Dhe crises in the world can be felt at Wal-Mart at the checkout. First it was the pandemic that made many products more expensive in the US, then Russia’s attack on Ukraine. For example, if you buy a carton of milk, a box of eggs and a pack of beef, you now pay just under $40. In February, America’s inflation was 7.9 percent – the highest value since 1982. But the Zip app promises a way out of the misery. Your users do not have to pay the entire sum immediately when making a purchase, but can pay it off. Wal-Mart’s financing offer for the milk, eggs and meat is four installments at $9.75 each over a six-week period.
A loan for a visit to the supermarket is probably the pinnacle of life on credit. But many Americans love such deals, especially now that everything is becoming more expensive. They are called “buy now, pay later”, BNPL for short, in German “buy now, pay later”. The difference to an ordinary loan is that not houses, cars or flat screen TVs are financed, but everyday necessities.
Volume of mini-loans: 80 billion dollars
In the US, the richest nation in the world, around 130 million people take on debt to pay for their weekly groceries. The country is the world’s largest market for mini-loans, according to Berkshire Hathaway, the holding company of star investor Warren Buffett. This year, their volume there is expected to exceed 80 billion dollars, the equivalent of around 73 billion euros. There are dozens of providers, the best known include Zip, Affirm, Afterpay, Klarna and PayPal. In a transaction, they transfer the full amount to the retailer – and then gradually collect the money from the customers.
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One in two adult Americans has paid with BNPL services at some point, surveys show. A third of the users belong to Generation Z, so they are hardly older than their mid-20s. BNPL is tempting, after all the loans are interest-free. Zip and the other companies are paid by the supermarkets, fashion stores, and restaurants they work with. You earn with every purchase. But the idea that all customers can apparently finance everything is dangerous. “A loan with zero percent interest may be a great offer,” says Chuck Bell of the American consumer organization Consumer Reports. “But only for people who can actually pay their bills later.” In the USA, where half of the population does not build up any financial reserves and lives from paycheck to paycheck, from salary to salary, this is often not the case. “Many Americans,” says Bell, “run up debt with BNPL without realizing it.”
More than one in three BNPL users defaults on their payments, according to a study by the American financial services provider Credit Karma. The industry is largely unregulated, and nobody checks the creditworthiness of borrowers. This makes BNPL particularly popular with people who are short on cash. Consumer Reports is aware of the case of a Florida woman who filed for personal bankruptcy – and had just taken out 43 BNPL loans.
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Debt, as such stories show, is part of the culture in the USA. Citizens juggle all sorts of liabilities as a matter of course: mortgages, credit card bills, loans for cars, medical treatments, and for college. Overall, according to the Central Bank of the State of New York, the Americans are currently in debt with 15.58 trillion dollars. That’s more than ever.
In the past year alone, the public’s debt has increased by a trillion dollars. Many people seemed to consume like they were intoxicated, catching up on what they had missed during the pandemic. There was talk of “revenge shopping” in the USA, of shopping as revenge on the corona virus.
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Consequences of the Ukraine war
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Mortgages or college loans are considered “good debt” by American financial advisers – however, anything that can be achieved through the use of credit cards accumulated is “bad”. After all, these are often expenses that are not absolutely necessary to live on. According to the finance portal LendingTree, American families have an average of $6,270 in credit card debt. There are more than a billion credit cards in circulation in the country, statistically every adult has four. And now the BNPL services are added. Behind all this, consumer advocate Chuck Bell suspects what can be described as typically American optimism. “People here often believe,” says Bell, “that for some reason they will have more money on their hands next month than they have today and that it will be easier to pay bills.”
Dangerous hype
But that’s a mistake, says Bell. Especially when it comes to products such as groceries, i.e. recurring expenses. According to research by Consumer Reports, many BNPL users actually have no money for the goods they buy. Almost half of them can only afford what they want with a mini loan. That, says Bell, is what makes the hype about BNPL so dangerous. The companies, on the other hand, see something positive in this. According to Afterpay, a provider that cooperates with 26,000 shops in the USA: The service enables poorer people to access economic participation. “For financially weak households,” says the company, “the fees and interest incurred when using credit cards are a huge problem.” BNPL, according to Afterpay, protects users from these costs.
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Leads BNPL to the end of the Credit card? For the giants Visa, Mastercard and American Express, who have long been the rulers of everyday loans, the triumph of Afterpay and Co. is a problem. According to surveys, four out of ten American BNPL users actually want to give up their credit cards in the foreseeable future – and finance their lives exclusively through fintech apps. The big American banks face similar challenges. According to McKinsey, the BNPL providers reduce the annual turnover of the industry by eight to ten billion dollars. According to the management consultants, many institutes underestimated the threat posed by BNPL and riskedlosing the battle for young customers.
Some banks are now reacting. The largest in the USA – JPMorgan Chase – has also recently been offering its customers interest-free mini-loans. However, they can only be used for transactions of 100 dollars or more. So they should be uninteresting for many young users. After all, Generation Z in America also wants to buy milk, eggs and meat on installments.
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