0:00

On our previous episode we spoke about the

0:02

buy now , pay later industry and

0:05

the players that wrote the pandemic

0:07

to all-time highs , so

0:09

called buy now , pay later .

0:11

Space like Affirm and Clarn and others is

0:13

also booming but it could be a dangerous place

0:15

for people taking on debt And in April , 42%

0:18

of buy now , pay later users admitted they'd

0:20

paid late on one of those loans .

0:22

But what we didn't talk about was the chaos

0:25

that ensured post-COVID

0:27

.

0:28

Affirm is cutting 19% of

0:30

its workforce .

0:31

Affirm's stock is down 90%

0:33

since November 2021 . Afterpay

0:36

80% down . Clarn

0:38

is 70% down . So

0:40

what's behind the turbulence ?

0:42

Yeah , i mean buy now , pay later . To my mind

0:44

, is financial dynamite Now pay

0:46

later . Companies like Affirm shares are

0:48

moving down after the US Consumer

0:50

Financial Protection Bureau and now it's plans to

0:52

begin regulating businesses like Affirm

0:54

Blockwall afterpay , which is owned by Block

0:57

PayPal Clarno , due to worries that the buy now

0:59

, pay later products are harming consumers

1:01

.

1:01

There's rising interest rates , inflation concerns

1:04

and even worries about consumer

1:06

debt have left investors

1:08

scratching their heads . The number one

1:10

factor for consumer stress that we're seeing

1:13

is really things have cost

1:15

more than I expected them to . Things like

1:17

gas , things like food . Especially if you're feeding a large

1:19

family , those expenses are starting to blow . But don't

1:21

worry , we at Things Have Changed are

1:23

here to make sense of it all .

1:25

A total of $24 billion is loaned

1:27

out in 2021 through these

1:29

types of companies , and so we are seeing

1:32

them decline .

1:33

So in this episode , we'll explore the

1:35

challenges facing the BNPL industry

1:38

and how it's adapting

1:40

to the economic storm . That

1:42

said , affirm isn't giving credit as freely

1:44

as it did a couple years ago . We'll also

1:47

discuss the importance of responsible spending

1:49

and share some tips to ensure you're

1:51

making informed decisions when

1:53

using buy now , pay later

1:55

services . Well , we want to ensure that

1:58

, while there is competition and while there is innovation

2:00

, that the harmful effects of poor marketing

2:02

practices and poor lending practices don't

2:05

impact particularly on vulnerable communities

2:08

.

2:13

If you had known how important the technology

2:15

economy was 20 years ago , would you have done

2:17

things differently ? The

2:21

internet , cell phones , the cloud and data

2:23

Things have changed

2:26

. We're here to talk about it . Hi , I'm Jed .

2:30

Hi I'm Shikhar , welcome

2:34

to . Things Have Changed your new Economics and Technology podcast

2:36

. Important announcement

2:38

If

2:47

you're part of any company

2:49

, any public company right now

2:51

and you want your stock to like double the

2:53

next day , just scream AI like 100 times on any call on CNBC , and

2:56

that's how you get it . It's a new thing , dude

2:58

, it's a new flame .

3:04

It's the new wave . That's what gets people going .

3:07

Yeah , it's provocative .

3:07

Jim Kramer hears about it If he

3:09

hears you say AI , bye , bye , bye , dude , bye , bye

3:11

, bye . You

3:13

know what's not ?

3:15

bye , bye , bye . right

3:17

now , though , bnpl Man . If

3:21

AI is trending in one direction

3:24

, bnpl companies are going the other .

3:29

It's kind of great segue dude .

3:31

Great segue . I was

3:34

just making it up as I was going . you

3:38

know your firms , your Clarina

3:40

Square , buying Afterpay . It was just

3:42

the hottest thing in tech

3:44

after blockchain . Right , and

3:47

it's gone the way .

3:48

It's a big thing to say .

3:50

Yeah , yeah , yeah , and it really got

3:52

hammered . I mean , all

3:54

those companies that I mentioned are down like

3:56

70 to 80% since

3:59

the pandemic . So like since

4:01

2022 , right , 75

4:03

, 80% drawdowns are staggering

4:06

.

4:06

But , like you can't really ignore

4:09

, you know how they

4:11

all rose so quickly during

4:13

the pandemic . You know like this

4:15

fall from grace is because they were just

4:17

experiencing a shit ton of growth in

4:19

2020 when the pandemic

4:22

hit . And just to give you a little background on

4:24

that , if you didn't remember , we started buying

4:26

a ton more stuff online

4:29

. You start already on Amazon like

4:31

crazy . You started buying more products . Companies

4:35

like Affirm , afterpay and Klarna . You know

4:37

the BNPL industry enjoyed

4:39

a great lift

4:41

, you know up , because

4:43

during the time we were going to e-commerce also

4:46

, the trend of BNPL

4:48

as a form of payment was just , you

4:50

know , destroying roofs all over the

4:53

place . So that's why , like , looking at

4:55

these huge declines in

4:57

the recent quarter seems a

4:59

little more believable because of that insane growth

5:02

. Maybe things are just getting back to valuation

5:04

, right , but you know why

5:06

. Why are these things

5:08

happening in the current quarter

5:10

? I mean , we've blamed

5:12

this shit for the past two

5:14

years when it started

5:17

happening post pandemic , when

5:20

rates were rising right Crazy

5:22

crazy time . We lightly

5:25

spoke about its effect to traditional financial

5:27

institutions who , you know , make

5:29

money off of these margins from

5:31

the federal funds rate . Right , and

5:34

the interesting thing about

5:36

how the rise in the interest

5:38

rates are affecting the BNPL

5:40

industry is because of the structure

5:42

of business , dude , it's just the way

5:44

they run their loans

5:47

, right . They are not inherently

5:49

a capital intensive company

5:51

, right ? They don't have a lot of cash to

5:54

put down on these actual loans that they're making to

5:56

these customers , because , if you remember , we explained

5:58

in the previous episode how

6:00

these BNPL companies work . They pay

6:02

the merchants that they work with ahead

6:04

of time , right ? So where do they get all this

6:07

money ? They themselves have

6:09

to borrow as well .

6:10

So okay , i get it . now . They are

6:13

borrowing themselves and then lending

6:15

, so then your interest rates

6:17

increase , they are borrowing

6:19

at a higher rate and they

6:21

have to still somehow lend that

6:23

right . So , yeah

6:26

, they're probably getting squeezed on both sides because

6:28

consumers are not spending as

6:30

much and rates are higher , so

6:32

they're borrowing at higher rates and

6:34

lending it to fewer customers

6:37

. Geez .

6:38

Crazy stuff happening in the industry right now . Like

6:41

any you know corporation that

6:43

borrows a ton of money when

6:45

the rates rise , you just have problems

6:47

on that front as well , on

6:49

financing your business . So

6:51

, you know , for these BNPL lenders

6:54

, getting that squeeze

6:56

for them is enough for the

6:58

slowdown that's happening right now in the markets , and

7:00

it's kind of like for me it's been

7:02

a good enough explanation of why this

7:05

industry is experiencing some downfalls

7:07

. But that's not the only

7:09

thing that's going on in this industry . I mean , if

7:12

your paying attention to like fintech

7:14

kind of stuff and regulation

7:17

, that's one thing

7:19

again that's hitting this space so

7:21

hard , dude , because regulators are starting

7:23

to go hold on just like

7:25

how they had to regulate

7:28

these financial

7:30

companies . You know , at opposed to 2008

7:33

world , this is again a new

7:35

product that's getting a lot of traction . That's

7:37

hitting a lot of consumers' pockets , right

7:40

. So the government gets involved

7:42

, naturally , and I feel like that's

7:44

another reason of why we're

7:46

seeing kind of a slowdown in this space , because

7:49

we have an increase of

7:51

interest from the government to regulate

7:53

this industry

7:55

.

7:56

Everyone was able to use this

7:58

method to pay for certain items

8:00

high cost items , expensive items

8:02

And ultimately , when you

8:04

look at it , this business can

8:06

be quite risky in the sense risky lending

8:09

or providing risky loans right

8:11

When you , when you break it down

8:13

to what's actually

8:15

the core of this business . So

8:18

it's no wonder that you

8:20

know , because they've seen some regulatory scrutiny

8:22

, because in many ways there's

8:24

a risk of overspending here , And also they

8:27

target consumers because

8:29

, yeah , that's how they increase the

8:31

revenue that they generate .

8:32

Yeah , i know , and these examples

8:35

that are coming out today are what's causing the

8:37

players in the space to go hold on . We

8:39

got to relook at the way we're actually approving

8:42

customers . We got to relook at the risk

8:44

profiles . You know

8:46

it's . it's a chance to rethink

8:48

how they do business . And

8:50

one of the things that was interesting , at least when

8:53

we both did this process of like , we

8:55

both me and Shikhar both have experienced BNPL

8:58

schemes , right , we've used it for one reason or the

9:00

other , and one of the

9:02

things that come along with this is that

9:05

you

9:07

don't realize that if

9:09

you don't clear the payments , there

9:11

is a risk to the consumer , right

9:13

? You ? irresponsible spending is what we called

9:16

it in in the first episode , and

9:18

this is kind of the

9:20

risk that regulators are out

9:22

there to try to protect you from , just like

9:25

how they try to protect you from banks , right , having

9:27

your deposits in a place and having

9:29

insurance for that kind of thing . This is what's going

9:31

to happen in the next few years . I believe they're

9:33

going to target , like responsibility

9:35

in the space for companies to step up

9:37

and maybe do

9:40

some credit checks . when we did those things , we didn't have

9:42

credit checks , right . So it's

9:44

a super quick process dude , and that

9:46

maybe is you know what's going to end

9:49

up being such a high risk for regulators to

9:51

try to remediate .

9:51

Yeah , and the issue here is they're also there

9:53

were cases of them targeting vulnerable

9:56

consumers right With poor credit

9:58

scores . So what

10:00

happens now is you know lending

10:02

is easy . You

10:05

can give money to whoever you want . you know

10:07

to buy whatever product they want . It's

10:10

the recovery . How are you going to get the money

10:12

back ? And if the consumer

10:14

defaults or those loans default

10:16

, now you are in big

10:18

trouble . right , you're the company

10:21

. the BNPL company is liable

10:23

And they would have to bear

10:25

a big part of the loss in that case . So

10:28

I think all these

10:30

factors are working towards the

10:32

market looking at these companies

10:34

differently now High interest rates

10:36

, consumers not spending

10:38

as much or default on

10:40

the loans that you get .

10:42

You know it's interesting . When I was looking into

10:44

the numbers of what

10:46

kind of payment methods for folks using

10:49

to pay off BNPL , i

10:51

noticed that a large majority of

10:53

folks are using their debit

10:55

cards for BNPL instead

10:57

of like credit . That is a

10:59

little more accessible . So

11:01

there was this kind of shift as well

11:04

, which I didn't know before I started

11:06

reading about this episode . There

11:08

was a shift during the pandemic of

11:10

folks using more of their debit

11:12

cards than their credit cards as well . So

11:15

there was kind of this like shift from credit to debit

11:17

, and BNPL is kind of in that space

11:20

of using your debit card for these

11:22

kind of payments . Right , for folks who

11:24

aren't too willing

11:28

to sign up for a new credit card or have access

11:30

to like a range of credit

11:32

products , debit might be the

11:34

way to go . That's the easiest to set up . Right , and that's

11:36

kind of what's risky about BNPL as well

11:38

is that's what they rely on . Is

11:41

that debit pile of folks , and

11:43

you know , typically these folks are

11:45

having trouble paying for

11:47

other things , you know . So

11:49

it's already an inherently risky profile

11:51

of the folks that are in there , and there does

11:54

need to be some protection here for people

11:57

who are just signing up pressing buttons . Dude , it's way

11:59

too easy right now .

12:00

That's the world we live in . you know . consumerism

12:02

is everywhere , But what should these BNPL

12:05

companies do , Because it seems like

12:07

they're under everything ? There

12:09

seems to be a good business here .

12:11

When we were watching like a lot of videos on the

12:15

CEOs and what they had to say about the

12:17

industry . After these like downfalls . They a

12:19

lot of them are on the news lately after PACEO

12:21

, firmco , and

12:23

what they're preaching is like you know , how do they

12:25

survive this environment right now ? And

12:28

what they're preaching is like really strong

12:30

partnerships with merchants , like

12:32

the merchants that you work with right now . Typically

12:35

, bnpl will know a lot more

12:37

about their customers than

12:40

traditional credit companies . For example , your credit

12:42

card doesn't know exactly what the SKU

12:44

code is of what you bought , right , it just

12:46

knows that you bought X amount of thing

12:48

for X amount of dollars in

12:51

X place . But BNPL

12:53

companies , dude , they have so much more data

12:56

. You know the merchants are trusting the

12:58

BNPL companies with this kind of data

13:00

of , like you know we got the idea of the type

13:02

of purchase you made . They actually have the

13:04

ability to market

13:07

you something that is specific to your taste

13:09

. Dude , that's how much data they're getting in the

13:11

BNPL space . So strong partnerships

13:13

with the merchants over there will lead

13:15

to continued success . You

13:18

know , for example , a firm signed up with

13:20

Amazon quite recently , right , like that's

13:22

a huge headstone . Amazon customers

13:24

are sticky AF . Okay , they

13:27

sign up for this really expensive program to

13:29

be on and purchase thousands of dollars a year . So

13:31

that's one thing like really strong partnership

13:34

with merchants . And

13:36

then I think what have made

13:38

a firm so successful , just

13:40

in my view , is that dude , ui

13:42

was great , bro , like when I was buying

13:45

these things , making that decision

13:47

with the purple bed my God

13:49

, it was easy . It's one of the options that

13:51

came up for me of how to pay .

13:53

And it says literally click off a

13:55

button . I'm not even

13:57

like exaggerating

13:59

. It was a click off a button And

14:02

so quick you were financing

14:04

it over a few months .

14:07

Yeah , no , that's that's what I'm saying is like , having

14:09

that is amazing Because , again , that lends

14:11

itself to the strong partnership with the merchants

14:13

. If you have that clean integration , it's

14:16

going to be ultimately easier for you to get those customers

14:18

. I've there's two scenarios

14:20

that I've seen in this bro . One is a

14:23

link that would take you through learning

14:26

about the whole BNPL transaction

14:29

, And there was a case

14:31

where I see it written in Apple

14:34

Pay , a firm and you know it's just

14:36

cleanly integrated . I think that's

14:38

the best way to go . I think that's the best way to go

14:40

, But yeah , I think those are two things I feel

14:42

like the big guys are doing to stay afloat .

14:45

I'll take the example of the regional banks

14:47

fallout that we're seeing over the last few days . We

14:49

covered it in our previous episode A

14:52

couple of weeks ago , where we

14:54

broke into how JP Morgan , the

14:56

biggest bank in the land , is getting bigger

14:58

. Right , and maybe

15:01

we don't need that many regional

15:04

banks . There are like 6000 regional

15:06

banks in the US . Similarly

15:08

, i'm thinking do we really

15:10

need four $60

15:13

billion companies in this

15:15

space ? if it's a feature , you

15:17

know , and that's what we're seeing like Apple's

15:21

coming And now , if

15:23

you have an Apple savings account

15:25

or Apple card , you get BNPL

15:28

on Apple And it is such

15:30

an interesting business model because Apple

15:32

has made itself into like a luxury

15:35

tech brand that everyone aspires

15:37

to have . Right , you aspire to have a

15:39

thousand dollar MacBook or a

15:41

thousand dollar cell phone . It's wild , the

15:43

cell phone and the MacBook are the same price

15:45

. They know

15:47

a lot about the consumer and are

15:49

able to maybe use that

15:52

knowledge , that data , that insight in

15:54

the back end to lend with low

15:56

risk of default , because Apple just

15:58

caters to that set of customers . You

16:00

will spend a grand on a phone And

16:02

so it could just be a feature in

16:05

Apple's suite of financial

16:07

products , and we did speak

16:09

about Apple , too in the

16:11

episode , in the episode just a few weeks

16:14

ago . Another

16:16

way that I'm thinking this

16:19

industry unfolds

16:21

is maybe they stop lending

16:24

to everyone , right

16:26

, and they start becoming picky , because I

16:28

read some articles where you

16:30

have these big customers now pulling back . They're

16:32

like maybe you don't need this product , maybe

16:35

you don't need the fourth sneaker , maybe

16:37

you don't need the fourth third Gucci

16:40

bag you ordered in the past year

16:42

, right ? So some really

16:44

interesting observations

16:46

where the

16:49

BNPL providers have actually had

16:51

to slow down lending And

16:54

, yes , that's hitting their growth

16:56

targets But it's

17:00

better to implement those tougher

17:02

credit requirements because

17:04

then , okay , you're not going to be

17:06

targeted as much by

17:08

regulation , right ? And

17:10

also you kind of form up your

17:12

balance sheet to last

17:14

this storm .

17:19

Yeah , interesting dude . It's an

17:21

interesting development in that space

17:23

. And , as we're talking about

17:25

Apple coming into

17:27

this space , I read a

17:29

lot about what the other CEOs

17:33

if the other CEOs were afraid that Apple

17:35

would take up a significant market share , And

17:38

an interesting answer from after

17:41

PACE CEO and a firm CEO is that they

17:44

believe Apple is just on

17:46

a completely different customer base than

17:48

these other folks who are buying furniture and whatnot

17:50

because they have such . again

17:52

, we just mentioned how luxury

17:55

product Apple is right now . So they

17:57

feel like they're not competing in that space . But you

17:59

know what , When this regulation

18:01

starts coming down and these companies are going to have to

18:03

spend a lot of resources and money

18:07

on improving their processes

18:09

and adding more bells and whistles into their product

18:11

, I think companies

18:13

like Apple are in a good position

18:16

to withstand all of this scrutiny . They're

18:18

used to this kind of stuff already . Tech

18:21

is used to getting regulated

18:23

at this point right Always taught me

18:25

getting fines left and right right

18:27

. So companies like

18:29

Apple and PayPal , who

18:31

are really large customer

18:34

bases , are in a good position to do

18:36

really well in this space and maybe take that concept

18:38

that had come from this buy now

18:40

, pay later scheme and just freaking universalize

18:43

it . So it'll be interesting what happens

18:45

and who comes onto it . Honestly , that

18:50

wraps up our episode of

18:52

Things Have Changed podcast . We

18:54

really hope you enjoyed our exploration

18:57

into the BNPL space . We learned a lot

18:59

during this episode and we

19:01

hope that you got valuable insights along

19:04

the way . As the BNPL landscape

19:06

kind of evolves , it's crucial

19:09

to stay informed about how

19:11

these products actually work , what are the

19:13

terms and conditions of what you're signing

19:15

up for , know how much you have to pay if you

19:17

miss a payment . You have to know what happens

19:19

to you if you don't get to fulfill what

19:22

these companies are asking you to do . So

19:25

stay informed , read up on these kind of things

19:27

. Really appreciate you for joining

19:29

us on this ride and tune in

19:31

next time as we talk more about the fintech

19:34

space . As always here at Things

19:36

Have Changed podcast , stay curious

19:38

.