The New Way of Paying For Things
My experience with buy now, pay later
This past week Square bought Afterpay for $29 billion. Afterpay is a buy now, pay later (BNPL) company. Affirm which is another buy now, pay later company rocketed up 18% when the Square and Afterpay deal was announced. Affirm’s market cap now stands at $17 billion. The shift away from buying on credit to the buy now, pay later model is starting to take off.
We’ve seen the BNPL monthly payment trends start with phone companies offering cell phones to be paid for in monthly installments. Now this is shifting to all segments of e-commerce.
Apple is partnering with Goldman Sachs to offer BNPL on products bought through their website. While shopping online it’s becoming common to see two prices. One is the full price of the item and then another showing the BNPL installment payments option. How long before we see this for items on Amazon? Or on the shelves at Target and Wal Mart? Here is what shoppers see on all the items on Lululemon’s website.
This shift will continue to grow as it allows companies to sell more of their products faster. Once the item is sold it’s up to the BNPL company to collect the payments from the consumer. With the interest rates at 0%, I expect more and more shoppers to start opting for this. Especially with the larger items. You can keep your money and pay a small monthly payment for the next 12 to 36 months.
If someone purchases an item and instead of paying for it in full, they can keep the money in their pocket; what do you think they do with that money? They still have it in their bank account so they go and buy something else. It’s an added way to increase sales for companies through the consumers buyers psychology and it spurs consumer spending.
Earlier this year as I saw the BNPL catching on I wanted to try it out and see if it really worked as easily as everyone was saying.
I bought a Peloton in December. The cost after everything was added on was $2,970.45. When I was checking out, the sales associate asked if I wanted to pay it in full or pay it off for up to 36 months at 0% interest? I asked what’s the catch. To my surprise there wasn’t any.
She stated that I can choose whatever pay back timeframe that I wanted to do through Affirm and it was still 0% interest regardless of the term I selected. You can even pay it off early with no penalties.
I figured this will be a good exercise to try. I selected 24 months. It was extremely simple. I just had to fill in my name and pertinent information and it was done, all approved. It would pull on the same day each month. Not a penny of interest.
To take this experiment one step further. I decided to invest the money I would have spent if I paid in full in the S&P 500 index. I wanted to watch what that $2,970.45 would do if it were invested versus paying for the Peloton.
As of this writing, the S&P 500 was up 18.12%. By leaving that $2,970.45 invested in the stock market, it had grown to $3,508.70 in roughly eight months. A growth of $538.25.
Now I don’t always expect the market to be up over 18%. I will usually assume a 10% investment return when I compare paying in full or spreading payments over time. The average return for the S&P 500 over the last 50 years is 10.9%.
The concept of BNPL brings full circle what has been my thought process when making larger purchases. If a company is going to extend 0% interest, why should I give up a large amount of money, when I know what I can expect to get for an investment return on that money? This is a form of leverage you can use.
How we pay for products is changing. If done responsibly it isn’t such a bad thing. Based on what’s happening in the BNPL space there is a lot banking on this new trend continuing to grow. Don’t be surprised to see installment prices listed on products at the places that you shop.