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Buy now, Pay later | Learning by Proxy
Generations will be in debt even before they get out of college thanks to this financial innovation!
2021 was the year of fintech. Technology is about eliminating human effort through automation to ultimately make money. Finance is about the assumption that money spawns money merely by sitting around (we call it interest). Seems to be a match made in heaven.
In Economist speak - Banks are organisations responsible for allocation of capital.
You don’t know who to loan the money to, so the bank will do that for you and give you a portion of the interest. The one thing that banks have learnt over the last 15 years is that in the long arc of time, there is no certainty. First the 2008 financial collapse and then the pandemic; not to mention the right-wing flip-flop on policy and rules.
- Donald Trump changed all of the tariff policies with China (Does WTO still exist?)
- The Indian PM goes around blowing the bugle of startups while following a policy of antagonising e-commerce (voter base are shopkeepers)
- Europe does not know if technology is good or bad. They want to regulate but have only managed to repeatedly fine American tech companies
How do you allocate funds as a bank?
While a lot of ‘fintech’ over the past decade has been focused on bringing old-world financial services such as insurance, loans, etc. online. The past year has seen a stunning rise of this new beast called ‘Buy now, pay later’ (BNPL). It is not like BNPL companies started out yesterday, I know many of them who have been active since 2015. They just found their time in the sun.
COVID really threw a spanner in the works for the banking system. Despite all of the credit ratings, there is no way of knowing who is well poised or underwater in the post-pandemic era. It serves the banks better to be able to allocate capital in small chunks to individuals who need short term loans. Banks are not good at undertaking this. The instrument of choice for banks has been credit cards. Issuing Credit Cards to make a 10000 rupee loan is too expensive. This is where technology comes into play.
An Ola can introduce post-paid, where the bill of a few hundred rupees is settled in the app automatically. The money is recovered later. A food order on Swiggy can be paid through Simpl or Lazypay and can be settled later.
The service settles your outstanding right now and gives you between 5 to 15 days to make good the payment. After which interest to the tune of 30% p.a. can apply. To add to that, you might have a processing fee also if you get late. The processing fee is a flat fee of about Rs 500. The problem is - when your outstanding is Rs 2000 and you pay Rs. 500 as processing fee you have already been charged 25%. This is what makes BNPL really expensive. The amount they lend can go from Rs. 1000 to Rs. 100,000 in India. I do not know what is the kind of number that is being offered in the west.
There is a nuclear arms race to acquire BNPL companies that is underway.
U.S. payments giant PayPal Holdings said it would acquire Japanese buy now, pay later (BNPL) firm Paidy in a $2.7 billion largely cash deal, taking another step to claim the top spot in an industry witnessing a pandemic-led boom.
Now you know why Jack Dorsey quit Twitter to focus on Square (sorry Block).
The credit card giant announced on Tuesday "Mastercard Installments" for U.S., Australian, and UK markets, offering consumers a 0% interest, pay-in-four-installments model that's similar to the rest of the BNPL players in the industry.
Source: Yahoo Finance
Zip said its investment was part of its plan to build a global BNPL business, with India as a key market where ZestMoney already has over 11m registered users and over 10,000 online merchants.
In preparation for a large-scale expansion into the US market, the large London BNPL (Buy Now Pay Later) player Zilch has acquired the debt funding platform NepFin (Neptune Financial) for an undisclosed sum.
This acquisition is particularly significant in light of NepFin's location. Headquartered in San Francisco, this business will serve as a convenient entry point for Zilch to enter the US market.
Source: PR News Wire
Every organisation that has anything to do with finance, even Goldman Sachs, is trying to make a break into BNPL.
I thought it should be called Buy now, pay altogether later. The trouble really is that most of these services are available to kids who are 18+. A college student who is a Swiggy user comes across a discount if they pay with one of these services. Go open an account and you are set. The 18-year-old is careless and sometimes even broke. So this Rs 2000 becomes a cycle of payments and in the meantime, the BNPL service is also destroying their credit record. They are being set back in life even before it begins.
BNPL is a financial weapon on mass destruction and I think a lot of regulation is needed which is currently completely absent.
Finance in many ways adds lesser and lesser value to society and take more and more of the value pie. This cannot be allowed to perpetuate.
An 18-year-old will not think Rs. 500 processing fee on a Rs. 2000 spend is 25% flat interest.
Allowing these acquisitions to go through is akin to the Facebook purchase of Instagram. Governments will rue these mistakes in about a decade. They won’t be able to undo it then. There have to be limitations on the amount of money that can be made using such channels. The market is not the best at regulating this, especially when most of the users do not even understand what it is costing them.