Traditionally, signs of the apocalypse were events like: wars and rumors of wars, floods, famines, eEarthquakes, false Messiahs, political upheaval, attacks on Israel, etc. My reaction to these items is, “When in recent human history were these not happening?” They aren’t exactly signs that would help you to nail down a date. But don’t lose heart, I may have found a new one – BNPL.

Buy Now, Pay Later

BNPL isn’t new, it stands for By Now, Pay Later. It’s an old term that’s been repackaged into new products offered by Affirm, Afterpay, Klarna and Zip – companies I’ve never heard of, but I’m old and not hip (even using the word “hip” proves I’m old). I am more familiar with Layaway and Credit Cards. These new services gained popularity during the Covid pandemic.

How They Work

Here’s how they work: you set up an online account and link a credit or debit card to the account. Most people have linked debit cards which connect directly to their checking account. You then start making purchases and small payments are deducted every two weeks until the purchase is paid off. At some point users can be charged a service fee if the balance isn’t cleared and new purchases are restricted. These service fees are unregulated and often hidden.

So, what’s the problem, in addition to the unregulated service fees? Unwinding transactions, that’s the problem – disputes related to returns and cancellations. Basically, if anything goes wrong with the purchase, there may be no one there to resolve issues. There’s now a third party between the buyer and seller. You could be stuck with the Birkenstocks that don’t fit!

Sounding the Alarm

In December 2021 the Consumer Financial Protection Bureau sounded the alarm for these products. Last week the CFPB put new rules in place for BNPL products that take effect in July. These rules provide rights and protections that are like Truth in Lending rules for credit cards. Yet unlike those rules, there is no similar protection that limits the fees that are charged. You can read more about the action of the CFPB here.

From my perspective, these services are still better than 29% interest rates on credit card balances, but the “disease” is similar – buying things you want but can’t afford. My grandparents lived through the Great Depression and would “eat dirt” before they bought anything on credit. My parents weren’t quite as extreme about debt, but they were still extremely cautious.

I don’t think most young folks just getting started today have similar fear of debt. Many of them are starting out burdened by massive educational debt that makes these purchases seem like peanuts. They are savvy enough to know that high interest rates on credit cards are bad and this has fueled the explosion of BNPL services. But consumption continues to roar along, regardless how it’s funded. Hence, inflation rates persist.

In Better News

There was a glimmer of hope this week. The EU cut interest rates and the UK may not be far behind. The Bank of England meeting on June 20^th will be illuminating. While the Fed is persistently independent, they will still take note of the actions of other countries when deciding whether to cut our rates. Let’s just hope consumption moderates enough for them to act so we can defer worrying about the apocalypse!

Rick Adkins, CFP®, ChFC, MBA

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