Unknown Speaker 0:00 Oh Joshua Warren 0:06 like I said, I'm really hoping I'm wrong. I'm hoping that interest rates start going down, or at least level off, inflation starts getting better and the economy's wonderful, but I think it's a good idea to be prepared just in case. And so what I would do as a merchant is, first of all, look at your contract. Your Buy now pay later provider, look how long they have to pay you and take that and look at in the past 30 days, how much revenue Have you collected via Buy now pay later? Because if that provider goes bankrupt, you're probably not gonna see any of that money. Darin Newbold 0:41 Good day, and welcome to commerce. today. We're excited to have you here. My name is Darren and as always, my cohort in crime. Josh is with me as as co host. Good day, Josh. How are you doing? Good. Joshua Warren 0:53 How are you doing? Darin Newbold 0:54 Hey, I'm doing all right. I was. I was thinking back to a time a while back and just being able to go out and and do you remember the old no doc loans? How crazy was that? Now we know where that ended up. Right? Joshua Warren 1:08 Yeah, that was that was not good for the economy. It was a lot of fun while it lasted, but then man the crash? They're not so great. Darin Newbold 1:15 Well, and that kind of relates a little bit to our, our topic today. This kind of thing, and I'll let you. I'll let you tell more about it. But in short, buy now pay later, what's going to happen? Joshua Warren 1:28 Yeah, yeah. And hopefully, hopefully, it doesn't relate too much. Oh, man, that is my big hope. I'm hoping I'm totally wrong about this baseline. But yeah, I wanted to talk specifically about a buy now pay later bubble and what impact that might have on retailers and E commerce. And so basically, if you're not familiar with it, but I'm sure you've seen it before, even as a consumer buy now pay later has been the hot trend of the past few years, we're at checkout, users can select, buy now pay later. And instead of paying for the transaction all at once they can do a financing deal. So they can say, hey, I want to pay for it. I know that a lot of them on smaller transactions, it'll be like, you pay every two weeks for two months, something like that all the way up to you know, on bigger purchases, it'll offer 1224 48 month financing. Really? Yeah, yeah. Which is a little scary to think about for your everyday ecommerce purchase. But I mean, this is this is exercise equipment and other you know, kind of higher ticket higher order value items. And the way the way it works is it basically works like any other payment method in your E commerce platform. So retailers just kind of plugs it in as a payment method. And then as the retailer kind of the advantages, you do pay a fee, just like you would a payment processor, you pay a percentage to the Buy Now pay later provider, but your customer doesn't have to pay right away, but you still get the money effectively right away? Darin Newbold 2:52 How soon how soon do you typically get it? Joshua Warren 2:55 It depends on the provider, most of them try to model a typical credit card payment provider to where you'll have it within a few days, some of them pay out on more like a 30 day cycle. A lot of that's negotiable depends on the size of your business and the size of the provider. Interesting. Darin Newbold 3:12 So what do you see is the challenge here? Joshua Warren 3:15 Well, so the challenge is, is a few things, it's basically the the entire business model, which is a little scary. So the way these companies are financing their growth, most of these aren't banks. Actually, I don't know if any of them are banks, most of them are these new FinTech companies. So they're basically tech companies. While they're growing as fast as they can, as a, especially a venture backed or public company likes to do, especially in the tech industry, it's like hey, acquire as many users as much market share as possible. Well, they don't have the money to do that. So when you go and as a consumer, you get a loan from them, by making a buy now pay later purchase, they're actually using their own loans, their own financing to cover that. So they are acquiring more and more customers and more and more debt by going out and actually sign up for the debt. Now when interest rates are low, and they can have a nice spread between the interest rate they pay and the interest rate you pay. That's awesome. That's more profit for them. But then you got the Fed and the Federal Reserve and you got this thing called inflation. And, again, you're you're hearing about this everywhere, probably in the news, but interest rates keep going up and up and up. Oh, yeah. And so, couple of things happen there. First of all, your payments go up, they get more expensive. So the payments that these by now pay later companies are having to pay and the payments that consumers are having to pay, they're getting more and more expensive. That actually makes it harder than to qualify. So then you have more and more customers that are basically gonna get priced out by that interest rate increase. So that's not good. And at some point, it becomes harder to even Then for the Buy Now pay later company, it becomes harder for them to even get the debt in the first place. There's people are less and less likely and willing to lend Darin Newbold 5:10 to loan it out. And so it becomes a real challenge for, for the consumers and, and for the merchant, trying to get those consumers each and every time so well, yeah, that becomes a real challenge, because they're, they're really playing the market and playing the spread, it's an arbitrage situation of how they're making their money, the interest rates are gonna ultimately kill them. So what happens? Well, I guess, let me pause you there the bigger question, okay, we know the house of cards that can come crumbling down. But what is it from a merchant? What do they need to be thinking about? What do they need to be looking out for? Joshua Warren 5:48 So there's actually one last thing in that house of cards that I forgot to mention, and that is just that the these loans, and this does this is so much like the 2008 financial issues and bubble, that it's a little scary, but these loans aren't tied to any collateral. And these loans are usually not tied to really any documentation. So what happens is, if you're a consumer, and you're hit by inflation, I mean, eggs, that's all I have to say, the eggs lately. You're hit with inflation, and maybe you've gotten laid off and all these layoffs lately. And you're sitting there saying, Alright, here's, here's the bills I have to pay, here's the money I have, whether these two numbers don't add up, what am I gonna pay? Okay, well, my mortgage, if I don't pay, that, they're gonna come take my house away. So I think I'm gonna pay that by now pay later bill, well, they're not going to repossess my sneakers, right? So yeah, maybe I'll let that one slide. Well, then that means more and more people start defaulting on those Buy now pay later loans there. That means all of the money going in to the Buy Now pay later companies that they use to pay their debts goes away. And then that house of cards really crumbles. And I think and I'm hoping I'm wrong, but I think that this could end with at least one of these companies going bankrupt. And that that's where it'll hit the retailers. Darin Newbold 7:09 And that is sad. And I guess, do you know, do you know the criteria, kind of the qualification criteria that these Buy now pay later? What they're using? And is it hey, if I can fog a mirror and have a pulse I can get it? Or what do they look at? Or do you know? Joshua Warren 7:27 So it depends on the dollar amount. There are some just from my own experience, as a consumer kind of playing around with these things to test them and see how it works. If it's a small enough purchase, there's no criteria, there's Do you have an email address, and you have a credit card, and that's it. And then for the larger purchases, then you start looking at at least a basic credit check. But it's not the most intense qualifications so Darin Newbold 7:54 and what kind of what kind of rates do these kinds of get on this? I mean, it's just the almost usury level stuff of 20 plus percent kind of thing, or Joshua Warren 8:05 they can be but usually these services are pitch themselves to merchants by saying, you know, hey, this is a lower cost alternative that your customers are like better. And they will actually give the merchant the option to pay, basically pay down your customers rates. So I actually did use this once on a pretty big exercise equipment purchase. And in that case that ran was paying to where I paid 0% interest. So I said, Well, of course I'm going to use it. It's free money. So it can be anywhere from 0% on up to it's not it's usually close to credit card rates. And Darin Newbold 8:40 all in between those. Yeah, these days with inflation stuff. I think credit card rates are near they're not great. I would consider usury. But well, we talked about the issues. And we talked about kind of what could potentially happen in the House of Cards. What's my risk as, as at merchant in and, you know, what do I need to what's kind of the last last bits of advice you would give kind of around this for the merchants? Joshua Warren 9:08 So like I said, I'm really hoping I'm wrong. I'm hoping that interest rates start going down, or at least level off, inflation starts getting better, and the economy is wonderful. But I think it's a good idea to be prepared just in case. And so what I would do as a merchant is first of all, look at your contract. With your buy now pay later provider. Look how long they have to pay you and take that so like let's say it's 30 days. Take that and look at in the past 30 days, how much revenue Have you collected via Buy now pay later? Because if that provider goes bankrupt, you're probably not gonna see any of that money. So that basically lets you know, what's your kind of direct your risk? Yeah, your direct financial risk is but then also you have to start thinking, Okay, what if they don't go bankrupt? What if they just keep raising their rates and raising their requirements to where my customers can't qualify? Well, then that's where I would look at your percentage of your revenue that's coming from by now pay later and say, Okay, if this is a large enough percentage, I need to come up with a backup plan, I need to, you know, maybe talk to a couple other providers see what they're doing. See if there's someone that maybe hasn't had to raise their rates yet, maybe they're a little bit more stable. And so they're not as concerned about it. And I would do that no matter what I would basically have a backup of if my provider goes under or if they have some sort of issue where they raise the requirements too high. This is who I would switch to. And luckily, there's, there's more than a few of these companies out there right now offering the service. Darin Newbold 10:37 Well, that's great. So at least there's options. And knowing what your risk is and planning ahead. I think we've, we've talked about that before and in other podcast episodes. So this is a continuation of that of doing what we can to be prepared at all times. So with ad we we do want to stay we don't want any evil hate mail or anything, because we're not hating on any of these Buy now pay later places. We think they're great. And they do provide a fantastic service. But we like all things that provide fantastic service with all the good, there can be some challenges. And the changing economy puts us in a place where what one day was awesome. Just isn't that awesome anymore? Right? Joshua Warren 11:21 Exactly. And as always, we are not accountants or lawyers. I would definitely say if you have an attorney, if you're worried about this, and you have an attorney that reviews your contracts, maybe ask them to look at your contract or their buy now pay later provider just to get a better sense of that risk. There. There could be things we didn't mention or your contract could Darin Newbold 11:41 be different. So yeah, absolutely. As always in Yeah, neither one of us are lawyers or accountants and neither one of us stayed in Holiday Inn Express. We're good. Anyway, with that. Hey, as always, we are very happy to have you with us at Commerce today. And as always, we will see you next time Transcribed by https://otter.ai