Regulators aim at BNPL to bring some credit-card-like structure to Buy Now Pay Later (BNPL) borrowing, as we see in the UK market, where there is an effort to install Ability to Repay (ATR) tests and more transparent disclosures. Without a concise definition of what BNPL means to consumers, there appear to be further developments on how credit-impaired consumers can get in on the latest financing tool.
The Washington Post reports today on Best Buy’s latest option in an article titled: A Best Buy Program is Doubling the Price of Items for Some Customers”. This one is scary and suggests that maybe it is time for regulators to step in and put some common sense into pricing, availability, and protecting consumers from themselves (and their creditors).
Lease-to-Own, similar to installment lending, is not new. From a product design standpoint, it ranks with PayDay lending in its pricing scheme.
Best Buy has a traditional co-brand credit card with Citi, and as the Washington Post reports, the card generates 25% of sales. The program is important enough for Best Buy to call out in their September 2020 prospectus filing with the Securities and Exchange Commission, where they report: “In addition, we may experience pressure from lower profit-sharing revenue related to our private label and co-branded credit card arrangement, as the economic ramifications of COVID-19 may lead to higher credit card defaults over time, which would have an adverse effect on our profitability…”
But the development comes from outside the credit card space, and the Post reports: “Eager to win over online shoppers, retailers are turning to a growing number of buy-now, pay-later services that put a new twist on layaway: Get your purchase now, and pay it off in installments.”
- Best Buy last spring began offering a splashy lease-to-own program to customers who had been rejected for its store credit card. Progressive Leasing, executives said, would help cash-strapped shoppers buy big-ticket items they couldn’t otherwise afford.
- “This is a great offer,” chief executive Corie Barry said in an earnings call last year. “It’s great for our brand. It’s great for our customers.” It also could bring in tens of millions of dollars in revenue each year, internal documents show.
- But some store and corporate employees say the program has become polarizing. They contend it preys on the chain’s most financially vulnerable shoppers, who often end up paying twice the list price for electronics, appliances, and mobile phones.
The Washington Post indicates that some Best Buy staff abhor the process:
- “It feels abusive and gross,” said a former assistant store manager who was there for the program’s launch. He spoke on the condition of anonymity because he is still on the company’s payroll. “You look at the terms, and we are charging more than $2,000 for a $1,000 product.”
Yet executive management defends:
Matt Furman, a spokesman for the Minneapolis-based company, said the program provides a valuable service. Most consumers use it to buy computers, major appliances, and mobile phones.
“If it were not for a lease-to-own program at our stores, many of these individuals would be making these purchases from rent-to-own retailers or using payday loans,” he said. “Our view is that these are clearly poor alternatives.”
Perhaps disclosures show the costs, but do people read them?:
- Best Buy provided price comparisons of its products with those being offered by a popular lease-to-own company. An Acer Chromebook that sells for $199 at Best Buy, for example, would cost $495 over 12 months with Progressive Leasing.
Ouch. A quick math check says that the financing event would more than double the price in 12 months.
- Progressive Leasing, they say, signals a new extreme in the way retailers do business. The program — which is owned by rent-to-own furniture chain Aaron’s — essentially buys the product and leases it to the customer.
- Best Buy gets paid right away, while Progressive Leasing takes on any risk of nonpayment. The program is offered at more than 30,000 stores by some of the country’s largest retailers, including Lowe’s, Big Lots, and Kay Jewelers.
But, alas:
- Last week, Aaron’s announced it would pay $175 million to the Federal Trade Commission to resolve an investigation into Progressive Leasing’s disclosure practices. The company said it also would “enhance certain compliance-related activities” related to its rent-to-own programs.
- Best Buy, which has about 980 U.S. stores, offers Progressive Leasing in 45 states and plans to make the program available online this year. (It is not offered in Wisconsin, New Jersey, Wyoming, Vermont, and Minnesota, which have strict laws on rent-to-own contracts.)
- Analysts at UBS estimate the arrangement could generate much as $4 billion a year for Best Buy, which had $43.6 billion in revenue last year.
Interested consumers will find the Progressive Leasing app at the Apple Store, though before doing so, they should probably check the price estimator at the Best Buy site. I entered as a Florida resident just for fun, interested in a $1,000 item, with a weekly pay cycle. The result was that $79 would be required upfront to enter the program; there would be 24 drafted payments over 12 months, at $80.39, with a lease-to-own cost of $1,169 on top of the $1,000 price, resulting in a total cost of $2,169.
Now, if the term were reset to 3 months, the 90-day early purchase option would be $1,079, which is much more palatable, but there is nothing in the world that I would be interested in financing over 12 months, where the cost went from $1,000 to $2,169!
Perhaps the new terminology should be “caveat emptor” or better yet, “ Financing stipendium operam ad details”, or “pay attention to financing details.”
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group