Seven Head-Scratching Features from WWDC 2022

The psychology of debt is interesting. We are wired to avoid pain, and paying cash is painful. BNPL and other tools to delay upfront payment short this circuit, making it easier to purchase items on impulse for immediate gratification.

We also value money differently as time horizon changes, and people with poor financial literacy often could not evaluate time value of money properly. Couple this with the incentive to avoid immediate pain, it is not surprising that many people prefer to stretch out their payments over longer period of time, despite potentially much higher total payment (e.g. additional interest) and opportunity cost (e.g. additional income from alternative use of funds such as investments).

Earlier discussions touched on the argument that some BNPL services are interest-free, and so do not cost anything. This might sound tautological, but there is an important cost that we do not take into account - the cognitive load of managing debt. At worst it might impair cognitive performance and lead to a host of psychological problems. It might also distract one from spending time more productively, for example deploying funds to profitable investments instead of managing the complex debt- and cash-flow arrangements.

https://www.pnas.org/doi/full/10.1073/pnas.1810901116

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I’ll bet that a large fraction of that 42% simply forgot to make the payments.

Good point, and one result of the cognitive overload is that they forget to pay. You can avoid that by setting up automatic bill payment, but that still takes some time and effort. BNPL companies are betting that some fraction of customers are going to forget. I wonder what the breakeven point is for them.

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I suspect (and if someone knows of a study that supports or contradicts me, please let me know) that there are two kinds of people using credit.

  • The first is people who are able to and are careful to not spend beyond their means. If something is expensive, they will save until the money is available.

    For these people, all forms of credit (aside from big purchases like a car or a home) is a matter of convenience. To avoid needing to carry large sums of cash or mail cheques. Especially when stores frequently don’t want to deal with any payment form other than plastic.

    For these people, a credit card with a suitable limit is just fine. They pay off the card in full every month and never pay interest. For them, BNPL might be convenient from time to time, but it ultimately doesn’t offer anything that a credit card doesn’t offer and has some major drawbacks (some of which we’ve already mentioned here).

  • The second category are those that use credit to buy things they wouldn’t otherwise be able to buy. Whether this is for necessities (to get through hard times) or for spending above their means, these people may not be able to pay off the entire balance every month.

    These people tend to carry balances from month to month and they pay interest charges. For them, credit cards are a bad deal, because the interest rates are very high and can get insanely high if you miss a payment or two.

    For these people, BNPL seems like a good deal because it’s (usually) zero-interest. But ultimately, that won’t solve the real problem if they are spending more than they can afford (whether or not the reason is justifiable). If they can’t get on top of the debt, it is going to end badly, no matter what the credit mechanism may be.

According to this article I found, credit card delinquency rates are typically 3-5%, occasionally spiking up to about 10%.

So why is BNPL so much worse? I think it’s because people in the second category (who are having problems with credit cards) are flocking to it, believing that it is a safer alternative. And people in the first category (who don’t have credit problems) don’t see any reason to use it. If your product is disproportionately attracting the worst credit risks, you probably should expect to see numbers like these.

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The very reliable Motley Fool recently published extensive research conducted among American adults via their Ascent division about BNPL users and usage. There’s a ton of interesting information and analysis on their website. Here’s just a very few reasons why I think Apple was motivated to launch a BNPL service:

The Ascent, the research unit of the Motley Fool, “surveyed 2,000 Americans in 2020 about their buy now, pay later The company then followed that survey with another in March 2021, with the results showing an almost 50% growth in BNPL in less than a year.”

“Buying electronics is the most common use of buy now, pay later, with 48% of users saying they’ve used it for that reason.”

“ 61% of buy now, pay later users would rather use a BNPL service offered directly from the retailer they’re buying from than going through a third party.”

And “Buy now, pay later users aged 18 to 24 are the most likely to pay $250 or more per month when they have a BNPL payment.”

Study: Buy Now, Pay Later Services Growing Quickly Among U.S. Consumers | The Ascent.

And “62% of BNPL users said BNPL could replace their credit cards.”

*Buy now, pay later usage growth was largest in the 18 to 24 (62% growth) and 55+ (98% growth) age groups between July 2020 and March 2021.“

There’s a lot more interesting stuff in the article.

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I suspect you’re right - there are two kinds of people using debt. There’s the pre credit card people and the post credit card people.

I come from the former. I’m mid-60s and grew up before credit cards - the only way you could buy something was to have the money. Yes, you could get a loan but it was a long, painful exercise which normally required an interview with the bank manager. We learnt to save and value money. The simple rule was if you didn’t have the money you didn’t buy it.

Then there’s the latter - like my young adult kids. They’ve had credit cards all their life and BNPL is just another ‘thing’. They rarely have any issues because I’ve drummed into them the importance of respecting their earnings and understanding the difference between good and bad debt.

They do however, exhibit a far greater impatience that we ever did as kids - they want ti now and their enthusiasm for spending sometimes needs tempering.

I wish financial literacy was taught in schools, it would be far more valuable than some of the things I learnt (log tables, quadratic equations etc).

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Turning to Apple Card for just a moment:

0% interest (equal payments) installment purchase plans for Apple equipment and accessories are structured to go out of their way to keep the customer from accidentally making a late payment.

I currently have a MacBook Air M1 and two iPhones on installment plans that all started at different times. On the first of the month, the Wallet app notifies me that my Apple Card statement is ready, and I see a single amount for what’s due from the 3 installment plans. I can choose to pay it now or pay it some time before the due date at the end of the month (and since I’m maximizing cash flow, I push it out to a couple of days before the due date). Pushing it out puts up a dialog that asks me when I want to pay the minimum, and the dates offered do not go past the due date.

I can easily pull up details on each of the 3 installment plans, which have helpful subject lines like “Monthly Installment (11 of 12)”.

The only way to mess this up is willfully. It’s psychologically difficult to screw it up by accident.

I would hope that BNPL would work similarly to this model. If it does, then most of the concerns that have been rightly raised here would be addressed, and it would be in line with the mission statement that Apple expressed about remaking the credit market model.

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I would add a third category…people like my bride and I who use our fee free and cash back Navy Federal Credit Union card as a bill consolidation service. We pay for almost everything with a single card and it’s our default ApplePay card. The bill gets paid in full online when it comes in. We’ve been doing this for many years now and write very few checks a month…6 or 7 typically maximum…and use very little cash as well. Even for something as simple as a couple of burgers from McDs…wave the watch at the terminal and then it’s a single payment once a month at billing time.

Fortunately…our financial position keeps us from having to worry about the buy something we can’t afford option…but back in the day when we had smaller salaries we occasionally split Christmas spending or vacation spending across 2 months for cash flow purposes…but it’s been probably 25 or 30 years since we did that.

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This is essentially how we live. We use our credit cards as a tool, not as a method of buying because we don’t have the funds. The outstanding balance is paid in full automatically so we never pay interest. We’ve been able to travel extensively with the FF miles we’ve accumulated. It’s also an accurate record of spending when required for tax time.

It’s rare these days to have more than $50 in my wallet and it can last several weeks. I do keep $50 in my iPhone’s case for emergencies (flat battery, no wallet etc).

I think it was calion’s point that there are a lot of people in America who have no choice about living beyond their means, who don’t have any surplus cash to save, and that it’s patronizing to tut-tut them for being poor. If it’s a choice between having the electricity disconnected and using credit to pay it off until a paycheck arrives, well, at least Apple’s not charging interest.

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Nobody here is saying that there aren’t people in dire financial straits.

But it is equally unfair to claim that everybody carrying a large balance is doing it because they have no other option. There are quite a lot of people who habitually spend more than they can afford on things they don’t need and then get in big trouble if they lose a source of income or when inflation rises or when interest rates go up. Things like BNPL won’t help these people - it will likely end up making their problems worse, because their problem has nothing to do with who is issuing their line of credit.

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The discussion had focused pretty much exclusively on “people who spend more than they can afford on things they don’t need” and it’s a useful corrective to think as well about people who aren’t in that situation but are living lives of financial precariousness. Lecturing them about saving a bit every month or not carrying a credit balance does seem patronizing, because that’s not an option, and Apple’s solution is better than payday loans at usurious interest rates.

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One thing that might be worth keeping in mind here is that Apple Pay Later isn’t a general-purpose way of spreading out expenses. It won’t be an option for most people, and it won’t be available for all expenses.

First, it’s only available to those who have Apple Pay, which by definition is only those who own Apple devices. That’s a lot of people, certainly, but still a subset. Only 24% of US iPhone users use Apple Pay. Plus, the need for an Apple device likely restricts the audience to somewhat higher-income people given that it’s always possible to spend less on an Android phone or Windows or Chrome OS computer.

Second, while Apple Pay Later is available for anything you’re buying with Apple Pay, that probably doesn’t include rent, electric bills, and many other hard-to-avoid expenses. It likely would include gas and groceries, since it’s fairly easy to find stores that allow Apple Pay for both. And given the cost of gas these days, I could see someone needing to fill up a tank and spread out the cost, knowing that if they can just get to their job, they’ll be able to make enough to pay off the bill.

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A single-card approach is convenient, but after having cards compromised several times some years back, I’m always wary of having only one payment method available.

My experience with excess charges makes me wary of automatic payment. Billing screwups can happen; the worst I have seen was an $8000 overcharge by gas company after an estimated bill. If you want to use it, be sure to keep enough money in the bank to allow for unexpected fluctuations in billing.

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Agreed. I try to avoid automatic bill-pay. The only exception in my case is with my TV provider, since I get a significant discount using it. But the automatic payment is via my credit card, not my bank account.

For any bills where it is possible (credit cards, mortgage, a few others), I use my bank’s bill-pay system to make the payments. For many, the bills are sent electronically to the bank, but in all cases, I need to manually schedule the payment via the bank’s web site or mobile app. So I always have the ability to catch a problem before the payment is made.

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I don’t know about your local electric company, but I know none of my local utilities (electricity, gas, water) take any form of credit card. Cash/check/ACH transactions only.

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It’s also (currently) only going to be available in the US.

I disagree. There should be discussion of people spending on things they wouldn’t normally purchase as that’s exactly the scenario that BNPL affords. There are also people who will be struggling and BNPL may offer a better option than a traditional credit card. As I said in an earlier post, we use our credit cards as a tool and if people can use it to avoid hardship that’s great.

No-one is tut-tutting or patronising people doing it tough. I grew up in a very poor household and know exactly what it’s like to struggle for every cent.

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We have multiple credit cards and multiple accounts with different banks for exactly this reason.

That reminds me that our bank does allow you to set a limit on automatic payments, and I have done that for AT&T Mobile. I had to raise the limit after we changed our service, but it’s a good feature to set for regular bills. That’s more difficult to do for credit cards because your bills can vary widely if you use them to pay for things like buying appliances or car repairs.

Rather than set a limit on my cards, I have my accounts send me alerts (via text message and e-mail) for a variety of events, including any charge over $100 and any charge from a foreign country (regardless of amount).

I get alerted as soon as the charge is made. If it’s unexpected, I have a few days to investigate and (if necessary) dispute the charge while it’s still pending.

I also log on to each card’s web site every evening, just to make sure there’s nothing unexpected present that I might have missed.

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