Are Buy Now Pay Later Companies Reinventing The Tab?
2 min read

Are Buy Now Pay Later Companies Reinventing The Tab?

What happens when you start using Buy Now Pay Later as for your every day purchases.

After a stellar rise in adoption of the last few years, Buy Now Pay Later companies are under increasing scrutiny by regulators. The main problem is that while it functions similar to using a credit card, BNPL usage doesn't show up in consumers credit histories. Regulators are worried that consumers might build up unsustainable debts without realizing it, while the companies themselves are worried that since they don't have visibility on how indebted their customers really are - making it hard to judge how risky they are to default.

No wonder then if we are seeing headlines such as this:

"Red flag: Consumers are using Buy Now, Pay Later to cover everyday expenses" - CNN

And yeah, that's understandable. When Domino's Pizza starts offering BNPL, you know we might be going overboard. With runaway inflation, it's understandable that people would rather split out their payments even for shopping to make ends meet. Ironically, it's a street smart tactic: with this rate of inflation, stretching out your payments inflates away the debt.

But there's another aspect to this: as BNPL options arrive to brick-and-mortar services, such as caf├ęs or restaurants, buy now pay later effectively reinvents the tab.

Back in the good ol' days of the last decade, if you were a regular at an establishment and you were friends were the owner, they'd let you have a tab. Regulars after all are well above 80% of your revenue stream, so if they are under the weather financially it's still in your best interest to let them enjoy whatever you're offering and pay their tab later. Of course there's a certain risk involved - your regulars can go off the deep end and their tabs will remain unsettled, costing you money. But the benefits outweigh the risks, as regulars tend to come in groups, providing you with additional income.

This system doesn't really work for big franchises, as the experience is less personal. Sure, big chains offer loyalty cards, but it's not the same as having a tab. If you're not on a first name basis with the owner of the establishment, you ain't getting credit, because there's no trust between the parties.

What buy now pay later (and credit cards, for that matter) does, is that it centralizes the system of "who trusts who". By paying merchants up front, they vouch for their users as buyers in good standing.

In fact, this is how credit cards got started: the Diners Club was established so frequent patrons of restaurants could keep going out carefree, and settle their debts at a later date in one go.

And here it's where it gets interesting. The more we see the disappearance of cash from our everyday lives, the more we return to bookkeeping systems that precede common currency use.

We all know the story of how money emerged to make barter more efficient - but according to the late anthropologist David Graeber, that story might be false.

In his tome of a book, Debt, the First 5000 years Graeber shows that before currencies, commerce was largely done through credit. All sorts of ancient merchants would offer their goods to say the local agricultural workers (so they would survive), and then they'd paid only at a later date, during harvest, because that's when currency entered the local market in sufficient amounts to settle the debts.

It feels a lot like innovation in fintech is skirting around this problem: physical money might have actually been an anomaly, rather than the norm. After all the economy is basically run on debt already, with currencies largely being government backed IOU-s. And the real reason they circulate is that there's a special time of the year when you need a whole lot of it at hand: when you have to pay your taxes.

So maybe there's a lesson there for the crypto enthusiasts in these strange, strange times.