Why millennials and gen-Zs are jumping on the buy now, pay later trend
All 21-year-old Taylor Emmi wanted was a cosmetic kit from makeup artist and social media star Jeffree Star after watching a video about the brand on YouTube in October 2019.
So she took the $144 leap, and nearly two years later, she’s shelled out thousands on a makeup brand she normally couldn’t afford thanks to a buy now pay later platform known as Afterpay.
“Obviously I really like the things and want to collect them, but I would have never been able to have half of it without Afterpay,” Emmi said.
Buy now pay later platforms that allow customers to purchase on installment plans are growing in the U.S., and younger Americans seeking new ways to purchase high ticket items like computers and designer clothing with lower wages are obsessed.
While the platforms have existed in the U.S. for years, demand and investor interest in the companies are starting to pick up. Just this week, digital payments company Square said it would purchase Afterpay in a $29 billion all-stock deal. As of June 30, Afterpay served more than 16 million customers and roughly 100,000 merchants.
Apple is also reportedly teaming up with Affirm Holdings Inc.‘s PayBright to launch an installment program for Apple devices bought in Canada, according to Bloomberg. And shares of Affirm, which went public in January, are up about 23% in the last three months as of Friday. Klarna is valued at almost $46 billion and raised $639 million in a funding round led by SoftBank.
And a lot of that interest is coming from the younger generations, millennials and Gen-Zs, who are turning to the various BNPL platforms instead of traditional credit cards with high interest rates.
CNBC interviewed seven Millennial and Gen-Z buy now pay later users for this story. The majority said they were drawn to the platforms for their convenience. At least six were influenced by peers or social media to start using the platforms and the majority started within the last year.
How buy now pay later works
Platforms like Afterpay allow users to make big box purchases like a new MacBook without having to shell out the entire cost upfront. They typically let users pay in four installments over a six-week period. Most also offer a companion app or web browser plug-in to equip payment with the merchant’s website.
User accounts are typically linked to a debit card or bank account, where payments are taken out automatically. They also offer automated reminders when an automatic payment is coming up. As a user makes more on-time purchases with the platform, their spending limit grows. For Emmi, that limit is $2,000 on Afterpay and $1,000 on Klarna.
Many platforms don’t charge interest to the customer, making money mostly off of retailer fees and some late fee charges. Affirm does charge interest. The platforms grew 215% year-over-year within the first two months of 2021, an Adobe analysis suggests. Studies have shown that when consumers pay in installments, they typically spend more.
‘It sounds cheaper’
Many younger consumers say they use buy now pay later because they want new clothing or electronics and don’t have the money, said Joseph Flowers, a full-time content creator. The 22-year-old regularly updates his wardrobe for his social media videos and uses Afterpay when a bill tops $300.
“This generation likes to buy a lot of things,” said Flowers, who started using Afterpay when he was approached for an advertising campaign. “I spend a lot of money, and it makes me feel better when I don’t have to pay it all at once.”
Breaking up costs because it “feels smaller” is not uncommon among younger generations, who struggle to think about or plan for the future, said Sarah Newcomb, a behavioral economist at financial services firm Morningstar. In the U.S., consumers focus on material goods rather than saving, a problem that social media is amplifying, she added.
Chiziterem Ogbonna admits there is a culture on TikTok and social media where people overspend and that is contributing to the growth of buy now pay later among her generation. Many platforms are utilizing TikTok for paid advertising campaigns with influencers, a platform some cash-strapped Millennials and Gen-Zs are also utilizing to crack jokes at the trend.
Eighteen-year-old Ogbonna typically uses Klarna for clothing company Shein purchases over $100 because four payments of $25 “sounds cheaper even though it’s not,” she said. At least four of those interviewed echoed that sentiment.
Some experts say in the wake of the financial crisis, younger generations are steering clear of traditional credit and debit. Emmi, the 21-year-old who works as a bartender and waitress, has two credit cards she rarely uses. She likes not worrying about overusing her credit limit with Klarna or Afterpay because “they don’t know that you owe anything.”
Many younger Americans say they use buy now pay later sparingly. Of those interviewed, at least four said a purchase needs to top $100. Emmi uses Afterpay or Klarma on any purchase she can but cautions overspending, a lesson she learned when she lost her job during Covid-19 and struggled to pay mounting installment bills.
“You want nice things and think ‘I’ll be able to pay for it over time,'” Emmi said. “But a lot of time you do have to scrape to [make a payment].”
Technology
Apple remains Buffett’s biggest public stock holding, but his thesis about its moat faces questions
Tim Cook and Warren Buffett
Getty Images (L) | CNBC (R)
Berkshire Hathaway‘s Warren Buffett was still using a flip phone as late as 2020, four years after his investment behemoth started amassing a huge stake in the company that makes iPhones.
“I don’t understand the phone at all, but I do understand consumer behavior,” Buffett said last year at Berkshire’s annual shareholder meeting in Omaha, Nebraska.
He’s emerged in recent years as one of Apple’s top evangelists.
At the end of 2023, Berkshire owned about 6% of Apple, a stake worth $174 billion at the time, or about 40% of Berkshire’s total value. That’s about four times bigger than Berkshire’s second-biggest public stock holding, Bank of America, and makes Berkshire the No. 2 Apple shareholder, behind only Vanguard.
As Berkshire investors and fanboys of the 93-year-old Buffett flood Omaha this weekend for the 2024 annual meeting, Apple is likely to be a hot topic of discussion. The tech giant on Thursday reported a 10% year-over-year decline in iPhone sales, leading to a 4% drop in total revenue. But the stock had its best day since late 2022 on Friday due largely to a $110 billion stock buyback plan and increased margins that result from a growing services business.
The bet on Apple and CEO Tim Cook, has paid off handsomely for Buffett, who said in 2022 that the cost of Berkshire’s Apple stake was only $31 billion. His firm is up almost 620% on its investment since the start of 2016.
Despite being a self-described luddite, Buffett has long had a coherent non-techie thesis for loving Apple. He’s seen how devoted Apple users are to their devices, and has viewed the iPhone as an extraordinary product that could keep its customers spending inside the Apple ecosystem. He calls it a moat, one of his favorite words for describing his preferred businesses.
“Apple has a position with consumers that they’re paying $1,500 or whatever it may be for a phone, and these same people pay $35,000 for a second car,” Buffett said at last year’s meeting. “And if they had to give up their second car or give up their iPhone, they’d give up their second car!”
Data is in his favor. According to a study from Consumer Intelligence Research Partners, Apple has 94% customer loyalty, meaning that nine out of 10 current U.S. iPhone owners choose another iPhone when buying a new device.
Buffett has also hailed Apple’s ability to return billions of dollars to shareholders annually through share buybacks and dividends, a capital allocation strategy for which Buffett may have himself to thank. When asked in a 2016 interview with The Washington Post who he turns to for advice at pivotal moments, Cook offered up a story about his relationship with Buffett.
“When I was going through [the question of] what should we do on returning cash to shareholders, I thought who could really give us great advice here? Who wouldn’t have a bias?” Cook said. “So I called up Warren Buffett. I thought he’s the natural person.”
Apple has shown its appreciation for the Oracle of Omaha in other ways.
In 2019, the company published an original iPhone game called “Warren Buffett’s Paper Wizard” in which a paperboy bikes from Omaha to Apple’s hometown of Cupertino, California.
But with Apple’s business having declined in size in five of the past six quarters and with the company expecting just low-single digit growth in the current quarter, Buffett may face questions this weekend about whether he still sees the same power in the moat, particularly with regulatory pressures building around tech’s megacap companies.
Buffett trimmed his stake in Apple late year, though only by about 1%. Even after Friday’s rally, the stock is down 3.8% in 2024, while the S&P 500 is up 7.5%.
‘Very, very, very locked in’
Berkshire’s initial foray into Apple in 2016 was not Buffett’s idea. Rather, the investment was led by Ted Weschler, one of Buffett’s top deputies, and was seen as a passing of the torch to the next generation of Berskhire investment mangers.
But the following year, Berkshire started purchasing even more Apple, and Buffett began talking it up. He said he liked the stock and the company’s “sticky” product, although he didn’t use it.
In 2018, he said Apple users are “very, very, very locked in, at least psychologically and mentally” to the product and the ecosystem.
“Apple has an extraordinary consumer franchise,” he said.
At last year’s annual meeting, when asked how Berkshire can defend having Apple make up so much of its public portfolio, Buffett said, “It just happens to be a better business than any we own.” He also hailed Cook, calling him one of the “best managers in the world.”
A number Apple likes to use to tout the health of its business, despite the declining revenue, is 2.2 billion. That’s how many devices the company says are currently in use and points to the massive customer base available as Apple rolls out new subscription services.
“Once customers get into the ecosystem, they don’t leave. So it’s not a a speculative tech play,” said Dan Eye, chief investment officer at Fort Pitt Capital Group, which owns Apple shares. “It’s kind of more like an annuity and I think that’s what Warren Buffett really sees as well.”
In addition to the drop in revenue, Apple faces new challenges from regulations and weak overseas markets, as well as from Microsoft and Google’s advancements in artificial intelligence. For regulators, the concern surrounds the very moat that Buffett finds so attractive, and whether its give the company monopolistic control in the smartphone market.
The U.S. government in March alleged that Apple designs its business to keep customers locked in. The Justice Department’s lawsuit claimed that products like Apple Card, the Apple Arcade game subscription, iMessage, and Apple Watch work best or only with an iPhone, creating illegal barriers to competition and making it harder for consumers to switch when it’s time for an upgrade.
However, the litigation is expected to take years, pushing any potential penalties to Apple and its products well into the future. In the meantime, there’s no sign that the iPhone is becoming less important as new devices like virtual reality goggles have found only niche audiences, while consumer AI products have failed to take off.
Buffett hasn’t voiced his view publicly on Apple’s regulatory hurdles, and this will be the first opportunity for investors to ask him about the issue since the DOJ’s lawsuit. But Buffett knows a little something about regulation — two markets where he’s most active are railroads and insurance.
In a note to clients earlier this month, Bernstein analyst Toni Sacconaghi didn’t go deep on regulatory concerns, but mentioned that he doesn’t believe the DOJ suit will “seriously threaten” the strength of Apple’s ecosystem. He also said that following Buffett’s lead on getting in and out of Apple is a solid strategy for making money.
“Despite his reputation as a long term buy and hold investor, Warren Buffett has been remarkably disciplined at adding to his Apple position when it is relatively cheap and trimming when it is relatively expensive,” Sacconaghi wrote. He encouraged investors to “be like Buffett.”
More money back
Odds are that Buffett was thrilled with Apple’s announcement this week regarding its expanded repurchase program. It’s a practice he’s long adored.
“When I buy Apple, I know that Apple is going to repurchase a lot of shares,” he said in 2018.
And he likes to note how buybacks result in getting a bigger stake in the company without buying more shares.
“The math of repurchases grinds away slowly, but can be powerful over time,” Buffett said in 2021.
Apple also increased its dividend by 4%, and signaled that it would continue to lift it annually.
Buffett was effusive about Apple’s capital return strategy at the company’s annual meeting last year, pointing out that it helped Berkshire own a bigger piece of the pie. Unlike insurance company Geico and homebuilder Clayton Homes, which his firm owns in their entirety, Berkshire can continue to increase its stake in Apple, a fact he reminded investors of at the meeting.
“The good thing about Apple is that we can go up,” Buffett said.
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