‘Buy Now, Pay Later’ is painful reminder of notorious NINJA mortgages

Buy Now Pay Later Concept In Notepad At Desk

Would you turn down an offer to pay for a purchase in future installments particularly if they don’t carry an interest burden?

A set of start-ups across the world evidently believe that most buyers would jump to avail of such an offer. These firms have been gaining traction in the private capital space with Reuters reporting how Swedish payments company Klarna, one of the pioneers of the model, is now Europe's most valued start-up.

In fact, after a recent round of funding, it is now as valuable as storied financial powerhouses such as Barclays, Credit Suisse, and Swiss Re and is larger than Germany's biggest lender Deutsche Bank.

Klarna's business is laughably simple and is summed up by the acronym BNPL, which stands for Buy Now, Pay Later. It is a proposition being offered by a number of new ventures in India as well, including the Bengaluru-based Simpl, PayU’s LazyPay, and ePayLater. They have accumulated millions of users and millions in funding.

Conceptually the BNPL formula is simple. It offers shoppers the option of paying for purchase through a series of fixed instalments, instead of all at once. It works well for those who don’t have sufficient savings and don’t also have the credit record to get a zero-interest credit card since there’s usually no credit history check required. The lender in turn makes money by charging the retailer a certain fee, with the latter gaining a customer who may otherwise have refrained from buying.

But demons lurk in this win-win model. For one, there’s the temptation for a customer to spend big even if they don’t have the money to pay upfront. After all Rs 2,000, a month seems eminently affordable when you don’t have Rs 24,000 to buy that music system. But once you are locked in, there’s a price to be paid for missing an installment in the form of penalties or interest.

It is easy to fall into that trap since, while individual transactions tend to be low, a shopper could accumulate multiple such purchases. In the absence of any credit limit, it could just add up to a completely unviable amount, especially when it is multiplied by tens of thousands of people.

Evidence from the US suggests those numbers are growing rapidly. A survey by Credit Karma and Qualtrics found that 42 percent of Americans have used some sort of ‘buy now, pay later service. What's worrying, of the survey respondents who had used the BNPL options, 38 percent reported missing at least one payment. Seventy-two percent of respondents who said they missed payment also reported a subsequent decline in their credit scores.

No wonder that the United Kingdom’s Financial Conduct Authority (FCA) under which such credit agreements fall, following its review of the unsecured credit market, found that there is potential for harm to the consumer.

Unfortunately, while the BNPL is new, its basic premise is old, as it preys upon the human tendency to live beyond one’s means. Whether it was the ancient Greeks who borrowed and often forgot to pay or it is the billionaires of today who happily borrow from banks and other institutions, the tendency to stretch is all-pervasive. Poor Socrates might have died with the burden of debt on his soul, but most of us don’t think of a loan, especially one that is so freely available, as such a heavy liability.

That perhaps what explains the rash of new start-ups touting the tempting message of buy now, pay later, or when you can. Unlikely though it seems at this point, there’s the danger of this leading up to a situation akin to the housing bubble that eventually sent the financial world teetering a decade ago. That too was fuelled by the same rush to lend money to homebuyers without any regard to their repayment ability. Then too like now, there was an acronym for the occasion, the so-called NINJA mortgages (no income, no job, no assets).

So did we learn nothing from the spectacular falls that ended those excesses? Is the BNPL any different from all those easy money schemes of the past? As author Michael Lewis writes in Panic: The Story of Modern Financial Insanity: “The new madness looks entirely different from any madness that has ever happened before.”

Maybe then, this time it is different.