Americans learn to love the Brazilian way to pay
Lesson summary
Hi there everyone, I’m Jeff and you are listening to Plain English lesson number 471. Here at Plain English, JR and I help you upgrade your English with current events and trending topics. Who, exactly, is JR? He’s the producer and he’s the one working hard behind the scenes to make sure you get the audio on time every week, that the web site is updated with all our great content. Speaking of which, the URL for this lesson is PlainEnglish.com/471. And there is a lot to discover there in addition to the audio lesson.
Coming up today: A new type of “fintech” company is offering a convenient new way to pay for goods and services online. This will sound familiar to our Brazilian listeners. It’s called “buy now, pay later.” The specific product is new, but the concept is old as time—and so are the drawbacks, as some in the TikTok generation are starting to learn. In the second half of the lesson, I’ll show you what it means to “think twice.” And we have a song of the week. Let’s get started.
Buy now, pay later: the newest innovation in online shopping
I don’t have to tell you that online shopping is a big deal , here in the U.S. as in many other parts of the world. In 2021, American consumers spent $870 billion in online commerce. And in recent years, as those shoppers got to the checkout page , they started to notice a new payment option . It’s called “Buy Now, Pay Later.”
The option is offered by new companies with names like Klarna, Afterpay, and Affirm. It works like this. Consumers can buy a product for, say, $200. But instead of paying $200 upfront , they can split it into four monthly payments of $50 each—and pay no interest .
These companies market themselves as a friendly way to pay. Their names, web sites, colors, marketing, and messaging are all bright, positive, upbeat , fresh, friendly, and modern—a contrast to the stuffy , restrictive , rules-laden world of banks and traditional credit cards. And this new payment option is a hit with Generation Z.
Consumers like buy now, pay later for a few reasons. The first one is obvious: get what you want today and pay less for it. To date , credit cards have been the primary way a consumer can get something today and pay for it tomorrow. But not everyone can get a credit card. To get a credit card here, you need a credit history in the United States.
But over 53 million Americans don’t have a credit score , so they can’t even get a credit card. And people who’ve recently immigrated might have the credit history, just not in the right country. Buy now, pay later companies do analyze the potential buyer , but they don’t rely on traditional credit scores. That allows them to offer credit to shoppers that can’t get a credit card.
In fact, this is the exact reason this payment became popular in the United States. Paying in installments is common in some parts of the world, especially in Brazil and other parts of Latin America. But it hadn’t ever caught on in the United States, where consumers preferred credit cards.
Then Walmart realized that many of its customers wanted to pay for their items over time, but they didn’t qualify for credit cards—they didn’t even qualify for the Walmart store card. So Walmart partnered with Affirm, a startup , to let shoppers pay in installments. And it worked. Suddenly , other stores, especially online stores, realized that if this was working for Walmart, it could work for them, too.
While it started by catering to consumers who couldn’t get credit, the idea has gone mainstream . Now, many consumers who do have credit cards still prefer buy now, pay later. They think it’s easier to manage than credit card debt . With credit cards, you have to pay the full balance at the end of every month; if you don’t, you start paying interest. If you can’t pay the full amount, a lump-sum balance rolls forward from month to month. And for consumers that carry credit card balances, there’s no end in sight —there’s no term to a credit card loan, it just seems to go on forever .
But with buy now, pay later, a $200 purchase spread over four monthly payments has a beginning and an end, and no interest. And if consumers pay on time, there are no fees either.
Wait—no fees? So how do these companies make money? The answer is they charge the retailer , usually three percent of the total purchase. And why do retailers pay the charge ? Three reasons: cart abandonment , average order size, and order frequency .
Consumers often put items in their online shopping cart, and then get to the checkout page and, for whatever reason , they don’t order. This is called cart abandonment, and it has many causes. It could be password issues . It could be that having to enter a credit card makes them think twice . Or it could be that the price is just too high.
But if, say , a $200 item only requires a $50 payment today, and if you don’t even need to enter a credit card number, well, that sounds more reasonable . And more consumers continue with the purchase rather than abandon the cart—and the store makes their money.
There are two other reasons retailers like buy now, pay later: average order size and order frequency. Afterpay is one of the buy now, pay later firms. They have a special page where they explain their service to retailers, and on that page they cite two compelling statistics . First, shoppers who use Afterpay spend 40 percent more per order. And those same shoppers complete 50 percent more transactions .
Retailers, then, are all too happy to pay the three percent fee these companies charge because they know that with this option, their customers will buy more, and buy more often.
So what’s not to like? SFGate is a web site based in San Francisco, where many of these buy now, pay later companies are based. And SFGate found that Generation Z is spiraling into debt by using buy now, pay later.
On Monday’s lesson, I’ll tell you what that investigation found, and why it’s worrying .
Credit challenges
I will say this, it’s not easy to establish a credit history and credit score if you just move here from another country. And there are so many advantages to having a credit card, even if you don’t use it to borrow, and those are not available to people without a credit score. So I do appreciate that buy now, pay later can help someone spread out payments for something big, like a flight or a new appliance or something. But, as we’ll see next week, a lot of people are buying everyday things this way…and I’d think twice about doing that. Speaking of which…
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