Summary of Buy Now, Pay Later: Echoes of the 2008 Recession

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Buy now, pay later services are becoming increasingly popular, but there are some risks associated with them. In the past, these services have been associated with risky behavior, but companies are trying to shift their focus to other revenue streams. One of these is charging investors a service fee for lending their money to the company.

  • 00:00:00 Buy now, pay later is a type of short-term unsecured personal loan where you can defer the cost of an item by splitting the payment into smaller installments. The concept of debt and payment plans have been around for centuries, and America itself was founded on buy now pay later. In 2021, a firm Barna and afterpay together boasted over 173 million global active customers. Buy now, pay later is popularized by three companies, Klarna, Clarina, and Afterpay. Klarna and Clarina have brought in the purpose of short-term unsecured personal loans from large one-time Essentials into everyday impulse and Splurge purchases, while Afterpay has made it easy for anyone to borrow money simplifying a historically opaque time-consuming process of applications and manual underwriting. Fintech has a terrible track record when it comes to both idea and execution, like blockchain, peer-to-peer lending, and Equity crowdfunding. However, companies are always eager to jump on fintech bandwagons before the wheels are even placed. scared of losing their duopoly, Visa and MasterCard have jumped headfirst into buy now pay later PayPal and Stripe have launched their own products, Chase and Citibank have thrown their hats
  • 00:05:00 Ecommerce is booming, and traditional banks are struggling to keep up. Younger generations are turning to fintech startups like Clarna and Afterpay to handle their finances, instead of banks. The high cost of acquiring and maintaining customers, as well as the pressure to grow sales without discounts, has made buy now pay later a popular choice among consumers and retailers.
  • 00:10:00 In this video, three different buy now, pay later companies are compared. All three companies boast low default rates and offer flexible repayment terms, but the products and user experience between them are strikingly similar. All three companies focus their marketing efforts on signing up new retailers, and all three offer savings accounts that allow users to deposit cash and earn interest. The main differentiation between the three companies is their respective retailers' exclusivity.
  • 00:15:00 The author discusses how a buy now pay later option, such as Dyson products, can be a cheaper alternative to traditional retail purchases. He also discusses how certain retailers do not allow for credit card payments, which can lead to a sense of consumer debt. The author concludes the article by discussing how investing in art can be a safer option in the current economy.
  • 00:20:00 Buy now, pay later companies are booming in popularity, but there are risks associated with the products. Klarna, the largest buy now, pay later company, saw its stock price plummet after Square acquired it in late 2021. After Pay is the largest buy now, pay later company in 2021, followed by Arna. Clarna is the largest buy now, pay later company in Europe, while After Pay has the most customers in Asia Pacific.
  • 00:25:00 Buy now, pay later is a popular payment method that has seen significant growth in recent years. Merchants who offer the service often make a large percentage of their revenue from interest and late fees. However, these models are not sustainable in the long term, as companies lose billions of dollars each year. Klarna and Afterpay are two of the more successful buy now, pay later companies, but their paths to profitability are not without challenges. Klarna and Afterpay both offer virtual card products that allow customers to use their cards at any store that accepts Visa. However, these products are not profitable without daily compound interest, which is not common among buy now, pay later companies.
  • 00:30:00 Buy now, pay later companies lose money on zero interest loans with no interest to collect, but this is an unavoidable cost of business for these companies to the extent that a firm has an entire category dedicated to this expense called loss on loan purchase commitment. This represents on average nearly 20 percent of a firm's annual operating expenses.
  • 00:35:00 Buy now, pay later loans were created in the wake of the 2008 recession in order to help people who couldn't pay back their loans in the short term. These loans became notorious for being very risky, and many companies have gone out of business as a result. In the current economy, where interest rates are rising and consumers are spending more than they are earning, buy now, pay later companies are trying to shift their focus to other revenue streams. One of these is charging investors a service fee for lending their money to the company.
  • 00:40:00 Buy now, pay later has been seen as a risky behavior in the past, but it is a trend that is growing in popularity. In China, where regulations are stricter, companies have been shut down for using buy now pay later services. In the United States, however, regulators have opted for a wait until it falls over approach.

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