Buy now, pay later and the evolution of innovation

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Kai So this is the teaser.

Sandra Tease now, listen later.

Kai Tease now, tell later.

Sandra Buy now, pay later.

Kai Or as I say pay now, buy later. BNPL. Buy now, pay later on The Future, This Week.

Intro From The University of Sydney Business School this is Sydney Business Insights, an initiative that explores the future of business. And you're listening to The Future. This Week where Sandra Peter and Kai Riemer sit down every week to rethink trends in technology and business.

Sandra Before we talk about buy now, pay later and there is a lot to say about it, not only Apple Pay introducing it, but also the National Australia Bank, NAB, NAB Now Pay Later.

Kai Everyone seems to be moving into that space.

Sandra GoTo in Indonesia has also made the move, quite a lot of activity in that space. So it is now finally time to unpack buy now, pay later.

Kai Yeah, but later.

Sandra But later, because both of us have found out this week that it turns out that bees are now officially a type of fish.

Kai Bees are fish. What?

Sandra What?

Kai Well, this is legislation...

Sandra In California.

Kai Yeah, which has now found that bees apparently are fish so they can be protected.

Sandra What?

Kai What?

Sandra Three judges in California decided at the beginning of this week that bees should be legally classified as a type of fish, to add conservation protections to the endangered species. And we've done a whole episode on the business of bees. And we'll add that in the shownotes, some very interesting stories there around how bees are disappearing, and how much they contribute to business, and what some of the approaches around the world have been to be conservation. But in the meantime, the bee falls, seemingly, within the definition of a fish.

Kai Well, that is what the judges established. Bees used to fall through the cracks of the California Endangered Species Act, even though they are classified as endangered, because insects are not explicitly named, but fish are. And part of the species of fish are invertebrate, which bees are. But judges have now decided that yes, some invertebrates are part of the fish category. And since bees are invertebrate, we can be liberal in the interpretation here and classify land invertebrate, you know, flying invertebrate, also as fish.

Sandra So it's basically now the same as an anemone or a sea urchin.

Kai Yeah, so they found a way to actually protect the endangered species under the act. Even though insects are not explicitly named, it's a bit of a classification technicality. But the outcome is good because it helps the bees which, as you said, we have established in our special on bees are really important to sustain, among other things, agriculture.

Sandra There were some other interesting stories last week as well, some around China's population getting smaller for the first time in 60 years, basically the first time since the Great Famine. And that's quite surprising, because we know that China has abandoned it's one-child policy about six years ago. And it's introduced what is now a three-child policy. And that's backed by quite a few incentives for people to have children to grow the population including tax incentives, yet the population is set to shrink.

Kai To me that comes as a surprise because I've always thought about China as a growing population, it's so big already. But for me, that will take some unlearning to now realise that China's population is actually shrinking, because birth rates have dropped dramatically. And not only because of COVID. But also because we know that lower birth rates are associated with higher levels of wealth and education, for example.

Sandra The birth rate back in the 80s was 2.6 births per woman. And that always used to be well above the 2.1 that you need to basically replace the population and it's been dropping ever since. And at the start of the pandemic it was 1.3. And now it's down to 1.1 last year. And just by way of comparison here in Australia, that rate is 1.6 births per woman. And even in Japan that's considered to have an ageing population and the very low birth rate it's 1.3.

Kai So not only is it shrinking, it is shrinking quite dramatically now.

Sandra 1.1, which means just shy of half a million births a year which is a record low, if you think what there was maybe even a decade ago, it was over 8 million births a year now down to just shy of half a million.

Kai Well, I have another one. It's a musk. Elon Musk has come out and said, people have to go back to the office. In his words, it's fine to work from home, as long as you do 40 hours a week in the office first, the rest, you can work at home. Otherwise, you might want to pretend to work for someone else.

Sandra So that's to his workers at Tesla and SpaceX, not yet Twitter, which actually said people can work from home, that's gonna be interesting.

Kai Yeah, and also not his company yet, or ever. We don't know.

Sandra We don't know. But Elon Musk was only one of the stories last week in the news around a move away from hybrid work, trying to kind of go back to pre-COVID. We've seen Jamie Dimon, the CEO of JPMorgan, saying that the offices will look very much like they did before. So going back to basically 2019, by September or October. And while both Elon and Jamie are admitting that hybrid work and remote work is kind of here to stay and part of the landscape, it's just not in their companies.

Kai And we will put a link to a New York Times article in the shownotes that talks about this also, from the point of view of you know, offices in downtown New York. The city of New York has come out and said, 'look all our people should come back to the office because we're making a lot of our tax income from people working in offices. And so we can't be seen to not support going back to the office'. There's a real push in the US now to bring people back into offices. And interestingly, there was this Twitter spat where Scott Farquhar, one of the cofounders of Atlassian, came out in response to Elon and said, 'look, you know, if you're pushing people out, I'm sure you have good people in your company, they can come and work for us at Atlassian'. And they even updated their HR hiring page and said, 'Tesla people welcome, we work from home'. Atlassian famously allows all of their people still to work from wherever they want. And they found that they can actually hire good people overseas.

Sandra So Tesla workers, work for an Australian company. I think these couple of stories do highlight just how much companies are still struggling with what is the right balance between being at the office and remote work and what does hybrid work look like? And Tim Cook, the Apple CEO came out just this week saying that this is the mother of all experiments that they're running, and they still have no idea, they've tried to bring people back for three days a week, then there was another wave of COVID. And they very much recognise that this is still a pilot. And figuring out how to make the best of both worlds is not yet clear.

Kai Well he seems to be the only moderate voice in the last week because it's really gotten very polarised. All remote with Atlassian, or all back to the office with JPMorgan or Tesla. The discussion about hybrid work and how that would work out has been background a little bit by this very animated discussion.

Sandra And there's quite a few pilots going around, we're not going to pre-empt the conversation that we're hoping to have soon around the four-day workweek. This is something that we've kept an eye on over the last few years now. And again, a number of experiments in the four-day work week space are happening.

Kai They seem to be getting bigger as well, the BBC is reporting about a large experiment in the UK.

Sandra Yeah, it's actually the world's biggest pilot scheme. So far, there's about 70 companies that are going to move to four-day work weeks for the next six months. That is employees will still get all of their pay, but only work 80% of the hours that they would normally work. And the aim is here to basically make them more productive over the four days that they're in the office, and Oxford and Cambridge are involved with the study. And the companies that they're looking at are everywhere from, kind of, software developers to HR firms, to charities to, like, fish and chips shop, basically across the board trying to figure out how this will work out. And here again, we've got people on both sides of the debate, saying, 'this will help reduce stress for workers and improve well-being', other people saying, 'well, if you're in healthcare now, working over 25% more everyday will make it even worse'.

Kai So, questions about inequality for how to make it work. And there's experiments in other countries, Iceland, Belgium, Scotland, Spain, you name it.

Sandra And one in Australia as well, that we hope to discuss soon on The Future, This Week.

Kai And our colleague John Buchanan from the Business School will be involved in this experiment about the four-day work week which also has other colleagues from UQ and colleagues from New Zealand involved in it.

Sandra And that's going to be about 20 Australian businesses that will start in July, very much looking at the mental wealth effects of going to a four-day work week, and more on that very soon. But today we are talking about buy now, pay later.

Kai So this is all over the news. But the story we've picked this from Tech Crunch "Apple Pay Later lets you split up purchases into four payments at no interest", which is pretty much the definition, or how we have commonly come to understand buy now, pay later services. Apple has just announced at their developer conference that they will roll this out into Apple Pay in the US first. But we can all assume that this will come to other parts of the world very soon as well.

Sandra So big news because Apple is doing it, but at the same time this week, NAB became the third of the big four Australian banks to offer buy now, pay later with you know, NAB Now Pay Later from July.

Kai To that comes on top of the Commonwealth Bank and ANZ already doing it which leaves Westpac the only of the four who have yet to announce it.

Sandra And also this week, Indonesia's biggest startup going into buy now, pay later. GoTo is the big Indonesian tech group that basically offers everything from ride-hailing to online shopping. And now also making a move in the lending space.

Kai And the buy now, pay later space is a big market, especially in Australia, been popularised by Australian startup one of our success stories, Afterpay, which has since been bought by Square, which is now called Block, which is owned by Jack Dorsey who used to be the CEO of Twitter, which brings us straight to Elon Musk, no.

Sandra Stay, stay with buy now, pay later. There's Afterpay. But there's also Zip. PayPal has a service, there's...

Kai Sezzle...

Sandra Klarna...

Kai And Humm, which also operates in Australia. It's a very crowded space now with the banks, and now Apple moving into there. And the move by tech companies such as PayPal, and now Apple is significant because it makes accessing the services even more easy. You don't have to actually sign up with an extra service like Afterpay, it will be right in your Apple Pay app when you pay through the service facilitated by Apple in collaboration with MasterCard, in this instance.

Sandra And let's just make it clear that the global market for buy now, pay later seems to be huge. Global Payments Report estimates that the industry is worth globally around $157 billion. And in Australia, it was worth about $14 billion just in 2021, which is much, much higher than a place like the UK where it's only about 4 billion, and close to what the market is currently worth in the US, which is about 17 billion.

Kai Yeah, a very significant service pioneered by companies such as Afterpay, that really explains why Australia is an early-adopter, and why here the services are more popular because we're ahead on the curve of adoption, ahead of places such as the US where it is growing very, very fast right now.

Sandra So if we're unpacking this, how does it actually work? So I buy something now, and I will pay it in four equal instalments without any fees. Who's paying for this?

Kai For customers, most of these services are free. So the retailer pays a fee to be able to offer Afterpay, or any of these services. And of course, customers pay if they run late with their payments. If you pay up your four instalments as advertised before, then customers do not pay anything with most of these services.

Sandra So this is quite different to how credit card works in a number of different ways, right? This was a very interesting innovation in that I don't have to apply for a credit line, these companies will do a soft credit check that will not impact credit ratings in most jurisdictions. And then I just qualify for it.

Kai And in many respects it's a typical tech innovation that exploits a regulation loophole. Much like Uber started not having to comply with taxi regulation and taxi licences, came into a market by basically working outside of regulatory frameworks. Buy now, pay later came in to exploit a loophole in Australia. It's not regulated as a lending service because there are no interest payments. There are just late fees and merchant fees. And in the US, for example, because you pay in four instalments, it doesn't fall under the TILA, Truth in Lending Act, because that only applies if you have a service that has at least five instalments of repayments. So these companies have found a way to offer this service without having to comply with existing regulation.

Sandra So it is an innovation. And as with most innovations, a lot of young people use it. According to CHOICE about 30% of Australians have used by now, pay later in the last 12 months. But it seems like the younger generations, Millennials and Gen Z, are quite attracted to the service. And indeed, many prefer it to credit cards and traditional forms of credit.

Kai In the US, among Gen Z and Millennials, about a third of them are using buy now, pay later, which falls to about 17% for Gen X and only 6% for Baby boomers. So it's really a service adopted by young people, mostly.

Sandra And there's also a difference in what they're buying compared to what people normally use credit cards or lines of credit for.

Kai Statista reports that the product categories with the highest share of BNPL purchases are clothing and accessories, electronics and computing, and beauty and health, actually.

Sandra And so besides the fashion and beauty purchases, health was singled out also as a category, many people wanting to pay for health care, especially in places like the US.

Kai And that's a product category quite different to fashion, where unforeseen one-off payments have to be fronted by people where these services and help spread the cost over multiple months of payments. But interestingly, the use of these services is associated with the fast fashion or now ultra-fast fashion phenomenon, closely associated with influencers on TikTok, actually.

Sandra Well as with many innovations, right, it is popular on TikTok. And it's very easy to use, it seems quite glamorous. As you said, there's many influencers who do it. There's now even an Afterpay day.

Kai A four-day shopping bonanza, where people spruik, not only the services, but the use of credit, the use of debt, to gratify themselves and defer payment into the future.

Sandra But it's also quite popular with companies, right, because there's quite a few stats that show that people tend to overspend. As we said, this is a particular category that spends on things like fashion and beauty. And companies are very happy to support a service that encourages people to spend more.

Kai And here is where it becomes interesting, when you unpack the way in which buy now, pay later companies talk about their services, often in terms of prudent budgeting and responsible spend. And the way in which these companies sell their services to retailers, where they make it known that their clients, their users, spend more, that they have higher shopping carts. And we'll put an article in the shownotes from SFGATE which unpacks this phenomenon, which says that the average spent on a BNPL transaction in the US is about $365. Whereas a typical shopping cart online is only $100. So, retailers like it because it's associated with higher spending, and it drives spending on their sites.

Sandra And this is where it gets quite tricky, because for, kind of, prudent users or prudent budgeters, right, and if you do pay it off on time, it's actually a tool to manage your finances better and your cash flow better. It allows people to spread the spend over a number of payments and manage their budgets better. But then at the same time, it also makes it easier to overspend, to have less visibility over how much you've drawn out. And that, you know, sense that well it's technically free, right, you're not paying for it upfront, seems to cause a lot of problems with overspending.

Kai And this impacts Gen Z in particular. And it ties in with the TikTok phenomenon and the glamorous nature of spending now and not thinking too much about payments in the future where people are there and say, 'oh, you know, it's practically free, because I pay for it later'. And as it turns out, those payments will come due eventually. And it becomes especially problematic when users use many of these services at the same time, to the effect that in the US about 43% of Gen Z have missed at least one of the payments and 30% have missed two or more payments. Which is a lot, and then shows that for many people this is not free, and can become a problem when, you know, frivolous spending can spiral out of control.

Sandra So where to for this market? Because again, there are good things associated with buy now, pay later if used in a prudent way, there are real dangers for people from, you know, late fees to debt collectors to credit ratings and so on, defaults.

Kai And as you said, if you're using this in a prudent way, it can be a good service. But if you start defaulting on your payments, it's not just the late fees, some of these services sell on the debt to debt collectors very quickly. And then that leaves negative entries on people's credit ratings. Which is particularly a problem for young people who need to build a credit rating, want to get into the mortgage market at some point, where these services do little to build a positive rating, because you know, if you pay on time, it doesn't go onto your credit rating. But where you can actually ruin your credit rating very quickly if you don't pay attention to your repayments.

Sandra But let's get back to the Apple move that we've seen this week, because I think it comes in a line of moves by big companies that are now starting to colonise the space and really changing the landscape of what that buy now, pay later market used to look like. Because just a few years ago, even before the pandemic, it was still very much an innovative playground where really any of the big banks or established financial institutions were just kind of watching to see what happens, it was very much a disruption story where, you know, these startups or tech companies like Afterpay, were changing the landscape of what it means for lending.

Kai And very much riding on the narrative of the small fintech coming into, you know, sort of stick it to the big established banks.

Sandra And they were creating these relationships, both with merchants and with customers themselves, who were gaining more and more confidence in using these products. Pair that with kind of the pandemic and a lot of shopping online and a lot of home improvements and other things, it's now become a space where increasingly we're seeing the big banks, and we're seeing Apple really very much kind of striking back and moving the market more towards the commoditisation space rather than innovative, kind of, tech space. And we're very much seeing that in the change in stock prices as well, for the initial players.

Kai Yeah, many of these have dropped in price, we don't have a share price for Afterpay anymore, because it's just a service of Block the company now, but Sezzle, one of the smaller players in Australia, their share price fell 14%, the day Apple announced its service. And it is quite significant that you can now have this service from your bank, or from tech companies such as PayPal and Apple, which means you do not have to sign up to anyone, retailers don't have to sign up to a service, you can just now use buy now, pay later in your payment wallet, basically, but doesn't have to be offered through the retailer anymore.

Sandra And likely this will mean two things. One is as this goes more and more mainstream; it is attracting the attention of regulators. Here in Australia, the new financial services Minister has said that the government will push ahead with plans to bring in the buy now, pay later sector under kind of established credit card laws, which again will have a significant impact on the sector.

Kai But it presents a challenge for standalone buy now, pay later companies because this is moving likely from a business model or a business idea to just a service. A service that is either offered by a payment system like PayPal, by a bank, or where the service now becomes part of a bigger ecosystem of a platform. And that makes the move by Afterpay to sell itself to Square, or now Block, quite significant because now it's a service in the ecosystem of a company that basically sells bigger payment infrastructure to retailers.

Sandra So it will be interesting to see what new innovations this might bring. Because the moment these sort of moves happen in the market, there's often another wave of innovation. Whether that's what we're starting to see these partnership models or kind of ecosystem plays where you've got Klarna partnering with Flybuys, for instance, or whether it's going after new market segments, and we've talked about health, but also travel is an emerging sector. Or we're seeing kind of add-on services, that might be things like recommending certain products, or offering kind of insights, or some added shopping experience on top of just the staggered payment.

Kai So this marks an interesting turning point or evolutionary step in this disruption story where the disruptive phase has now ended, there's a consolidation and there's a normalisation of this service, as just one service in the portfolio of bigger players, which likely makes it hard for smaller companies to survive. But as always, we do not give investment advice on The Future, This Week.

Sandra So that is all we have time for today. Thanks for listening.

Kai Thanks for listening.

Outro You've been listening to The Future, This Week from The University of Sydney Business School. Sandra Peter is the Director of Sydney Business Insights and Kai Riemer is Professor of Information Technology and Organisation. Connect with us on LinkedIn, Twitter, and WeChat. And follow, like, or leave us a rating wherever you get your podcasts. If you have any weird or wonderful topics for us to discuss, send them to sbi@sydney.edu.au.