Published in the San Diego Union-Tribune, August 30, 2021
by Neil Senturia
I am mentoring some young people who have aged out of the foster care program and are now on their own making independent choices and decisions. My assignment is to improve their financial literacy. I have given some serious thinking to this assignment, in particular puzzling if a person my age, (boomer) is in touch with the current reality of money and spending for someone younger, Gen Z.
The subtext here is the rise of “buy now, pay later” apps extensively available on the Internet. This is what is commonly referred to as “fintech-ification” of our everyday commerce experiences.
If you were my parent, you would know this as buying on “layaway” where you make small payments to hold the item until you can afford to pay for it in full. The next iteration of this idea was “store financing.” You can sit on Jerome’s couch now but pay for it for the rest of your life, with no interest for the first five years. Trust me, the interest is factored into the price. There is no free lunch.
Then came credit cards where you can buy what you don’t need and can’t afford and not have to pay for it immediately, but welcome to the concept of 18 percent interest. And if you want to do a mind bend, read how they calculate the unpaid balance on which they apply that rate — welcome to debtor’s hell.
And now the world comes full circle back to installment sales with an Internet twist. The contemporary way to buy what you can’t afford is now being made available by companies like Affirm, Afterpay and Klaran, among others.
In a Bloomberg Businessweek column, Max Reyes writes that “unlike credit cards, which carry a minimum balance (indefinitely), these fintech companies are set up for you to make a fixed number of payments, often four, but the hook is that they are making their money from the retailers.” When you get sticker shock at the 96-inch 4K television, these app companies whisper in your ear, no problem. The CEO of Affirm, Max Levchin, says, “We are in the business of turning browsers into buyers.” Bloomberg says Americans spent an estimated $25 billion last year on deferred payments.
The irony is that it is the young Americans who are their customers. They distrust credit card companies. They don’t like “paying interest” on the cards, but kids, in the other model, the interest payment is built in. This is not a magic trick, it is simply misdirection. If you can’t get a credit card or distrust Visa, you will like these programs, but still no free lunch. It just makes it easier to get into debt, but it does nothing to help you pay for it. There is still potential for late fees, automatic debits, overdrafts.
And so, we come to my job as a purveyor of financial literacy. My father would not spend a dollar unless he had three in the bank. I am not that old school. But there is no question that installment payments, however, they are disguised, have the potential for quicksand to the young and less financially sophisticated. Things like budgeting, cash flow and credit score still matter.
The companies claim that they will be able “to use the borrower information as education, coaching, guidance and support.” Please, don’t insult me. And yes, I do have a bridge for sale.
Now, is there a corollary in the entrepreneur game? Look at how some large companies, like Uber, underwrote the millennial lifestyle by subsidizing the cost. MoviePass went broke offering unlimited movie-going for $10 per month. Maple, Sprig, Spoon Rocket and Muncher are all gone because they offered me something I wanted and didn’t have to pay the true cost to have it.
Airbnb, Uber, Lyft, DoorDash and Bird, and many other companies are raising prices. They hooked you on the drug, and now you need to pay up for the addiction. Economists call this inflation. I call it paying for lunch.
So, I need to be careful with my young charges. I will bring a large pepperoni pizza to the first session but after that, they will need to buy it by the slice.
If I only lose a dime on each widget, can I make it up on volume?