Jan 31, 2023

She is an investor at OVO Fund where she invests in pre-seed ideas. Got it! In a world rampant with scams, fraudsters, and bad actors (and not the Owen Wilson kind), the last thing we need is to glamorize an industry pumping out indebted consumers faster than Nick Cannon pumps out children. I'm talking about the $150B BNPL (Buy Now Pay Later) industry. Since the dawn of shopping, postponed payment programs have existed. However, today’s version of BNPL was first introduced to American households through start-ups like Affirm then Afterpay, and Klarna in Europe. I’m not saying they are all bad; but, I do think upending BNPL [as is today] could benefit those who need it most: financially-marginalized communities. After all, players like Klarna have been accused of targeting and misleading young and poor people with its services. Alicia Silverstone holding shopping bags in a scene from the film 'Clueless', 1995. (Photo by ... [+] Paramount Pictures/Getty Images) Getty Images Just like BNPL upended nearly a century of installment payments, it is now time to transform this model with a new modality that focuses on financial literacy, guardrails and positive action as opposed to reinforcing shopaholic behavior. This new modality should solve the problems of BNPL by– Using alternative data models to assess people’s ability to repay, proactively limiting a user’s spending power, and sharing information between the different BNPL programs. Before elaborating on those points, it is important to acknowledge who exactly is using these services. While a large percentage of the U.S. population has interacted with BNPL at some point in their shopping journey, those fueling BNPL usage are younger, non-White individuals . Such that, Gen Z favorite app, Tik Tok, has 145M views on #BuyNowPayLater . These quite impressionable shoppers makeup 75% of BNPL users and are missing payments more often than their Gen X and Boomer counterparts. Furthermore, these negatively impacted Gen Z and Millennial masses tend to come from a minority group; such that, 46% of the general population uses BNPL, compared to 71% of hispanics . Therefore, the Hypercultural Latinx is truly at risk of becoming BNPL’s biggest victim. Gen Zers are already entering adulthood saddled with huge challenges around unstable employment, inflation, and mental-health declines; so, why not alleviate their financial burdens through a better BNPL model? Hypercultural Latinx Today’s BNPL standard approach of assessing a user’s ability to repay often skips a hard credit check. In theory, this sounds like an upstanding method to increase accessibility for the many credit-score invisible Americans. However, in practice, it opens up BNPL services to those unable to pay leaving them riddled with debt. In the current environment of inflation and overall economic uncertainty, the risk of late payments or loan defaulting can be controlled through a decision-making process that includes alternative data points. These can include bank statements, debt ratios, or even mortgage payments. Additionally, these can be supplemented with data on rental payments, utility bills, digital wallets, or even social media data. Coupling and layering some of these data sources can provide a more holistic view of someone’s creditworthiness without needing to rely on traditionally biased, sexist, and discriminatory sources. In fact, why not even limit someone’s spending power by category? For example, if a user is trying to purchase a more necessary good (eg: food) as opposed to a more discretionary good (eg: a sweater), maybe the threshold is different. Furthermore, this modality of bundling seemingly unrelated data sources can help lenders unearth true ‘credit-worthiness’. Online shopping. Photo by Neil Godwin/Future Publishing via Getty Images) Future Publishing via Getty Images In parallel, proactively limiting one’s BNPL spending power can help a user avoid overspending. BNPL typically takes an Amex-like approach in that it doesn’t necessarily limit a spender. It simply approves or rejects a transaction at the time of purchase. Although this might work for the 1% of spenders, it doesn’t protect the other 99%. In fact, it encourages overspending and paycheck-to-paycheck living. In one study, 70% of users say they spend more than they normally would because of the ease and convenience of BNPL. Although this can be disguised as a recipe for success for lenders, [as more loans means more revenue] it often leads to loan defaulting. Setting these spending guardrails can be a step in dissolving unhealthy spending habits. Lastly, we strongly need more communication and (safely) sharing of information to exist between the different BNPL providers. It seems like an oversight that Paypal Credit (the most popular among the U.S. BNPL services) wouldn’t know if or how much one of their consumers currently has out as debt with Affirm/etc. The different players are blind to their shared users' online shopping activities. But why? Well, they are rarely reported to the 3 credit bureaus. It’s time to formalize these causal relationships between lenders. (Photo by Jamie McCarthy/Getty Images for MTV) Getty Images for MTV It may be true that BNPL is truly (as the inimitable Taylor Swift best put it) an “industry disruptor and soul deconstructor”. It disrupted a previously monotonous industry by giving credit to those who otherwise wouldn’t have access. At the same time, it trapped the poorest into debt. It’s clear our homework still seats undone. And look, even though I relish in package galore as much as the next online shopper, our society isn’t going to flourish if the next generation is constantly in debt over their latest Shein haul. And that affects us all. We should aim to make being financially smart and literate back in vogue. Follow me on  Twitter  or  LinkedIn . Check out my  website .