> It doesn't provide any actual reasons for why BNPL is a bubble nor why such a supposed bubble is about to burst.

I'll provide one: it only made any significant sense in the near-zero interest rate levels we had last year. "Split it into four payments for $0 fee" is attractive. Much less so when there's a fee; Amazon's BNPL via Affirm is now up to 10-30% APR from the previous 0%.

At those rates, people just put it on a credit card.

I see BNPL companies as having two types of customers: those that can't afford the full price and want to pay over time, those that read the terms closely and realized the deal is too good not to take.

I took out a number of BNPL loans last year and it was never because I couldn't pay the full price but rather if I was getting the money at 0%, "free money". But I was never the target customer of these places, I was just taking advantage of very good terms.

Now that Affirm (and I assume most other places) are charging a floor rate of 10%, that second group of customers are no longer customers. I'm not sure how significant this group is but I'm sure it's not an insignificant number. Since these places make most of their money on transaction fees rather than rate premiums and fees on the back end, this could really put a dent in their business.

Maybe I just haven't had the opportunity to buy any big ticket items with BNPL, but the few times I tried it (trying to do the "free money" thing, getting a bit more interest in my HYSA by amortizing the total payment out over time), it just created kind of a financial tracking nightmare. I'd get flurries of emails about how my "pay in 4" payment was about to process....for $13. Trying to keep track of all that for a few pennies became too difficult (matching up which purchase each micropayment was from), although those pennies add up for larger purchases indeed!

But for a floor rate of 10%, BNPL is just a less terrible credit card, not a good deal :(

This is my take too. A $10,000 purchase on 0% interest for a year earns you ~$400 in interesting from a money market fund or whatever. I'm in a high tax bracket so $160 of that goes to the government. So even for a large purchase I net $240 in a year. Hooray.

Decrease the total cost of things purchased in this manner or increase the number of different things to track (or both) and suddenly I'm paying quite a bit more in additional mental energy than I benefit in cash.

The only place where this makes sense (IMO) is when you buy a new car and can get 0% and no payments for more than a year

When you phrase it this way, it sounds very comparable in terms of return to a credit card rewards program

The nice thing about a credit card rewards program is that it requires zero mental effort. Some people like spending more effort to do churning or whatever, but I make the same computation in that case and conclude that the extra money isn't worth my time.

Paying without a credit card is just supporting the credit card fees of those who do pay with one. The price is the same, but you often get 2 or even 3% cash back (depending on offers).

Anyone financially responsible (i.e. that won't get enticed into carrying a balance by the opportunity to get cash back) is leaving money on the table by not using a credit card (with good rewards).

How does the floor rate make it a less terrible credit card?

Because you're paying interest. My credit union offers an 8% APR; a 10% BNPL gives me no benefit over that.

The BNPL schemes are targeting low income customers who either can't or won't use credit cards.

The frequent little payments is a "feature". If you can't handle a $200/mo credit card bill, getting emails for $8 here or $11 there is probably easier.

Similarly I've used BNPL products to buy things like car tyres because they don't cost me anything (well - okay, the cost is borne by the seller, so presumably they bump the prices up a bit across the board, but you know what I mean), not because I didn't have the money. Generally it was things like "half now half next month".

The thing is, doing stuff like that - taking on debt and paying it - builds up your credit score. My credit score was awful after some youthful indiscretions with bank loans and credit cards, but after borrowing (and paying back) a total of about ten grand over as many years I've got a credit rating like a Swiss bank.

Did that actually work? I just assumed they would find a way to charge me 'interest' by having processing fees or some other scam, so I never used them.

I never used one, but I'd assume they're as good at following the plan as you are (I had read some articles that said some of these lenders operate on voluntary repayment, no fees, no collections, but I don't know how widespread that was), but interest rate arbitrage has to be considered against the effort.

It's much less effort to use my everything credit card and get my 2% discount than to do a 0% apr over four months (or whatever), setup a new account, setup payment at that new account, remember to make the payments, etc and for what? Short term bank interest on most of my purchases would be peanuts, especially since I wasn't getting 2% bank interest when BNPL was at 0%.

I imagine there are a number of those out there, but I've taken many BNPL deals that were zero fee, zero interest. It truly worked out to be the exact same cost whether I paid upfront or took the BNPL.

I imagine the BNPL people made their money from the same kind of CC fee models and from customers who ended up not being able to stay within the 0% timeline. From my memory it usually had some big fines or interest rates if you couldn't make the payments.

I always imagined that the companies using the service at checkout would give the BNPL company a percentage of the sale if the customer used the service. Even if the price is the same for the consumer, BNPL companies could argue that they generated sales that might've backed out had they not been available.

This is exactly how they work. I work for an ecommerce company that offers one of these services. We pay them a small percentage and they take on the liability to collect payment and handle disputes. We already pay another percentage to try and detect fraud for a certain amount of our transactions. By letting the BNPL company act as the purchaser on behalf of the customer, we can offer them a cut of what we would have paid for fraud detection.

Exactly. The retailer pays the interest (a small marketing cost to increase customer spend), which is made into an offering to financiers of a low risk loan trenches, with absurdly high interest rate (20%+ APR).

Your claims are not true for several reasons:

- Whenever you see a BNPL offer for 0% it means the merchant is paying the interest on behalf of the consumer. The merchants are in charge of making that decision, not Affirm. Affirm earns interest on every loan. Many merchants choose to assume that cost because it greatly increases conversion rates. Replies to my comment only confirm this fact (“I only ever used BNPL cause I got 0%!”)

- "attractiveness" is in the eye of the beholder. You may be unwilling to pay a fee, many other people are. Plenty of people roll over their CC balances each month and pay even higher APRs.

- Interest rates have little effect on BNPL financing; many can either lend out of their bank account due to their size, or they sell the loans immediately upon origination and thus pass the risk of changing interest rate environments onto another party.

"You may be unwilling to pay a fee, many other people are. Plenty of people roll over their CC balances each month and pay even higher APRs."

I get the sense you're not thinking in the margin. This isn't a question of whether "some people" will pay the fee, it's about the fact that as soon as the fee is greater than zero, "some people" won't, and the rate of that will go up as the fee goes up. This isn't a binary thing where suddenly the rate goes from 0% to 100%.

1% or 2% doesn't mean much to me and my household budget, but for these businesses such percentage differences are generally the difference between profit or loss.

I disagree and I think interest rates have a huge impact on these places. Just look at Affirm that used to offer 0% and is now offering 10% at minimum.

As far as "attractiveness", I really see two groups here. You have one that legit cannot afford the full price and are taking out this loan as a traditional loan, within that group "attractiveness" is in the eye of the beholder. However the other group is people that can very much afford the product but see the magic "0%" rate, for this group the only "attractive" rate is 0, any higher and they will not use the service.

> Whenever you see a BNPL offer for 0% it means the merchant is paying the interest on behalf of the consumer.

Yes. We consumers appreciate that.

> You may be unwilling to pay a fee, many other people are.

Sure. I think a lot fewer people will be willing to pay $X than $0.

> Interest rates have little effect on BNPL financing

0% APRs are only really feasible in a low-interest environment. There's a reason that Fed rate hikes are immediately followed up by APRs.

> Whenever you see a BNPL offer for 0% it means the merchant is paying the interest on behalf of the consumer.

I don’t think this is true - the merchant pays a transaction fee (around 3-5%) with companies like Affirm or Klarna, which is not much different than typical credit card fees. The merchant is not paying an interest rate or liable to pay more if the customer fails to pay on time.

You’re on the right track, but have the wrong specifics.

A merchant accepting card payments might pay “sticker rate” for processing, 3%, at the outset; but, they eventually get IC+ pricing as their volume increases. This might be closer to 1-2%.

If they pay 5% to a BNPL, that extra 2-4% is meant to cover the interest of the “loan” if the customer doesn’t pay back on schedule.

Sure but the merchant isn’t literally paying interest - yes they get charged a fee which helps subsidize an interest-free loan, but that fee is not interest nor is the merchant party to any loans that the consumer enters. The merchant gets paid more or less immediately minus a fee - similar to how a credit card transaction works.

I am 1000% correct. Go look at Affirm’s Q1 2023 earnings supplement, slide 14.

Average MDR is actually closer to 5-7%, 0% is closer to 12.5%

Merchants pay the interest because they see larger basket amounts and therefore more revenue. If the cost to them increases then it can reach a point where it's no longer attractive.

I don't think you make a convincing argument. Anecdotally, I've only ever used Affirm when they offer me 0% interest. Paying 26% or more for a soundbar over six months is not attractive.

Market for lemons? How many BNPL customers don’t qualify for a good credit card?

I never used one of these, partly because it seemed like it would create significant friction if I needed to return the item.

What is the return/refund process like with these services? I assume they get the refund from the merchant and then disburse your part of it to you? Does it go smoothly, or do you have to chase things down?

> realistically it's functionally no different than a credit card.

> There are real issues with BNPL, mostly extremely loose underwriting in the pursuit of growth.

It's a cc with bad underwriting...

You don't see this as a fundamental problem?

This doesn't seem much different to me than other sub-prime bubbles...

When done correctly, the underwriting is actually significantly better as it's done on a per-transaction basis, incorporating the item itself (ring purchases are significantly more risky to finance than sneaker purchases). You can also incrementally dole out a credit limit, rather than giving someone a $10k threshold upfront without any veto power over how they use that amount.

That being said, there are a ton of hucksters in the industry and I suspect we'll see most of them wash out in the next few years :)

I’ve worked in this industry and the underwriting is actually significantly better than most cc companies

BNPL is just a non-asset-backed sub-prime loan. We've seen this movie before and how it ends. BNPL firms can't survive a recession or higher consumer delinquencies.

Funny credit cards survive when it’s the same thing

The difference is that credit cards are not almost exclusively sub-prime loans and are reported on the consumer's credit. Many companies have largely prime or super-prime credit portfolios, and the industry is well-developed to serve these customers (Amex makes much more money from interchange than from interest, for example, and even sub-prime borrowers have tight control over their credit portfolio).

LoanS. And most are small and very short term (4 payments). The risk from defaults isn't as worse as for a auto-loan lender, or a mortgage lender, or even a CC lender (as underwriting is done on a per-purchase base, the total amount underwritten per user is much smaller than a typical CC)

Functionally it is substantially different to a credit card. The value of BNPL to businesses is the way that it changes the basis for a customer’s purchase decision, a credit card does not have that same dynamic.

The underlying credit mechanism might be a lot like a credit card but the way borrowers interact with it, which is what matters, is very different. The mechanics of a mortgage and a car loan are very similar but that doesn’t make a mortgage a car loan and vice versa.

BNPL is a bubble. BNPL is just like ride-sharing circa 2016, as soon as cheap money stops and regulation arrives, the bottom falls out and people realise that BNPL is just new paint on an old idea and should be valued as such.

BNPL will not die because it has existed for decades, and it is a valuable service to a subset of consumers but when you set aside all of the tech-boom hype… it’s just a boring financial service with healthy-but-unremarkable profit opportunities.

I see your point in saying that credit cards and BNPL are different. But I think its very inaccurate to say that credit cards do not change customer's purchase decisions. Pre-credit cards you had to pay in cash or a check. Cash has the excellent value of you can't spend more than you brought with you. It limits spending to a pre-thought out amount.

Ever go out on the town and realize you spent more than you expected. Or look at your balance at the end of the month and have to look through to figure out how you spent $1000 more than normal? (I know I have, maybe I'm the weird one, but I doubt it).

And I think in that way, BNPL does have similarities. It allows you to spend more than you planned because you don't have to think about your limitations in the moment.

> the way borrowers interact with it, which is what matters, is very different

And the differences are?

A credit card is a long term commitment that integrates into your personal finance life, it’s a big decision you make once and can benefit from the broader finance system — e.g: you can refinance, you have legal rights (jurisdiction dependent). A credit card is a tool for the buyer.

BNPL is a product that merchants pay for because it increases their conversion rate: customers who wouldn’t otherwise buy something, will buy it, by clicking a button and entering into a financial agreement at checkout.

BNPL has been around for decades, the innovation of digital BNPL is in making it so easy for someone to walk into a financial commitment. For example, BNPL is very effective for fashion e-commerce, a market where it’s normal for a customer to fill their basket with products and then whittle it down to stay within their budget at checkout: BNPL is an antidote to that, it tells the consumer, “you don’t need to stay in budget! Just pay for it in future!”.

> BNPL is a product that merchants pay for because it increases their conversion rate: customers who wouldn’t otherwise buy something, will buy it, by clicking a button and entering into a financial agreement at checkout.

We've had BNPL for long time here in Central America and South America. In this side of the world, it's also the merchants that pay higher credit card processing fees for accepting BNPL payments.

What's curious is that BNPL in Central and South America is actually provided by the plain old banks or credit card issuers themselves. They are also 0% interest (Tasa 0/Cuotas/Visacuotas) and can be split in 3 up to 24 months depending on the purchase.

They are quite handy for larger than normal purchases, like an unexpected car repair or a tire change. But they can also be used for vacations, iPhones, laptops, furniture, appliance. In some countries you can even split a fast food meal in 0% installments.

BNPL usually breaks purchases up into discrete monthly payments up-front at checkout. Whereas your credit card lumps it together into one balance, which you can pay over time.

Another difference is that BNPL doesn't positively (or negatively) affect your credit.[1] I'm not sure how that affects any bubble though.

[1] https://www.consumerfinance.gov/ask-cfpb/will-a-buy-now-pay-...

BNPL is simply credit card with a dark pattern. Psychologically it is easier to justify 25/months for 4 months than it is to justify 100 at once (even knowing you'll pay it back later in installments)

Weak or not this article does present a simple and valid fact, BNPL is abused in US, just like subprime mortgages.

BTW,the same question can also be asked that you seems to be quite mad about many people seeing this article.

Credit cards are abused in the US as well, yet it is a solid industry worth hundreds of billions.

I mean, yeah the article should have prefaced it all with the raise in interest rates that signaled the end of QE/ZIRP aka "free money".