Podcast: The rise of buy now pay later

Welcome to the world of interest-free finance.

The way we pay for things is changing fast.

When it comes to consumer finance, the credit card has been on the top of the pack for years. Recently, the tides have begun to shift.

Buy now pay later is a new approach to cash flow management and leading companies like Afterpay, Zip and Klarna are attracting millions of customers across the globe.

Almost 2 million Australians had used buy now pay later services according to some research released by Roy Morgan in November last year. Young Australians are the most likely to shop with buy now pay later, with nearly 56% of customers between 14 and 34 years old, with those in the 25–34 range making up 33.5% of all users.

This new industry is not devoid of criticism. Some players have been critiqued for fostering poor budgeting habits, especially among young people. These services also fall outside of regular credit and financial regulation, which led to a Senate inquiry and involvement by ASIC.

To talk us through the ins and outs of this world, we're joined this week by Jonathan Kelly, the chief growth and innovation officer for Flexigroup. Kelly and Sally discuss the origins of this innovative new financial technology, why consumers are so keen and why he thinks the days are numbered for credit cards and frequent flyer points.

Presented by bundll, the buy now pay later app that works for everything, anywhere Mastercard is accepted. Two weeks to pay, interest-free. Shop online or in-store securely using bundll through Apple Pay and Google Pay. Find out more.

Presented by bundll – the buy now pay later app that works for everything, anywhere Mastercard is accepted. Two weeks to pay, interest-free. Shop online or in-store securely using bundll through Apple Pay and Google Pay.

Mentioned in this episode

• How will we be using buy now pay later one year from now?
• Compare buy now pay later providers
• 2018: ASIC releases review into buy now pay later industry

Read the transcript of this episode

• Episode 208 transcript

  Note: This is a machine-generated transcript. We've tidied it up, but we're sorry if any glitches have slipped through.

  Jonathan Kelly
  This is the same reason why people were originally used to credit card was to free up your cash flow. The only difference I can say is that within buy now pay later. It's not made just for you to go out and just max out.

  Sally McMullen
  Everyone, it's Sally and thanks for joining us for another episode of pocket money, the show for people who want to shop smart. In today's episode, we're digging into the fast-moving world of buy now pay later whether you've checked some of your retail therapy on Afterpay or seen ads for Zip Pay or Klarna. While you're at the checkout at the shops you've probably come across by now pay later at some point over the last few years. I know I have. Today I'm chatting with Jonathan Kelly, the chief Growth and Innovation Officer for Flexigroup formerly of Zip and PayPal. So he definitely knows what he's talking about. We're going to be chatting about how these services work, how they've changed over the last few years and how They've impacted how we handle our money as well as some of the critiques that we've seen on by now pay later in the headlines. Almost 2 million Australians have used by now pay later services according to some research released by Roy Morgan in November last year, and young Australians are the most likely to shop with them. Almost 56% of buy now pay later uses age between 14 and 34 with the biggest chunk of those users being between 25 and 34. So, me. Not everyone is a massive fan of buy now pay later though. Some of these services have been critiqued for fostering poor budgeting habits recently. These services also fall outside of regular credit and financial regulation, which led to a senate inquiry last year and some involvement by ASIC. This conversation gave me a lot of great insight about how this industry works and how it's changing how we can finances so whether you're a big fan of these services and use them all the time or you've never even tried one, you'll definitely learn something.

  Sally McMullen
  This episode of pocket money is presented by bundll. The buy now pay later app that works for everything everywhere wherever MasterCard is accepted. Bundll gives you two weeks to pay interest free and has built in budgeting tools to help track your spending. Head to bundll.com.au. That's bundll.com.au to check it out.

  Sally McMullen
  Welcome to pocket money. Jonathan. Thanks so much for joining us today.

  Jonathan Kelly
  Thanks so much for having me, Sally.

  Sally McMullen
  So today we're gonna be talking a lot about the buy now pay later movement that's happening in the world of finance. But for some of our listeners out there who might not know what that is, can you give us a little bit of a rundown of what buy now pay later is and how it works?

  Jonathan Kelly
  No worries. I mean, by now pay, they're really kind of emerges in Australia probably back in 2015 2016. And basically what it does is give customers a clear alternative to a standard credit card with the ability to know that they've never have to pay interest to fund multiple purchases,

  Sally McMullen
  right? And it's kind of like you buy something and then it's split into like, kind of like instalment payments, right?

  Jonathan Kelly
  Well, you can see, various different models have popped up around the world. Not all of them are installed models. Some are like rolling account models, like for instance, bundll, our new product doesn't put it on an instalment schedule, it basically allows the customer to then bundll up their transactions and pay off each fortnight but kind of at their pace. Zip does it the same way, but probably the one that brings the most amount of noise to the market is obviously the success of after pay. And their model does break it into four equal instalments. And so oftentimes I find people that associate sign up for their marketing With their particular model, but I've seen models coming up, but you're doing 10 weekly payments, six weekly payments, 10 fortnightly payments. Fundamentally, every model does follow the same kind of ethos, though, which is it will never charge compound interest to a customer. And it usually always is a very simple digital signup process. It's not very tedious. Like it would be potentially for regulated credit card.

  Sally McMullen
  I just wanted to talk a little bit about how people I using the services to budget and handle their finances.

  Jonathan Kelly
  We thought a lot about that when we created bundll. And I can't speak to every other merchant that's out there. But basically, if you fundamentally think about the way that a credit card is devised an issue to consumer, it is basically done to try to get that consumer to roll right so I need that consumer to pay interest. And when that came out, then the banks and everybody else started creating all these platforms for points right so get that person to put More under credit card, we're getting more points. But the more you put on the credit card, the more chance you'll have to roll onto compound interest. However, find out works in a completely different form. By not putting it doesn't work if you roll, it only works if you pay it back. So the risk algorithms and the way in which customers come on to the products and zip and bundll and home and after that is all kind of saying no, we need you to pay us back, Sally, I don't want you to roll. So from a budgeting standpoint, you're going to get a text message, you're going to get a push notification, you're going to get a reminder, there's going to be an automatic direct debit set up to your account so that you pay back on time, which isn't called credit card works. We've also been taking that kind of to another next level with our new product bundll, where we actually put budgeting tools within the app so you can set a weekly budget. You can even set a category budget so it kind of shocked me when I did my bundll and look at how much I was actually spending on food, three coffees every day. lunch, you know, then a pizza for the kids on the weekend. And I was saying you Spend $250 a week just on food. So we want to put those tools in the hands of the consumer. But fundamentally, when it comes down to budgeting, all the inherent products we've been buying out there are almost set up as a budgeting tool to try to get you to pay back on time and not prolong that money and put it into compound interest, where credit cards probably have a slightly different tech and how they're doing budget.

  Sally McMullen
  So you were talking about how credit cards make money. So how do they use by now pay later services make money if it isn't through interest in how is that different, say from a credit card.

  Jonathan Kelly
  So the original kind of way in which to line up with as much market to make money as they charged a merchant service fee, everybody pay later product and it's out there today, except for a bundll relies on what we call a closed loop system. So I walk into cotton, we talked to them, they sign up merchant service agreement with us. And then we agree on a price and whichever transaction that is going to take place on our product on their website or in their store occurs a merchant service fee and then in return for that They expect that you're going to have a higher average transaction order. And you're going to have a higher conversion rate to do that. So that's fundamentally where the money takes place. However, it's also changed in landscape as well, because we very much view bundll more as a marketplace than as a merchant service fee. So we actually drive customers to our very individual marketplace on bundll, and then that goes out to affiliate networks. And we can prove that that bundll or that sale was done through bundll on their website, then affiliate fees might come back to us and there's a 1.5% 1% or whatever might be whatever that merchant was willing to pay for that sale. That's the man way. Now there are a few others. Obviously, at the end of the day, especially with the models probably like a home or an after pay late fees, do drive revenue, that's not good revenue. We don't want that revenue. But our customers will be charged a late fee if they don't pay on time. The third one, then is whether or not the customer would have what we'd call a monthly fee. So zip obviously there gonna charge a $6 monthly fee, I believe and is it pay product. So if you have a balance at the end of the month and you don't pay it off in full, always free to pay off in full but if you carry a balance the charge of that flat fee, and then we created what we called this newsfeed within bundlls. So rather than charging automatic fee for our customers, we do a lot of research on him. He said, Well, if you wanted more time, and you knew that he was always flat, would you be more inclined to say alright, I'd rather just pay a $5 flat fee and move my payment now two weeks rather than charging our late fee that came back with an a resounding yes, most customers said very fair with an extent exactly what you're doing. We understand that we're paying for a little extra time. And we know we can never get in trouble because there's only ever going to be $5. So those are kind of your few mixtures. Merchant fees are the first one a bit of late fees, affiliate fees, that whether or not that customer decides to push payments or have some type of an account put on but it's always standard, never never any actual compound interest.

  Sally McMullen
  So what are the types of or who are the types of people that I using Buy now pay later and who doesn't?

  Jonathan Kelly
  The market assume that the people playing buying up a lead with kids escape wanting to have a job? That's not the case. I always get sick of people talking about the millennial market. I'm like, millennial market is the biggest market in Australia. So the baby boomers and Gen X have to realise that the point systems dead. This is the core market. If you kind of break it down into that those groups, I think you find three distinct areas. The first one is always what I call the digital natives. So the digital natives just like I grew up in a digital world, I don't want friction, tell me what it is. Let me sign up. And if I like it, I'll keep using you right now this particular quarter customers are probably the most ardent anti credit card. So even putting in a credit card application form in front of these guys would be something that would put them into kind of a hot frenzy like they would never want to do it. So that's that first core 1832 digital native, probably making around, you know, 80 k a year or something like that. On the second one, though, and this is actually the largest one and probably the one that drove by an operator to what I call the highest flirts. That's what I call the savvy spender, and it's massively female skewed, they might have a credit card, but they've actually stopped using the credit card and just completely moved all of their spending over to buy an apple later. So my wife is a perfect example. If it's within the millennial age group, and she has a credit card, she has no balance on the credit card, it's paid off for a month, but good luck in your try to use it anymore. She'll use this after paying bundll. That's it, right? It used to be like the bane of my existence. When I worked at zip, I try to get her to use it. But But after pay is so easy, so she says after pay. And then obviously since we launched bundlls, so basically she's throwing away a debit card, she only uses a bundll and doesn't use credit card at all, and then use after pay for the person as well. And what they're basically looked at this kind of thing that I always kind of come back to and I've got two kids and you know, they get the wicked pocket money. And you know, they said, Dad, I want to buy something and I go Yeah, it's fine. We'll get you $10 allowance at the end of the week, but it cost 20 bucks. Well, did I tell my son? Well, I'll lend you the $20 but if you don't pay back by Friday, I'm going to start charging you compound interest to 23.6%. Daily until you pay me back. It just looks at me this blank stare. If I say, Okay, well I can do I can do in three different ways to just pay me back and full next week, or you could pay me $5 each week and still keep $5. And that's basically all we're doing with pineapple here for that savvy splinter group. Is it a standard? Well, this is an easier way to understand my finances outside of the traditional compound interest rate. And that court of customers is what is driven in my opinion, by an apathetic to the high status today. And I mean, I can look at our initial stats after being a market for five weeks on bundll, it's 70% female because they just get to buy a proposition. And they're like, yeah, it's just a smarter way to spend and budget. Then the last one then and this is how you really knew that it was going up to the growth curve and starting to become something quite massive in Australia was in young families. So these were people that were on credit cards, use credit cards, but then again, started to stop using your credit cards quite So much. And I always try to say is that this particular group never really got the points part of it. I mean, I always say the same thing, okay? I don't know 300 bucks a year for an Amex card. And if I use it every day, I get a free toaster and the points right, that particular customers consider Wait a second, should I be using something different? As a young family and I'm paying school fees, I'm still going to take my kids out my family on a holiday I got a mortgage and pay my car off. And that quarter customers again started to use buying up there later as well.

  Sally McMullen
  That's so interesting, but it seems like at the core, they're all using the services to free up their cash flow.

  Jonathan Kelly
  It's the same reason why people who originally use your credit card was free cash flow. The only difference I can say is that within by now pay later, it's not made sense for you to go out and smacked up. So I was on for credit card and maxed out $5,000 in a month. Right? That can't happen in a bind out there scenario. You could potentially max that you spent but the limit Users start off quite lower and you build up your trust score with the company as you go through that journey, and they start to then you know allow you to potentially spend more over time.

  Sally
  This episode of pocket money is presented by bundll. Bundll lets you buy now pay later everywhere MasterCard is accepted from coffee to fuel to groceries and clouds. bundll gives you two weeks to pay interest free, and the one time snooze feature offers the ability to delay your repayment days by an additional fortnight for free. You can even earn additional snoozes by referring your friends to the app, learn more at bundll.com.au that's bundll.com.au. Now back to the show.

  Sally McMullen
  So at this point in the episode, we like to shake things up a little bit by playing a game of overrated or underrated. So I'll give you a topic and then you tell me if you think it's overrated or not. And it's a little bit of a rapid fire round, but feel free to explain your choice first on the top. Elon Musk, overrated, underrated.

  Jonathan Kelly
  underrated? Tell me why. I just think when I look at the things that he does in the way that he thinks, and the stuff that he says oftentimes we think it's provocative at the time, but then it usually comes to fruition within a few years. So yeah, I think it's underrated.

  Sally McMullen
  Okay, living in the US. overrated underrated?

  Jonathan Kelly
  overrated?

  Sally
  Tell me why. I want to know, our producer is from the States.

  Jonathan Kelly
  I've been here for 20 years and I'm not looking at I'll never look back. I think we live in the best country in the world. Australia is an excellent video of a country so I say overrated as a family back home, so I gotta be careful what I say.

  Sally
  True, you'll go home for like a family event. They're like, Oh, no, I heard what you said. And what about Sweden?

  Jonathan Kelly
  Oh, my wife is Swedish. So massively underrated as well. It's beautiful country to go there. Usually every Couple of years so I'd have to say underrated. Keep my wife happy,

  Sally
  Smart man. And next one, what kind of bear is best?

  Jonathan Kelly
  Bundll bear

  Sally
  I knew it. I was kind of hoping that you would say like polar bear or something just to throw me off.

  Jonathan Kelly
  Yea we have a lot of fun with that. So obviously, you'll see the the character of the bundll bear kind of come out. So, he's an Australian bear, which we don't have, but he always longs to go back to Canada, right? His favourite artist is like Bryan Adams. There's a lot of stuff our marketing team has been doing with him. We'll see over the coming weeks a month that we're going to kind of bring that character to life But yeah, I got it.

  Sally McMullen
  I love that can't wait to find out more. And what would you say is the most underrated TV show binge?

  Jonathan Kelly
  You can never go wrong with Seinfeld, Cisco Seinfeld, reruns could go on forever. So I'd say that's under Reading timeless classics. I think every kid should have to watch that even if they do grow up a cycle or not.

  Sally McMullen
  I completely agree. I feel like maybe that should be rolled out into the curriculum. Yeah. Nice. Well, that brings us to the end of the overrated underrated portion of the show. Thanks for playing.

  Jonathan Kelly
  No worries, it was too painful.

  Sally McMullen
  Damn it, we'll have to make them harder next time.

  Sally McMullen
  So I wanted to talk a little bit about the psychology behind these services because I think that is a big reason why they have been so popular, especially among younger people. So yeah, what some of the thoughts behind that especially like breaking down payments, or having payback periods that make it so appealing when it comes to like the psychology of dealing with our money.

  Jonathan Kelly
  First and foremost, I think oftentimes, it can be daunting when you go through any type of application with your actual bank right. So Get a car loan, if you get a credit card if you get a mortgage, most interactions are somewhat daunting. And I just think that the way that an operator takes technology understands algorithms and builds out the onboarding journey or the signup journeys, so to speak, it's done in a way that seems not daunting for the consumer. So I think that's the first one is almost kind of like, it's a warm welcome. When you come in, right? you kind of understand why they're asking me the questions. You know, I think Larry diamond, aka the phrase I don't take credit for. It was like, you can sign up with whatever's in your head or in your pocket doesn't take anything more than that, right? That starts off with that particular thing. And then the other one is in what I always call is the instant approval or instant knowing so it's either declined or you're approved. Now those are declined, probably have a different view. But those are approved. It's like okay, well, that was really easy. So you almost kind of start the journey off with I thought it was might be a little bit harder, wasn't I then was approved, and it's like it's kind of like this really I surprised and you can see it. We did a lot of research when I was at PayPal, and used to actually look at people when they clicked on the screen. And even though they hit the PayPal button and knew the transaction was going to go through the moment that it did, it was almost like, they were really, really excited about that happening. I think that I kind of equate that back to the way you sign up to provide our pet later is that it's quite easy when you go through and then when you get approved, it's like, Okay, that was that was something that was enjoyable and easy to do. And I think you're dead, right? The second piece, then is this around the way in which the binoculars services, keep you up to date and keep you on track of where you're going to be and don't just give you more money, right. So, I mean, probably I'd say one of the biggest questions that we get all the times when we launch bundlls, can I have my money? We're like, Well, no, he can't. Right. So you've signed up. That's it, you prove yourself make sure you're good with your money, and then you can potentially get more. And then I think the other thing is in around automatic drip debits from your account. So, you know, if you're trying to pay your credit card, you got to go into your bank, you have to transfer the money over, you got to go through BPAY, those types of things. There's always an action. I mean, obviously, you set up automatic direct debit, but you know, how much have I spent? What's my cycle, whereas button up at that you already know. So it's, it's automatically going to hit my accountant this day, and they got pulled the money. So it's the way in which we open up because it takes the money out of your account as well, in a more seamless way than traditional car. So say those three things.

  Sally McMullen
  These services have been used very widely, but they've also been critiqued quite widely as well. You know, there was the senate inquiry last year. And you know, we've probably all seen countless articles about how they services you know, maybe teaching young people bad budgeting habits. How do you respond to that argument?

  Jonathan Kelly
  We welcome any regulation or oversight over the industry from Mr. Lanza Flexi, you know, yeah, good. signed up to find out the letter code of conduct. That's part of that as well. So the last thing anybody wants to do is kind of go out and put consumers in a bad situation. But I think ultimately, it's consumer demand that's driving the influx, oh by an operator not the other way around. So I think the other thing is that oftentimes, I find people get confused around by an upper layer and what I would call payday lending. An upper layer is nowhere close to payday lending. We're not looking to leave that where as a payday lenders that corner out if you don't pay it back within the 60 day week window, you're getting charged like 40 or 50%, no compound interest, whatever they're going to do to be to pay the money back so I think there's a bit too often was a bit of confusion at the beginning around what is a payday lender and what is it find out later customer but I tend to do today, I think will be tightly coupled with regulation. We welcome it from our end. We want to make sure that everybody that comes on as a great experience with us our services is done in an ethical way that doesn't get in trouble.

  Sally McMullen
  And we did talk about how, you know, some of the core users of these programmes are using, buy now pay later to free up their cash flow, which like we said, people have been doing with credit cards for a long time. This is just a bit of a new way. But do you think that this model is actually compatible with good financial management?

  Jonathan Kelly
  Yes, I do. I would look at it this way. So I did today, I would have used my credit card for one reason, one reason only. And that was just the fact that I got five days paid off. So I basically just use a credit card, put it on there when I wanted to, and then pay it off for five days. So I'm doing the exact same thing as buying up in here user would be doing as well in relation to cash flow management, and then have to find out later came up and obviously, being an industry I started using that my credit card less but effectively, it was doing the same thing. The argument in some ways I find somewhat of a straw man. So would it be a better argument to put them onto a credit card and that's a better way to do it. Financial Management then do it by now for later. I don't think that argument stacks up per se. So just because they sign up by not that it doesn't mean they would have gotten a credit card either. They just chose not to sign up to the credit card use later, when they go out in relation to their budget and how they're gonna keep track of their funds.

  Sally McMullen
  Yeah, so at the end of the day, it's like, regardless of which one you are using, as long as you're using them responsibly and paying them back then yes, they can be and just another another budgeting tool. Let's say if you are using one of these services, and then you don't pay it back, and it gets to the point where it becomes like, say, a serious credit infringement. How can like the misuse of the services affect your credit score off so that people know and they know to, to use them properly?

  Jonathan Kelly
  Yeah, I mean, that that will come down to each individual organisation and there are worse and right off policies. I can say how each and everyone would do it. Obviously for us, we try To make it we have financial hardship available for our customers. So if that were to come to fruition, I'm trying to work out a way for them to pay it back, the last thing that you want to do is help somebody get a black mark or something on their file. So it all just comes down to the way in which individual provider looks at that customer that had those issues. And then you take the appropriate action. I mean, obviously, for us, as I said, you know, we'll, we'll give you a call, we don't sell your stuff off to a debt collection agency, we want to try to work with you to come up with a revised payment plan if we can, obviously, the moment you go into arrears, you stop from spending, so we don't let customers keep spending if something happened on an original payment, then we do have the appropriate means for financial hardship on that particular customer doesn't need it or something's happened to them that's caused them to go into some sort of financial strife.

  Sally McMullen
  That's cool. And with the rise of buy now pay later, we've also seen it's almost like as that goes off, credit cards go down, which I think is really in Interesting, how do you think that credit cards and some of those more traditional forms of payment, even payday loans will be impacted in the long term?

  Jonathan Kelly
  I think this is the new normal, I think it'd be massively impacted. I mean, you can look at all the RBA data in relation to credit card transactions. So what you'll find is that with the increased use button up later also increases use of debit cards right so the majority of customers that are using bind up better use the link a debit card up to that particular vehicle. So I think it is compatible with line of credit cards in the market. And as I think it'll be a bit of consolidation, but just more more customers variably coming more comfortable, more confident and wanting to use, you know, their by an operator service of choice or multiple choice wherever they want to just be restricted with where it's available.

  Sally McMullen
  Yeah, and the frequent flyer space in the credit card market is still pretty huge. So what about people who aren't using their cards unnecessarily to free up cash flow? Are they using them to earn points? Do you think that rewards and buy now pay later will ever kind of, you know, team up and work together and start capturing some of those people do?

  Jonathan Kelly
  No, I don't actually. So the reason the point systems work on the airlines is effectively the credit card companies buy the points from the airlines. And then because there's so much money within people not being back off that they're rewarding with basically, it's just a reward system to try to get you to spend more to get a fictional thing, which is points right and but up later is set up in a much more streamlined way in relation to the way that the margins and economics work, that it doesn't have all that fat down here on the bottom, like a credit card portfolio would have to go spend to try and get you to have different products or points that you could offset with your spend. So I don't see airline points probably in the initial phase being something I mean for me personally if I was going to buy a parent Do Adidas trainers I'd rather just get five or $10 cash back on it then you give me 2000 points on conscious of Virgin, right, like it's actually worth tangibly. It's just worth more to me. So yes, I think that's the way the space and that's that's why the space will go on rather than looking at a points based system.

  Sally McMullen
  Yeah, I think that's really interesting because we are seeing that kind of gap in the credit card market right now like, cashback is huge in the US and say in Singapore and some places or you have a say is, but in Australia, it's just not really there in the credit card market like nothing that's super competitive. Anyway, so it will be very interesting to see. Yeah, some of those services coming into play in that space. Well, thank you so much, Jonathan. I have learned a lot and I'm sure our listeners have as well.

  Jonathan Kelly
  Thank you so much. And thanks for talking to us today. And let me know if there's anything else you need.

  Sally McMullen
  Of course, anytime. Thanks again to bundll for their support of this episode of the podcast. Head over to bundll.com.au. You that's bundll to sign up and start keeping a close eye on your spending.

  Sally McMullen
  Thanks for listening to pocket money from finder, head over to find a.com.au slash podcast for the show notes for this episode. The find a podcast is intended to provide you with tips, tools and strategies that will help you make better decisions. Although we're licenced and authorised, we don't provide financial advice. So please consider your own situation or get advice before making any decisions based on anything in our show. Thanks for listening

The Finder Pocket Money podcast is intended to provide you with tips, tools and strategies that will help you make better decisions. Although we're licensed and authorised, we (and our guests) aren't providing any form of financial or legal advice. So please consider your own situation and get proper advice about your individual circumstances before making any decisions based on anything on our show. Thanks for listening.

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Pocket Money is hosted by Sally McMullen and Kate Browne, produced and directed by Franko Ali, with editing and theme music from Brianna Ansaldo of Bamby Media.

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