7 Myths About Buy Now Pay Later the Big Bank Boomers Want You to Believe
Buy Now, Pay Later (BNPL) is a revolutionary new way to pay for almost anything, and it’s making the big banks nervous.
Why? Because one of their greatest cash cows, the credit card, is now at risk of becoming obsolete. Australians have wiped $7 billion of credit card debt since COVID-19 and closed almost 1 million accounts.
Why would you pay 20% interest on a credit card these days when you can now borrow interest-free?
So some big banks are now weaponising common myths and misconceptions about BNPL to defend their turf.
To help dispel this cloud of misinformation, we’ve compiled a list of 7 of the most common myths about BNPL, with the hope of handing you the tools you need to better understand the fintech revolution.
Myth #1. “BNPL is a Dangerous Credit Product”
The first, most common myth about BNPL products is that they’re anywhere near as dangerous as credit cards.
ANZ Bank boss Shayne Elliott has attacked BNPL, saying it “doesn’t really fit into improving the financial wellbeing of our customers”. (This from the CEO of a bank whose ‘rewards credit card’ charges over 20% interest per annum and a $375 annual fee!)
Payday lender Nimble’s CEO Gavin Slater concurs, admonishing BNPL users for “getting themselves into a debt spiral” and calling on firms to help customers “get through this and more responsibly manage their finances”. (Nimble’s loans prey on the desperate and charge as much as 68% interest per year!)
Talk about the pots calling the kettle black. While BNPL products can be considered to be a particular form of credit, the key difference is that they don’t charge any interest. This means that if you can’t repay, you don’t get caught in a spiral of compounding debt.
The real “dangerous credit product” is credit cards. With often exorbitant interest rates of up to 24.99%, it’s easy to spend relatively small sums of money with these cards, only to find yourself knee deep in debt years later. Finder data shows the shocking spending habits of debt-happy Australians: 68% of us own a credit card, with a searing average balance of $2909!
Payday loans are even worse – charging up to 20% upfront and then as much as 48% interest per annum on top of that.
It’s true that BNPL does charge late fees. Afterpay, for example, has a comparatively small spending limit of $2000, and charges a $10 late fee if you miss the first payment. The worst case scenario if you miss multiple payment deadlines is just 25% of the purchase price or $68 in late fees as a maximum, whichever amount is less. But no rolling compounding debt cycle like you would see with a credit card.
|CASE STUDY: $250 OUTFIT|
We crunched the numbers on how much it costs to buy a $250 outfit with both a BNPL account and a credit card.
If you buy a $250 outfit with Afterpay and don’t pay it off after 12 months, assuming you’ve incurred the MAXIMUM amount of fees and/or interest, you’ll be liable to pay $318.
But do the same thing with a credit card charging 20% p.a. interest + 2% merchant fee? You’ll be in the hole for $451. And it gets worse year after year if you don’t pay it off.
*‘Best case’ is the cost to you if the outfit is paid off after 2 months. ‘Worst case’ is the total cost if the outfit is still not paid off after 12 months, and you’ve incurred the maximum amount of fees and/or interest. Note that we have NOT included the annual credit card fee in the ‘worst case’ cost for credit cards
So how do BNPL providers make their money? The key to understanding the difference in business incentive structure between credit cards and BNPL is to follow the money – credit cards make their money by charging late fees and interest on customers who can’t meet their debt obligations. As a customer, you also pay a merchant fee to the seller.
This means that credit card providers are rewarded when a customer fails to pay off their debt.
BNPL has a different approach to financing. BNPL firms make the vast majority of their money through merchant fees, not from the customer.
BNPL providers pay the retailer upfront – so they’re actually incentivised for you to make your payments. Afterpay even pauses your account if you miss one, so you can’t rack up more debt without paying up first.
Myth #2. “Young People Can’t be Trusted with Credit Products”
This is the most patronising myth of them all about BNPL. The notion that young people can’t be trusted with their finances is a common one, with many older Aussies believing we’re “ill-prepared” for an independent future.
The truth is that young people aren’t bad at managing our money – we’re just not using traditional methods to do so.
A recent Sydney Morning Herald article about the fintech revolution showed how young people are in fact better at managing money in some ways.
27% of Gen Y and 21% of Gen Z are open to switching their bank for a better deal in the next year. These stats are much higher than the rest of Australia, with just 14% of Aussies overall keen to switch banks.
Young people’s openness to switching – if it saves us money – is one area where we’re constantly underestimated by our older peers.
That’s why we’ve been so keen to switch to emerging technologies like BNPL, budgeting apps and neobanking.
Lastly, far from the “avocado toast” generation, younger Aussies are good at saving money, and we’re good at using technology to do it. As of 2019, 7% of millennials were using budgeting apps to reduce our household spending and save money. Young Aussies are more likely to use budgeting tools in general than our older counterparts as well.
To say that young people are financially illiterate is wrong, and to say that we should stay away from BNPL products like Afterpay, Klarna or Zip just because we’re young is patronising.
Myth #3. “Using BNPL Affects your ability to get a Home Loan”
This one is partially true, because it’s true of ALL credit-style products.
Using some BNPL products may negatively impact your credit score – if you use them unwisely. However this is no different to a credit card, and in most cases, much less so.
Let’s look at the top two BNPLs in Australia as an example:
Afterpay will not report to credit reporting agencies, even if you miss a payment. This means that your conduct on Afterpay will not count against your credit history.
Zip Pay also doesn’t list your regular payment defaults on your credit history, although they do say on their website that if you don’t make the minimum payment each month within the 21 day grace period, a poor repayment history may negatively affect your credit score in the long term.
If you’re worried about your credit score, then Afterpay is your best bet here. Their policy of not reporting to credit agencies means that you can rest assured that if you don’t make a payment on time, it won’t put a black mark on your credit history.
Since BNPL are not currently considered to be credit facilities by the Government, they don’t have the same effect that credit cards have on your ability to take out a home loan. Banks will still scrutinize your BNPL spending, however, so you will still want to make sure you spend responsibly.
Credit cards, on the other hand, are extremely hazardous when it comes time to apply for a mortgage. 64% of Aussies say they’ve missed a credit payment before, which means that most of us have at least one black mark on our credit history.
A common misconception about credit cards is that lenders will look at your credit card debt to assess your borrowing power. What banks actually do is they look at your credit card limit.
FACT: For every $1000 of your credit card limit, the amount you can borrow could be reduced by up to $5000.
This means that despite being a model customer with very little outstanding debt, you may still end up with a higher rate, or lower value home loan due to a high credit card limit, or you might not be able to borrow as much.
If you have multiple cards, you’re even worse off. This is a huge red flag for lenders, and they’ll think you’re living outside your means.
With BNPL, banks will assess your actual level of debt to determine your borrowing power. Whereas with credit cards, you may be slapped with a higher rate than you need if you have a high-limit card (or multiple cards) – even if you never even use half your limit.
For young Australians, it feels a bit like the Boomers locked us out of the housing market, and now they’re chiding us for our attempts to get back in.
Myth #4. “BNPL is Just for Kids”
Another common misconception is that BNPL is ‘just for kids’, so it can’t be a legitimate form of payment.
This is a lazy assumption. The data shows older people are chopping up their credit cards and beginning to realise the benefits of BNPL products, taking them up at an increasing rate.
Exclusive data from Afterpay and Deferit shows that nearly a quarter of BNPL customers are over 45
That figure has grown by 229% for Afterpay in 5 years – from just 7% in 2015 to 23% in 2020. This growth is set to continue in 2021, since BNPL take-up is increasing across all age groups.
The Commonwealth Bank recently released their inaugural Consumer Insights Report, which states that across all age groups, 34% of Australians are using buy now, pay later apps more frequently from 2020.
ABA chief Anna Bligh recently noted that part of the reason BNPL is so disruptive to the financial sector is because the new technology appeals to a growing number of Aussies who want some form of lending, but are justifiably reluctant to shackle themselves to high-rate credit cards. These consumers are willing to try new, less expensive technologies to meet their needs.
As BNPL technology continues to grow and evolve, innovations will continue to allow it to better serve its customers. With more Australians chopping up their credit cards, we can expect the number who turn to new payment methods like BNPL to rise – across all age groups.
Myth #5. “BNPL is for Idiots Who Can’t Control Their Spending”
The idea that BNPL is exclusively used by people who can’t control their finances is untrue, and also patronising.
The truth is that if someone is not in control of their spending, BNPL is far less dangerous than credit cards – with lower spend limits and no compounding interest, things can’t get out of control as quickly.
One commonly reported statistic is that 1 in 5 BNPL customers pay late fees.
While this is true, if you dig a little deeper, you’ll see that number dwindle to less than 1 in 10 customers incurring multiple late charges.
With credit cards, if you don’t make your payments, you may be charged a late payment fee. Then, you’ll be charged interest on every single transaction you’ve made within the statement period (including the late fee). Then, you’ll be charged interest on that interest, and also your credit issuer will add the details to your credit report, which could have a negative impact on your credit history.
As mentioned above, this could negatively affect your ability to borrow for a house or a car down the line, which isn’t exactly a good thing.
As for fees with BNPL, put simply, it varies. Here’s a helpful table showing which providers charge what fees:
|Afterpay||Late fees of $10, with $7 more if you haven’t paid the next week.Maximum late fee of $68 or 25% of purchase price|
|Zip Pay||Up to 60 days with no fees$6 monthly after this period, remains until you pay off your purchase in fullMinimum Repayment of $40 every month|
|Humm||$6 late feeMonthly fee of $8 for payments over 5-60 months|
|Bundll||24hr grace period for late fees$10 late feeCan ‘snooze’ payments for 2 weeks for $5 (if you have a premium account)|
|Klarna||Late fees are:$3 for an order of up to $59.99$5 for an order from $60 to $99.99$7 for an order from $100 to $199.99$15 for an order of more than $200Maximum late fees range up to $45, depending on late fee bracket|
|Openpay||Processing fees of $2.50 to $3.95 apply, depending on your chosen planLate fees may vary|
|CreditLine||Fee of $25 to establish an accountServicing fee of $4.95 a month if you have more than $10 in your account$20 ATM and EFTPOS withdrawal feesCash/payment advance fee of 3% (or $3), whichever is greater|
|LattitudePay||$10 late feeCustomers have to pay an extra 10% when they purchase|
|Laybuy||$10 late fee|
|Brighte||$1000 minimum loan$1.50 a week ‘account keeping’ fee included in repayments$4.99 late fee – capped at 49.90 a year|
As stated above, if you miss just a single repayment, Afterpay will pause your account – which makes it impossible to increase your debts further using the service.
This is in part because the company wants you to spend responsibly, and also partly because they pay merchants in full at the time of purchase, so settling your account with them is in their best interest.
Myth #6. “Credit Cards are Better”
This is a big one – the Big Bank Boomers and the Credit Card Cartel have convinced consumers over many decades that there is something glamorous about the perks associated with high-interest cards.
Perks include points, airport lounge access, free travel insurance and fraud protection.
In theory, credit card points are great. You spend money, and you get Qantas points or some other reward to spend on other things, right?
Maybe if you’re running a small business or you’re made of money. But for most of us, credit card points aren’t worth enough to actually make a difference to your everyday life.
Business Insider found that it could cost you as much as $52,180 to redeem a mid-range toaster worth $129.
So ask yourself, is my ‘rewards’ credit card really worth the 20% interest rate and $300 annual fee, or am I just getting duped into spending more money and racking up the interest?
Credit card purchases also carry a merchant fee averaging around 1.76% of the total purchase – which, depending on the purchase, could cost you hundreds.
Most BNPLs, on the other hand, have no merchant fees. The seller agrees to pay the BNPL company a fraction of the purchase price (with Afterpay this is a flat 30c rate, plus between 4 and 6% of the purchase price, depending on the number of transactions), then the merchant receives the full purchase amount upfront from the BNPL company – while you pay the BNPL back in installments. This makes paying with BNPL cheaper at the point of purchase, as well as down the track.
Myth #7. “You Still Need a Credit Card”
Unfortunately, as great as BNPL products can be, there are still some “dinosaur” industries that demand a credit card – for now.
Most accommodation sites won’t let users BNPL yet, but there are 7 sites you can go on to book accommodation with Afterpay.
Car rental companies and some hotels still demand an imprint of your credit card too – you can’t simply send them your Zip Pay details.
So business travellers in particular might still need a credit card. But ask the business if they accept debit cards instead. A debit card will do the same job as credit, without the debt obligation – although it draws on your balance, or the company’s balance and might not be viable for that reason.
So there you have it – seven common myths about Buy Now Pay Later, and why they’re mostly bogus.
Do you have a credit card that you’re looking to get rid of? Are you a Buy Now Pay Later customer? We’d love to hear from you.