think it’s superimportant, and I do think that it’s not just a role to play, it’s actually something that has to be very active in the space. We are very regulated. Affirm certainly is. And we work with banks, and they are directly regulated by [the Federal Deposit Insurance Corp.], and there’s local, state authorities, etc. So we have full exposure to all those regulators, and generally speaking, welcome it in a sense that it allows us to educate regulators and legislators who create these regulations about what this product is and isn’t, what it will and will not do. Given our stance and our mission, from my point of view, it’s generally a very positive thing. So we’ve engaged with the regulators for many years. I spent a bunch of years on Consumer Financial Protection Bureau’s advisory board, trying to make sure that I understand the regulatory goals and, and help them shape their agenda. So generally speaking, I think it’s an important positive force in the space.

Kim: What kind of additional regulations would you want?

Levchin: I think, more than anything, I would want the regulators to understand more about the difference between this type of credit and credit cards. Because I ultimately think that this is a far better product for the end consumer, and providing a clear framework for comparing the two — explaining what these products do and do not do, disclosing all the various pieces of information that consumers really must understand, would benefit from standardization.

Kim: And part of the thing with credit cards, and I personally experienced credit card debt early on because I didn’t understand it. I didn’t know what I was getting into. And at the same time, I’m remembering all my parents and uncles and teachers who had that life experience saying, “Be careful with how you use your credit card.” This is such a new field, there isn’t that wisdom built into the populace. What’s the risk there?

Levchin: I think the real risk is that there’s a long history of headline zero percent offerings, which the credit card industry invented many, many years ago. In fact, I had my own “Oops.” I thought this was a interest-free-transaction moment all the way back in college days, where you’re promised zero percent, no-interest transaction. In very fine print somewhere in the back of the statement, it says, by the way, if you are a penny short or a day late, interest will compound basically from the beginning of time. And that’s what happened to me. I found myself suddenly owing a lot more money than I thought I did, only to be confused about what is the next minimum payment I must make, etc. So not only did that hurt my personal finances, but [it] also damaged my credit score for quite some time. That is the true problem, from my point of view, within this industry, and that’s where regulation really should look and do more. The danger forever is other actors, either through negligence, indifference or profit seeking, resorting to those practices, and I think that’s always looming. Our job and our mission is to educate the consumer to make sure they understand what those things are.

Related links: More insight from Jed Kim

By the way, I’m not actually looking to buy an Oculus. I have a 4-year-old during a pandemic. Just going on a walk is enough escape for me.

Protocol discusses a major reason the Amazon deal is so big for Affirm. It means direct access to lots of consumers. And building familiarity is important for a company that may want to be as ubiquitous as, say, Visa cards.

Buy now, pay later companies are hot properties. Goldman Sachs is buying GreenSky for $2.2 billion. The fintech company provides BNPL services for people looking to make home improvements. CNBC says the acquisition gives Goldman a boost in consumer finance, which is far different from its old approach of mainly doing investment banking, trading and wealth management. Apparently, regular folks can also be a treasure trove of investment.

There can be risk to paying later. A study has found that a third of people who’ve used BNPL in the U.S. have fallen behind on at least one payment. And 72% of those people said they took a hit to their credit scores as a result. It’s the young’uns that’re missing payments. More than half of Generation Z or millennial respondents said they’d been behind.

Finally, technically, buy now, pay later isn’t actually new. It’s a business practice going back more than 150 years. Bloomberg says it really got going when Singer sewing machines offered its products for a “dollar down, dollar a week.” What’s different now is that buyers aren’t using it for big-ticket items, but rather small things that’ll take a few weeks to pay off. Also, all the apps — those are new.