PLANSPONSOR - June - July 2022 - 2

Pay Me Later
INSIGHTS
PUBLISHER: Alison Cooke Mintzer
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D
uring the pandemic, we saw increased savings rates. That was good news,
but it hasn't lasted. Credit card balances reached $841 billion, and 229 million
people opened new credit card accounts in this year's first quarter, says
a report from the Federal Reserve Bank of New York. Household debt, at the same
time, grew to a $15.84 trillion record-I'd say debt is back in business.
Rising interest rates are leading to increased costs to finance items on credit
cards; the average annual percentage rate on a new credit card is now more than 20%,
according to LendingTree's tracker. This is the first time rates have topped 20% since
the tracker was introduced, in 2018. Add to that, inflation, and we'll find that items
are costing people much more. From a financial wellness perspective, with all we
know about how people are-or are not-saving, this is concerning.
I've been seeing a lot about the buy now, pay later industry-especially with
Apple's recent introduction of Apple Pay Later, which allows users to split the cost
of an Apple Pay purchase into four equal installments (every two weeks over a sixweek
period) without incurring interest or a late fee.
In case you haven't heard of it, as the name implies, the concept of buy now, pay
later permits users to make a purchase and receive ownership of the product immediately,
but pay for it over time or at some later date. It's in some ways a reverse
layaway. With layaway, people had to budget for an item and pay it off before taking
it home. There was, perhaps, a sense of financial wellness with such a system-
after all, you had to save and you had an incentive to do so.
However, BNPL seems to be everywhere now, and not just for big-ticket items.
I think I recall it first with the Peloton bikes during the pandemic; those are expensive,
so perhaps it made sense to pay for them over time. But now I see it at most
online checkouts-people have the option to use it even for everyday items, such
as clothing. Unlike, say, when stores offer 0% interest on an appliance purchased
with a new store-credit-card, most of the BNPL services don't do a hard credit check
to qualify the shopper. This means that people may avail themselves of the services
without the due diligence that opening a formal credit line would require. If those
who shouldn't use these services do, and they miss payments or somehow end up
in collection, that would have a negative impact on their credit score.
I can't quite understand the notion that pervades some conversations among
users of BNPL that the program is better than using credit cards. This can be a great
option, so long as people have the money to spend. Yes, there's often no interest,
so long as the payments are made in time, which is likely better than putting the
purchase on a card. Yet, there are penalties if payments are missed. And if people use
the option to pay for something relatively small, I worry that may indicate they're in
poor financial health. In other words, is this just creating a new cycle of debt?
Recent research from C+R suggests that 60% of consumers have already used a
BNPL service and owe an average of $883. Similar data from Experian points to four
in five U.S. consumers using BNPL on everything from clothing to cleaning supplies,
and most shoppers said buy now, pay later could replace their traditional payment
method (likely, credit cards).
While I hesitate to suggest more work for plan sponsors-I recommend that, as
you plan your financial wellness program, this topic be included. The boom in BNPL
could have far-reaching implications for employee financial health.
-Alison Cooke Mintzer, Publisher
2 PLANSPONSOR.COM June - July 2022
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