Buy Now, Pay Later is the Future of Payments. Just Ask Industry Leaders
What does the future of banking hold? With changes taking place at a breakneck pace for the last decade, even those in the industry can’t predict the coming years with much certainty. But what is technology if not simply a tool that improves people’s lives? The payments ecosystem is changing, with customers—who want ease and fairness—leading the way. Now, it seems the newest piece of technology is not software, but rather an approach that is changing people’s lives for the better. Buy Now, Pay Later may already be rendering traditional credit scores less and less relevant.
Why do credit scores need to go?
The modern credit score has been disenfranchising minorities since it began. In 1974, the Equal Credit Opportunity Act made it so that using sex, race, marital status, national origin, or religion was illegal in determining an individual’s credit score. Now, FICO uses payment history, amounts owed, length of credit history, new credit and credit mix in its model. However, experts say the system still isn’t neutral.
At its core, the FICO score is unethical and impractical. Not only is it a private company—the Fair Isaac Corporation—that developed and defined how credit functions in the United States, the methods they use to determine credit score are questionable at best, with plenty of problematic factors. Considerations like home ownership and generational wealth, which have historically presented roadblocks for black people and hispanics, still influence the FICO score. Even more subtle dynamics factor into people’s credit scores today—for instance the GI Bill being denied to millions of black servicemen after World War II, which white people typically leveraged to to buy homes, further their education, or otherwise build wealth. But that’s not all: the credit system depends on people overspending. It’s inherently bad for people.
Benefits (and Limitations) of BNPL
The Buy Now Pay Later system, on the other hand, removes the fee structures that normally come with credit cards, making it harder for people to get into the kind of debt that can cripple them. Put simply, BNPL is a better way to conceptualize how to structure your purchase. As long as you pay on time, you aren’t charged any interest. It can also be a way for people to receive credit who wouldn’t be able to otherwise, due to FICO score issues. Because BNPL companies are using non-FICO tech, they are helping those that have been disenfranchised by the inadequacies and troubles that plague the FICO system.
They’re not a free-for-all, though, and there are plenty of limits and restrictions in place. Some BNPL companies charge interest on certain transactions, and some still require a credit check, which of course keeps the FICO system relevant. Some charge for scheduling payments or have maximum purchase prices that won’t get you anything of significance—say, a piece of furniture or an expensive plane ticket—which are the types of purchases a person might use BNPL for in the first place. And some limit merchants. But plenty of them function without applications, credit checks, or even registration. And many of them place limitations reasonably, such as a spending limit based on your current income. This is why the concept is so revolutionary, and why it’s so important that Square was willing to spend twenty billion dollars to buy AfterPay.
Popular with Consumers
We know industry giants are taking notice. But what about everyday people? At the start of 2020, over 15 million consumers had reported using BNPL at least once. During the course of the pandemic, that number more than doubled, according to an Amazon Web Services Survey. Many reported that it helped them budget, while others enjoyed the flexibility. Others cited it as their only option to afford what they wanted. So far the data shows that younger consumers are using BNPL much more frequently than older consumers.
Fintech Giants Make Investments
Historically, issuers have had incredibly detailed portfolios on spenders, but their business model is for people to have a high balance, which leads consumers towards debt and high interest rates. With Square leading the charge, hopefully issuers will take notice that BNPL offers consumers a smarter, more ethical way to understand their spending habits. And Square isn’t the only giant taking notice. Affirm, SplitIt, Klarna, and PayPal Pay in 4 have all invested in one BNPL technology or another. So, what does this mean for the industry? That customers and their needs are leading the way, and as Fintechs scramble to improve the user experience, they’re actually changing the payments ecosystem. Maybe the most effective technology isn’t necessarily software—maybe it’s a concept.