If you’ve been here a while you know I’m not a massive fan of either credit cards or their really-not-so-distant cousin, the BNPL products. Knowing what I know about payment methods, it’s just another consumption smoothing tool, clearly promoting overspending, but claiming to help out the consumer during these difficult times (by throwing them into a bloody debt spiral…).
Now I’m hardly the only one who holds this belief. Clearly, my concerns are shared in the fintech community. How do I know that? Well, they came up with Save-now-buy-later (SNBL).
Yes, it’s the old “save your money before you spend it”. No, it’s not a revolutionary concept, but given the emphasis on spending in the fintech domain (BNPL, wage smoothing, spend tracking etc.) it’s a welcome counterweight.
So what is it? It’s an app, or feature within an app, which allows you to save, and incentivises you to do so. There’s several apps out there, such as Accrue, Split and Tortoise (which I think is very aptly named!).
There general structure is simple: you select a goal (often a product), a price is linked to this product. This price gets broken down into temporal parts (e.g. divided by 6, so you have 6 months to save for it). This sets up several milestones. And you will be incentivised to reach those milestones.
Now the incentive structure works differently depending on the app. Accrue seems to use rewards directly linked to the merchant (cashbacks etc.), whereas Split and Tortoise actually run discounts. Whichever way the app runs, hitting certain milestones is financially reinforced, and there’s financial gain (or less loss, in this case) from completing the savings journey within the allotted time.
Once the savings goal has been reached the app will send out a notification. Obviously, as it might have been a while between the original desire to own the product and the actual saving for it, the consumer may no longer want it (the endowment effect in action, with a large dose of opportunity cost as well). If the consumer decides to no longer want the product, their money is still theirs. The rewards and discounted associated with the purchase simply revert back to the merchant. No harm done.
Why are we seeing this product now? According to the head of Accrue it’s due to the rising cost of living, and as a result of optimising spending, when money is being spent: “With cost-of-living going up, people are really starting to ask for more tools to help them with their saving and make sure that when they are spending money, it’s on stuff they actually want.” And that seems to be the kicker for BNPL.
Numbers do indicate that BNPL is launching people into a debt spiral. Moreover, research by Empirica of 1000 Australians aged 16-34 found that 30% of those surveyed “found their purchases less enjoyable when paid over multiple instalments”. Additionally, Empirica also found that a quarter of Australians under 35 said BNPL had encouraged them to make purchases they now regret.
Additionally, the research by Empirica also found that 29% said the services made them stressed, and 26% said they had used the services despite concerns they could not afford the repayments. Not a good look for BNPL. Especially not during a cost of living crisis.
When you look at the structure of BNPL, and we have discussed this before on the blog, we see incentivisation towards spending now: all the reward of the product/service is awarded now, whereas the cost will be incurred later, and as such is discounted at the present time. From a temporal discounting perspective this is very clever.
Savings, on the other hand, is not clever in terms of temporal discounting at all. It’s incurring all the cost and restraint now, to have the fun later. Which means the cost is now, but the fun is being discounted. Our brains don’t particularly like this. And acting in accordance with this adagio is a lot more difficult as a result of it.
Despite our brains not being too keen on the idea, there is demand for this type of app. There is demand for restraint and savings. However, and it does have to be mentioned, these apps, despite being preferable to BNPL, still have a focus on spending. The incentives (cashbacks, rewards, discounts) can only be obtained through completing the purchase after the money has been saved up for it. No purchase means no obtaining of the incentives.
It can be argued that really, the incentive structure doesn’t matter too much, as people are in fact saving. Issue is, we are odd and complex creatures, and a discount may be all we need to still push us from saving to spending, whether we’re 100% “sold” on the product or not. On the other hand, it can also be argued that this structure is simply a means to an end and that any structure that promotes savings as a goal, and maybe even a habit, is better than what we have now. The jury is out on that one.
I look forward to seeing the developments in this sphere. Overall, I’m cautiously optimistic. Only time will tell.
Time in the form of equal chunks with milestones and an incentive structure.
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