Picture this: you’ve accidentally tripped and fallen into the online shopping cart for a limited edition pair of kicks. Whoops, how clumsy of you!
Too bad they’re $300 and you’ve got a big fat stack of bills eyeing you off on your counter. Maybe performing an entire rendition of West Side Story in the shower wasn’t the best use of your utilities this month.
Except, right below the price, there’s another option: “Four instalments of $75.00 by Afterpay”.
Cha-ching.
What is this sorcery?
This is the simple, seductive psychology behind the “buy now pay later” (BNPL) services that are sweeping the retail scene.
Companies like Afterpay, or ZipPay, one of many competitors, allow you to break up payments on items in monthly or biweekly instalments. This way, you’re not dropping a ton of cash all at once.
The aim is to make your experience as frictionless as possible, and it often is. But if you’ve learnt anything from your parents (or maybe you haven’t), it’s that you should read the fine print.
Here’s what the experts say
“People will do what they can to avoid pain,” says Dan Auerbach, a Clinical Psychotherapist at the Associated Counsellors & Psychologists Sydney.
“The main pain-point when we are shopping is the purchase price. When we shop, we try to overcome the loss of handing over our money with the pleasure of getting what we want.”
“In consumer psychology terms, we call that loss aversion.”
“BNPL also sweetens the deal of shopping by offering you the enjoyment of having the product right now, with the pain spread out into small chunks over time. It’s like saying: You can have all the pleasure now and don’t worry, you’ll barely feel the pain – we’ll break into small chunks for you.”
Yikes. Sounds painful.
A regulated industry or the wild, wild west?
This industry is booming, no doubt, but experts warn that it's too unregulated. Companies like Afterpay don’t charge interest on purchases—just late fees if you fail to pay on time—so they aren’t required to screen their applicants the same way traditional credit companies do.
Afterpay doesn’t run credit checks on applicants—they just need to be over 18 and have a verifiable email address, phone number and bank card.
“From a psychological point of view, being unregulated and therefore not needing to screen applicants is a big advantage. It enables a very quick transaction experience without frustrating the consumer with forms or having to justify their purchase,” Auerbach says.
“By being so fast, the opportunity for loss aversion is minimised and the reward is brought forward.”
Young people aren’t fans of credit cards? What a shocker
It’s no coincidence BNPL appeals to Millenials and their younger cohort.
ASIC found in 2018 that 60% of BNPL users were aged between 18 and 34, while Afterpay says their average customer age is 33. It appeals to a generational swing away from credit cards – even the founder of Afterpay himself says Millennials are more afraid of credit card debt than they are dying.
A little dramatic, sure, but we get it.
http://gph.is/YZsLtE
“I think the evidence is becoming overwhelmingly clear that BNPL has inspired a generation of young folks (Gen X and Gen Y) that are ditching credit cards faster than toupee flying off in a hurricane and scanning their BNPL codes at cash registers,” says Dan Jovevski, founder of financial wellness platform WeMoney.
“These customers have become a mainstay for a lot of the profits in credit cards for the banks which are now seeing this as a real and tangible threat, clearly evidenced by the slew of interest-free credit cards both NAB and CBA are planning to release to combat the threat of BNPL players.”
Do your homework and you’ll be fine
“There’s definitely a case for educating consumers,” Auerbach says, about the true cost of BNPL purchases. It’s like most public health campaigns. Mass education has huge advantages for society. The market left to its own devices will find clever ways to advantage itself at the cost of the most vulnerable.”
“Having an aggregated limit and regulation towards achieving this would seem to be a good idea.”
Joveski says BNPL has reimagined the way consumers purchase goods and services, and it’s not all bad.
“For an end consumer who uses the product responsibly, there are a lot of positives. There are effectively no fees and no interest,” he says.
“Some people also argue that the set repayments for most BNPL purchases give them an understanding there is an end and knowing they are in control, as opposed to traditional credit cards which can become very confusing on interest-free periods and minimum repayments.”
“Could we see price inflation for goods as a result given the pressure on retailing margins?”, asks Joveski rhetorically.. “Time will tell.”
Until then, perhaps it's best to reign in your BNPL endeavours until you’re clear on how much you’re spending.
The shoes can wait.