The CQ: BNPL Debt Is Coming for Consumers
Some customers bought a little too much, and couldn't afford to pay later.
Although it is far from enough, our hearts and thoughts go out to the people of Uvalde, Texas after this week’s painful tragedy. As a country, we must do better for our children.
Buzzing at the Forerunner Office…
‘Buy Now, Pay Later’ Is Coming Back to Bite Consumers
By Jason Bornstein, Principal
This week, reports at Klarna offered a bleak outlook. Critics have been warning that ‘Buy Now, Pay Later’ technology coerces “vulnerable consumers — often young people — to buy things they do not need with money they do not have,” per The Financial Times. As net losses quadrupled in Q1 during tougher economic times, Klarna plans to lay off 10% of its workforce and may see a $16 billion decline in valuation after its next round of financing. This week’s events may be a sign that the BNPL reckoning isn’t just coming, but has already arrived. Companies that once touted “a better way to pay” are now having real negative impacts on the economic well-being of many Americans. A sample of statistics:
“Buy Now, Pay Later” users increased by 300% from 2018 to 2021, now totaling 45 million.
Consumer debt was up $52 billion in the month of March, which represents the largest-ever increase.
In California, 91% of 2020 consumer loans were of the BNPL variety.
43% of POS (point-of-sale) financing applicants are subprime borrowers compared to 15% of the general population.
Holding the least spending power of any demographic, 40% of Gen-Z consumers will have adopted BNPL services by the end of this year—the most of any generation, and also high-risk customers overall.
4 out of 5 BNPL customers claim to use the service to avoid credit-card debts. Now, nearly 1/3 of that group cannot afford their BNPL debts.
The challenges with BNPL leaders like Klarna, Affirm, and Afterpay mirror those of retail trading apps like Robinhood and Coinbase. Persuasive marketing and hype created a sentiment over the past few years that easy (or free) money exists—but in reality, it doesn’t, and consumers are learning and feeling this the hard way as the exuberance of the market has turned this year. BNPL services in particular operate outside the well-established credit system (not without its own challenges), so a consumer’s credit report isn’t reviewed or affected when they use those services (for now). However, there are real downsides when part of your financial life goes unaccounted for: Consumers are far more likely to get into debt they didn’t realize would come back to haunt them, and companies are more likely to have credit or risk exposure to consumers without the full picture of their finances.
While regulation of BNPL services is imminent in the U.S., the root problem still remains: Data shows that only 34% of Americans can answer 4 out of 5 basic financial literacy questions revolving around mortgages, inflation, interest rates, and risks. We need “better ways to pay” that don’t get the consumer out over their skis—like Catch, which rewards consumers with money to spend at their favorite retailers whenever they leverage the power of ACH. We also need companies that empower a diverse range of consumers through knowledge, tools, and programs. Forerunner Principal KJ Sidberry highlighted several in a recent piece on consumer identity, including Kinly, a financial platform designed for a Black user base, leveraging technology, affinity-focus, and education; Suma helping the Latinx community; and Cheese, tailored for the Asian-American community.
There’s still hope for BNPL services. For instance, net-30 payment terms are the standard for B2B transactions—and companies like Balance are digitizing and making this process even smoother. They also exist in consumer credit-card payments, and both of which have more extensive underwriting processes than consumer BNPL. However, the consumerization of these terms shouldn’t be conveyed as a zero-harm way to avoid debt. That debt is still a consumer’s burden, whether they check out with a VISA, AmEx, Klarna, or Afterpay. And the consumer deserves to know that upfront.
This Week’s Best Consumer Insights
After this week’s tragic mass shooting in Texas, new data shows 88% of American voters support background checks on all gun sales and 67% are in favor of a ban on assault weapons.
The real estate market is (finally) cooling. The volume of listings is up 9% YOY, while the number of pending sales is down 9% compared to the same time last year.
Amid record inflation, consumers are opting for cheaper goods—and dollar stores are benefiting. Dollar General and Dollar Tree boost their outlooks for the year ahead, increasing prices and opening more (and bigger) stores.
The savings rate among fell 4.4% in April to its lowest point in 14 years, showing that consumers are cutting into their savings accounts to keep spending.
Walmart is expanding its drone delivery service. By the end of 2022, customers will soon be able to purchase up to 10 pounds of merchandise for $3.99 drone delivery in Arizona, Arkansas, Florida, Texas, Utah, and Virginia.
Which of the most visible brands do consumers actually trust? Trader Joe’s, Patagonia, Wegmans, and Amazon are among the Top 10 of the Axios/Harris Poll 100 Reputation Rankings. The Trump Organization, Wish, Twitter, Facebook, and Fox are at the bottom of the pack.
Consumers just want to have fun right now—and retailers are feeling squeezed as a result. While travel, dining out, and out-of-home entertainment spend has increased, consumers are economizing where inflation is greatest (grocery, clothing stores, etc.
With ongoing inflation and a unionization attempt, Apple raises its retail employees’ pay to a minimum of $22 per hour.
“The Great Resistance” is here. According to ADP data, 64% of workers would look for a new job if are asked to return to the office on a full-time basis.
Social media users have been captivated by the Johnny Depp-Amber Heard defamation trial, generating more chatter than hot topics like Elon Musk, inflation, abortion, and the Russia-Ukraine war.
“A founder is a forever identity, one that starts with a kernel of an idea and never ends. I will always be Glossier’s founder. But a CEO is the champion that a company looks to, to lead it into tomorrow. From my observation, the greatest companies in the world understand this distinction and make sure that the CEO seat is always filled with the right person to take it where it needs to go for its brightest next chapter.”
—Emily Weiss, Founder of Glossier, on passing the CEO torch to Kyle Leahy
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Eurie spoke alongside other VC “GOATs”—USV’s Rebecca Kaden, Reach Capital’s Shauntel Garvey, and Freestyle VC’s Jenny Lefcourt—at this year’s All Raise Summit. (Photo courtesy of Aileen Lee)
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