Why you need to stay mindful with your use of ‘buy now pay later’ services

Buy now pay later

Buy now pay later.

Popular new payment services like Afterpay, Openpay, Zip Pay and soon, Paypal’s ‘Pay in 4’ – collectively known as ‘buy now pay later’ services – perform something of a trick in the minds of consumers.

The trick results in people walking out of a store with a television, a carry bag of clothes, and high-end vacuum cleaners before they have fully paid partially switches off a healthy fear of debt.

But like credit cards, they are a form of credit – basically a loan – and with the real potential to increase financial stress in users.

With buy now pay later services, the consumer can purchase items with only paying the first instalment of the purchase value, then paying the remaining instalments in the future over the next 6 – 8 weeks. It’s like a cross between a layby service and credit cards but you get the product or service now.

The appeal of BNPL payment services

Buy now pay later is attractive for the buyer because the buyer had to only pay a portion of the item before they could take it home.

This appeal combined with clever marketing has become hugely popular.

In one recent Afterpay ad, Hollywood actor Rebel Wilson tells her on-screen boyfriend Afterpay is like eating a whole tub of ice cream at once but spreading the calories over six weeks.

This brilliantly captures the allure of the ‘instant gratification’ culture that is not just popular with millennials but with many people in nearly all age groups.

Afterpay boasts on their website they let customers get what they want when they want it, increasing average order value by up to 40%.

It is estimated one-in-five Australian consumers use a buy now pay later service, with over six million active accounts. The Reserve Bank of Australia says Afterpay is most popular with 3.4 million accounts, ahead of Zip Pay with 2.5 million.

The value of purchases made nearly tripled in Australia between 2017-18 and 2019-20, from just over $3 billion to over $9 billion.

Retailers love the services because they give the appearance of a new, cool, easy option when paying for your shopping – one that lets you walk out with products after spending just a quarter or one-fifth of its value.

How BNPL taps into the psychology of consumer spending

Buy now pay later have cleverly tapped into the consumer spending psychology and convinced shoppers to open their wallets – even though they don’t realise that is what they are doing.

Deferring payments is a relief to consumers, a positive feeling that reduces the pain of paying cold hard cash and even the nagging ‘I shouldn’t be doing this’ feeling that comes with using credit cards.

According to Dr Carey Morewedge, Asst. Professor at Carnegie Mellon University, the ‘pain’ of paying feels like it is reduced when using a buy now pay later service because we actually equate an imagined ‘pool of resources’ to having more cash.

M2P’s fintech blog explains the idea in an article titled ‘Factors and Psychology Behind the Great BNPL Allure’.

The larger your resource, the greater will be the inclination to make costlier purchases. For example, when shopping using BNPL, you feel like spending a small fraction of money from a large reserve with no immediate deadline.

So, the pain of paying becomes dramatically less with BNPL.

Whereas drawing a few currency notes out of your pocket seems like you are consuming a large portion of the available fund. Thus the pain of paying in immediate cash payment is more significant.’

Of course, buy now pay later providers know exactly what they are doing.

If a consumer cannot meet their end of the deal – and repay the full price within the agreed number of instalments, they are hit with late fees and charges, which vary depending on the fine print in the terms and conditions of each BNPL service.

It’s a very different mindset to using credit cards, which were first launched in Australia in 1974 and have peaked in usage in the past decade.

In 2020, there were 14.8 million consumer and business credit cards in Australia – more than one for every adult.

As credit card use has declined, the card companies have tried various marketing ploys to boost the use of their services, such as loyalty points schemes to 0% balance transfers.

But because so many people got into trouble with the complex and expensive interest payments on credit card companies, providers go out of their way to make it clear how repayments work.

According to Illion, Millennials under the age of 30 are twice as likely as their parents to fall more than two months behind in their credit card payments, suggesting they have greater difficulty balancing spending and debt, regardless of their credit limit.

The perils of buy now pay later services

The perils of credit card misuse are now well-known and widely understood. But the perils of buy now pay later are still developing as they are relatively new.

Afterpay, Zip pay, Openpay and equivalents remain relatively unregulated compared to the banks – meaning the gloss has not yet come off the services.

The perceived ‘win: win’ does not consider that our spending behaviour sometimes doesn’t make sense – for instance, how we can spend money based on our need to distract or ‘feel’ better rather than our need to stay within our limits.

Who could say they have never spent without thinking through all the consequences of a purchase? Probably none of us.

While it is entirely human to do so, it is the definition of mindless spending.

According to the Australian Financial Review, in 2020, Afterpay made $70 million from late fees, representing 20 per cent of its revenue.

The Australian Securities and Investment Commission also found that one in five buy now pay later customers were regularly missing payments.

An alarming half of users aged under 29 had taken out other loans to pay their buy now pay later debts.

How to use BNPL payment services safely

Just because buy now pay later services are relatively new, and the mixed impacts don’t make them bad news for everyone.

Andrew Fleming, Founder and CEO of Financial Mindfulness, says; ‘the way to avoid trouble with these payment services is the same as using any type of credit.’

‘Budgeting and sticking to your budget is key to ensure you do not get into trouble with BNPL products, but it also relates to any type of credit product, impulse spending is not wise’ he said.

‘Understand the product properly, including the fine print. Use BNPL services following your spending budget.’

‘The line between safe and unsafe use of these services is the difference between spending according to your budget and ‘reckless spending and not paying on-time’, he said.

You’ll have to decide for yourself what constitutes reckless, but it’s safe to assume that putting everyday shopping on instalments is not sensible.

To make the most of buy now pay later services, the optimum state of mind is one of financial mindfulness, which we define as ‘having awareness and paying attention to your finances and financial behaviours’.

But you have to hand it to the Founders of Afterpay, who discovered early the behaviour change with Millennials preferring to engage in cashless and credit-free spending lifestyles.

They have become a huge success story. The company was started 7 years ago and recently sold to Twitter founder Jack Dorsey’s Square for $39 billion making it the largest deal in Australian corporate history.

Buy now pay later
Buy now pay later

New clinical help on the horizon for shopalcoholics

New clinical help on the horizon for shopalcoholics

New clinical help on the horizon for shopalcoholics.

We all instinctively know that compulsive, mindless spending can be a problem.

We see it in those around us and even in ourselves at times – especially when stress drives the perceived need to ‘escape’ mentally.

Whatever is behind compulsive shopping, buying, spending, even shopalcoholism – whatever we call it – it can and does result in unnecessary financial stress and even distress if the behaviour goes on uninterrupted.

Financial stress is a condition that can respond positively to a mindfulness program, especially when coupled with other interventions, such as improved goal-setting, financial literacy, and behavioural tools.

These combined can help sufferers produce a preferred state of financial mindfulness.

But not many people realise compulsive shopping has also been described in clinical settings since the early 20th century – more than 100 years.

Despite this, until now there has been no officially recognised diagnosis for the disorder.

That seems surprising how commonplace it appears to be, and how it is widely accepted as growing and as a contributor to issues like personal debt and overconsumption at personal and even macro levels.

Now science has moved a step closer to being able to help people with this behaviour – which is finally being recognised as a condition to be treated.

Flinders University reports that for the first time, world experts in psychology have built a framework to diagnose Compulsive Buying-Shopping Disorder.

This means there could be new pathways for help for people struggling to manage their spending behaviour and mental wellbeing.

The framework, published in the internationally recognised Journal of Behavioral Addictions, confirms that compulsive over-spending can be regarded as a disorder.

The news gives researchers and clinicians tools to design targeted interventions for this potentially devastating condition.

The new guidelines, published in the Journal of Behavioral Addictions, confirm that excessive buying and shopping can be so serious as to constitute a disorder, giving researchers and clinicians new powers to develop more targeted interventions for this debilitating condition.

Evidence-based criteria for Compulsive Buying-Shopping Disorder (CBSD) will be developed by an international team, including Professor Mike Kyrios from Flinders University’s Órama Institute for Mental Health and Wellbeing and Professor Astrid Müller from the Hannover Medical School in Germany.

A study of 138 researchers and clinicians from 35 countries has begun the work.

The research was a collaboration with researchers from the Hannover Medical School at the University of Duisburg-Essen and University of Dresden in Germany funded by the German Academic Exchange Service and Universities Australia.

Professor Kyrios described the new work as a “game-changer” for research into the issue, which could underpin the development of much-needed treatments and improved diagnostic processes to follow.

“In over 20 years, since I started investigating excessive buying, there has been an absence of commonly agreed diagnostic criteria which has hampered the perceived seriousness of the problem, as well as research efforts and consequently the development of evidence-based treatments,” Professor Kyrios said.

Evidence-based treatments should now be possible with agreement on diagnostic criteria.

New diagnostic criteria include the recognition of “excessive purchasing of items without utilising them for their intended purposes”.

In the context of the criteria, excessiveness is described as “diminished control over buying/shopping”.

Another feature of the disorder is that “buying/shopping is used to regulate internal states, e.g., generating positive emotions or relieving negative mood”.

“Clients who show excessive buying behaviour commonly have difficulties in regulating their emotions, so buying or shopping is then used to feel better. Paradoxically, if someone with Compulsive Buying-Shopping Disorder goes on a shopping trip, this will briefly improve their negative feelings, but will soon lead to strong feelings of shame, guilt and embarrassment.”

The Delphi research method was used to reach a consensus from the researchers and clinicians involved in a complex psychological disorder.

“The Delphi technique is an ideal method to integrate diverse perspectives from international and interdisciplinary experts in the field of Compulsive Buying-Shopping Disorder,” says co-investigator Dr. Dan Fassnacht, Senior Lecturer in Psychology at Flinders University.

“This helped us to developed diagnostic criteria featuring large agreement among experts in the field, and is an important milestone to better understand and treat this behaviour.”

Dr. Kathina Ali, Research Fellow at Flinders University and co-investigator of the study adds: “Previously, it was difficult to compare studies without agreed criteria.”

“Now for the first time, we can start examining Compulsive Buying-Shopping Disorder more precisely which should help us improve our treatments for this disabling condition.”

How to stop spending too much at Christmas

How to stop spending too much at Christmas

How to stop spending too much at Christmas.

Christmas is by far the busiest time of the year for shopping and many of us deal with the pressure and financial stress of the annual retail frenzy with an increasingly popular new behaviour – self-gifting.

If you’re not familiar with the concept of self-gifting, you might be just a bit in denial. Think of it as December retail therapy: we all know that feeling – we are out shopping for Christmas gifts and we see a sexy new gadget, T-shirt with a funny slogan or a stylish home accessory in a store and realise the person it would be a perfect present for is actually ourselves. So, we buy it, you know, as a treat!

Retail therapy sounds nice – we fool ourselves it’s ok because it’s a type of therapy and we are told: “Therapy: Good!”

Retail therapy is of course popular all year round, especially after a shocking week at work, or an argument with our partner, or when we’re just feeling the blues.

But is it therapeutic if we buy non-essential to just manage predictable and recurring stress? Or is it really impulse spending?

Spending money impulsively can make us ‘feel better’ and ‘more alive’. But it can be a serious problem if this is something we begin to do regularly, especially with expensive items, as a way of coping. And let’s face it, jobs and relationships – and life in general – can be stressful for extended periods. New COVID-19 lockdowns are also very stressful especially on the eve of Christmas.

Data on impulse spending is contradictory – with one survey showing Aussies claim to have reduced our impulse buying while another shows that more than three quarters of us impulse buy when we shop via mobile. So it’s helpful to define it: when react to temptation by mindlessly spending money we haven’t budgeted on.

According to a poll of 1003 consumers by US website creditcards.com, five out of six Americans admit to impulse buying. One in five people had spent more than US$1000 on impulse, which rose to one in three for people earning over US$75,000.

Seven strategies to manage your impulse buying

  1. You are much less likely to buy on impulse if you plan your shopping trip therefore write a shopping list before you go.
  2. Avoid sales (or nominate an item you want and don’t break that agreement with yourself). A price discount is a real trigger for impulse spenders often buying things they don’t need.
  3. Don’t shop when you are emotional.
  4. Remind yourself of your longer-term financial goals before you spend.
  5. Wait a day before you purchase non-essential items.
  6. Make a budget for spending on ‘extras’ or treats and stick to it.
  7. Eat before you leave home to shop, this avoids spending extra money on food items as you will not be hungry during shopping time.

It’s not a huge leap to switch from a default state of mindless impulse spending to one of financial mindfulness– which means having awareness and paying attention to your finances and financial behaviours.

Working through complex and difficult problems that may trigger impulse buying is of course not easy. But let’s not forget what a hugely painful thing financial stress is. Ask yourself honestly, is your impulse buying adding to your financial stress? It’s a question worth pausing to consider honestly.

Financial worries are now accepted as a leading cause of stress in people’s lives throughout the western world.  Impulse spending therefore just compounds the problem.

The real cost of gift-giving: financial stress – part 3

The real costs of gift-giving: Financial stress

The real cost of gift-giving: financial stress – part 3.

In ancient history giving gifts began as part of the ritual of worship and over the centuries it has morphed into a show of appreciation. In the age of mass consumerism gift-giving has become an expensive habit too, especially in holiday season.

While most of us worry about money to some degree, gift-giving has costs we usually bear without much complaint; giving is a respected value, it feels good and it’s accepted as a cultural obligation. Besides, we have special labels for people who don’t play along with gift-giving: who wants to be labelled Scrooge or the Grinch?

Let’s take a look at one specific festive custom: the excessive expectation everyone will have a present for everyone else who arrives on Christmas Eve or Christmas Day – whether they are young nieces and nephews, twentysomethings, cousins, partners of relatives.

Even exes in attendance get a gift. It’s probably no exaggeration to say half the gifts exchanged in these situations are politely put in a cupboard when they arrive home – and forgotten. The obligation to provide a pile of gifts – of appropriate value – across extended families can add tension to what is often already awkward family gathering. It almost certainly adds to seasonal financial stress.

Never mind that in the affluent West that many of us take months to repay debts incurred at Christmas time and in Black Friday and Boxing Day sales. So, at least reasons to buy expensive gifts are out of the way after Christmas, right?

Wrong. February and March tend to have the most weddings in Australia, which means wedding costs and wedding gifts for guests. February and March also have a lot of birthday spending, as those are the second and third most common months to have a baby. From there, the retail calendar kicks in: with gift-giving the norm in Easter, then for Mother’s Day – not to mention birthdays and anniversaries for the rest of the year.

Another type of gift-giving that is anecdotally growing is also worth noting: buying ourselves gifts and treats for our birthdays or just ‘getting through hard times’ such as COVID, often just because we see appealing items in big seasonal sales.

So, how can we avoid the financial stress that comes from adding new debt to existing debt, and the symptoms and impacts of that financial stress?

Some of us at some point have completed a budget (even if we can’t always stick to it) and humble enough to get financial advice to try and do better. We are not clueless.

But without an overhaul in our thinking, choosing gifts will remain stressful for many people. There can be a huge array of options and a nagging temptation to show our appreciation – for ourselves and others – by over‐spending.

If you have tried every trick to rein in spending on gifts it could be time to try something new – using mindfulness with your finances, also known as financial mindfulness. Mindfulness is described as moment‐by‐moment awareness.

Take the example of a teenager who “needs” for a sleek iPhone 10 as a gift, if not the newest flagship Apple phone, an iPhone 12 Pro Max. An iPhone 11 Pro Max will set you back at least $750 and a Pro Max 12 starts from the mid $1500s and rapidly goes up beyond $2000.

“We all have urges that we really, really want a new gadget like an iPhone, including me,” says Financial Mindfulness CEO and Founder, Andrew Fleming.

“It feels good to take it out of the box and start using it. The feeling of having the latest technology makes you feel cool and the children love it. Like anyone else I’ve learned those feelings don’t last long and they certainly don’t improve your life, despite what the ads tell us.

“Always having the latest iPhone won’t make me or anyone else truly happy. In fact always giving in to buying the new iPhone – or the latest of any brand of device – will actually decrease happiness because it will probably contribute to increased financial stress.”

The reason those sentiments feel uncomfortable is because they’re true. Researchers from Washington University and Seoul National University, Joseph Goodman and Sarah Lim, found that giving ‘experiences’ increases the happiness of recipients more than material gifts – even if people are not socially close.

Hence the boom for online companies selling “experiential” gifts: in Australia, RedBalloon; in the UK, Red Letter Days and in the United States, retailers like Cloud 9 Living and Great American Days.

But focusing on experiential as opposed to material gifts is unarguably only half of the answer.

While the research shows a hot‐air balloon ride or chocolate‐making course should satisfy the recipient more than boxed gift wrapped with a bow, if you try to please someone with the dollar value of your gift your debt problems could get worse and that is undeniably a problem.

Ever looked at the cost of sky‐diving, rodeo‐riding or maybe cage diving with sharks? You will spend hundreds, if not over a thousand dollars on these.

Financial stress is irrefutably linked to health problems like depression, anxiety and sleep disorders so it’s not a big leap to see that the expensive gifts you buy – whether material or experiential ‐ could paradoxically lead you to feel less likely to connect with other people.

Most of us know overspending will put pressure on us, but since when did knowing right from wrong stop human beings from making mistakes?

A parent, relative or partner with poor self‐control around money will often buckle to badgering from a child, or give into a yearning to people‐please, and buy that new smartphone, tablet, a holiday or even a car.

A daily mindfulness practice will lead to a more mindful approach to gift‐giving, so we do not drift into autopilot when buying. It’s inevitable this will lead us to confront some fundamental uncomfortable truths about money. “Mindfulness helps to calm the mind and with a calm mind we make better decisions,” Fleming says.

“Sometimes it’s a better decision to treat ourselves to a book or a movie or a massage instead of the latest smartphone.”

It’s important to note mindfulness is no silver bullet – it can however help you begin to change in that area. From there we can make some deep, meaningful changes: when we are forced to face old assumptions about money.

“There’s a big mindset change some of us need to make at times like Christmas, birthdays and weddings: how much we spend on people is not automatically a sign of our value and love for each other.”

Which brings us back to gifts. You can create lasting memories with creativity and your knowledge of a person.

How about home‐made cookies baked with personal messages – each describing why you love the recipient ‐ hidden in the dough? Or a hand‐made recipe book containing meal suggestions from the recipient’s family members?

Maybe get a t‐shirt printed with the recipient’s favourite funny saying or if you have time, plan a surprise outing and put thought into favourite stops and a destination, or even fill a tall jar with inspirational quotes written and printed in different colours.

If you have lots of time, learn the guitar then write someone a song and play it for them. If you don’t have much time, spend a couple of hours hand‐writing a letter telling the recipient what they mean to you. Could any gift feel better and teach about the real meaning of value?

Time is a key resource when it comes to gift-giving; you need to know someone or learn about them to know what might make them happy. And time is valuable. Benjamin Franklin was widely credited with the unforgettable line “time is money” in 1748 (although it’s been shown to have much earlier origins, perhaps even ancient Greece).

We can spend money and time, but where spending too much money might cause you crippling financial stress, spending a lot of time only enhances relationships – especially on children – by creating last memories.

Andrew Fleming says getting our minds to a state where we can see that spending time is just as valuable as money when it comes to gifts isn’t easy. “Everyone thinks they are time-poor.

One tool I know that can really transform how much time I think I have is mindfulness. Using mindfulness when I’m spending money means I make better decisions – no doubt about it.”