Even Goldman Sachs Is Jumping Aboard Buy Now, Pay Later: Paul J. Davies

People can be just the worst borrowers, failing to pay what they owe especially if defaulting doesn’t cost them their house or their car. That’s why credit cards charge eye-watering interest rates and late fees. It’s also why cards and other unsecured consumer debt cause the biggest losses for banks during major downturns — and why central banks assume that consumer defaults bring the most pain in financial stress tests.

So it’s a bit of mystery why “Buy Now Pay Later” apps — which let users pay for purchases next month of in a few installments, without charging interest and often no late fees either — are the hottest thing in fintech. Investors have been throwing money at firms like Sweden’s Klarna and Australia’s Afterpay, driving valuations to dizzying heights. Goldman Sachs Group Inc. and PayPal Holdings Inc. have also jumped into the fray, each striking $2 billion-plus takeovers this month.

It’s still too early to assess the true credit risks in these new technology-driven firms. But there are reasons to suspect that in tough times bad debts could bite hard.

Apps like Klarna and Afterpay mostly offer very short-term, interest-free loans for fashion and beauty products. The loans are interest-free because the shop pays a fee of a few percent to get its money straight away and to cover payment processing. Retailers like Yoox or Net-A-Porter are also willing to pay because the apps draw in customers and encourage them to spend.

Use of the apps has been growing fast, especially during the pandemic. European transactions are up almost 100% in the past year and Klarna’s U.S. volumes jumped more than 300% in the first half of 2021.

Investors are flocking in. In Europe, Buy Now Pay Later firms have raised more than $2 billion from venture capital and private equity this year alone, according to Morgan Stanley.