treat yo'self

impulse, irresponsibility, and instant gratification

Think about the last time you bought something online. Christmas and Boxing Day recently passed, so it was likely not too long ago. Did you search for an elusive discount code, or cry internally as the money left your bank account? We all know the feeling, and many of us may be familiar with new and seemingly profitless fintech innovations created to alleviate these issues. How could a free service that saves us money or allows us flexibility in our payment timelines be anything but altruistic?

PayPal Honey (formerly Honey) is a free browser extension designed to automatically test different discount codes that have been recently used all over the internet on an individual order, potentially allowing you to save money without manually searching out and testing codes. It was founded in 2012 and went viral after having a prototype leaked to Reddit; in 2020, PayPal bought the company for four billion dollars. Honey is well-known for advertising in less conventional ways; in particular, it is one of the largest and most famous sponsors of YouTube creators. 

Buy Now, Pay Later (BNPL) represents a concept employed by multiple companies on the market; the most famous of these are Klarna, Affirm, and Afterpay. When purchasing online, you can use one of these services (whichever one is offered by the retailer) to buy: your product will be promptly delivered, because the BNPL service has already paid the retailer full price. You then pay the service back in installments, allowing you to soften the blow of money leaving your account or getting charged to your credit card. These companies are known for charging no interest on these micro-loans, provided you pay them back within a short time frame (generally in four installments over a six to eight weeks). 

Though at initial glance it’s difficult to understand how these services can be profitable, understanding the mechanics of online marketing and purchasing leads us to the answer. For one thing, both Honey and BNPL services receive commissions from retailers when a consumer follows through on a purchase and uses their service during the transactions; this is similar to the percentage fee that credit card companies charge merchants (though it can be substantially higher). Controversy exists over whether this is Honey’s only source of funding — while the service claims to be “pro data protection” and collect only the minimum required consumer data, independent analyses have revealed the extension collects far more data than the company admits, raising concerns as to whether consumer behavior information is being sold for marketing purposes. And BNPL services have, in addition to these retailer fees, some combination of interest fees (for purchases split into more than four payments or over a longer period of time) and late fees. 

Still, the ultra-high valuations of these companies are hard to stomach. Some part of it is likely the inflated valuations of all kinds of tech startups, in the vein of Uber, Airbnb, DoorDash, and the like; they are all lauded as “disrupting the marketplace” and they receive swathes of investment. 

The feverish excitement does wear off eventually, though, and with it goes the endless supply of VC money, forcing the Sand Hill Road darlings to revise their business models in ways that actually produce revenue. Uber introduced demand pricing, Airbnb introduced enough extra fees that its prices are now comparable to hotels (with none of the perks, like not having to clean the rooms yourself), and DoorDash started adding mandatory “service charges” comparable to tips expected at a sit-down restaurant. Prices rise and profitability (if there was ever any to begin with) plateaus.

Honey is no exception here, monetizing in the form of commissions collected from the retailers. The service’s “How does Honey make money?” FAQ page explains that in exchange for being featured in the extension, Honey charges retailers a minimum 3% commission on every purchase made through it, part of which is used to fund the discounts the service provides to users. The specifics of the commission received depend on each company’s agreement with Honey: retailers can choose to pay the company between 0.5% and 20% of each Honey-generated sale, with higher payments corresponding to better brand placements in the Honey app. Though this may seem like a relatively inoffensive approach to monetization compared to soaring Uber fares, one does wonder whether better deals at smaller retailers are being buried by their inability to purchase prime ad real estate. 

Honey’s revenue streams also throw into question how committed the extension’s creators are to their stated purpose. While the extension’s goal is ostensibly to save money for its users, the fact that its funding depends on it being an effective advertising platform essentially makes its true goal to increase users’ spending. This makes it difficult not to be cynical about Honey’s mission, especially given that many of the most frequently featured coupons and deals are perks such as free shipping and cashback which have been devised specifically psychological tricks that encourage potential buyers to commit (for more on this, see this blog’s first ever article). How much faith can one really have in a money-saving app that relies on advertising and consumerism to continue existing?

Unfortunately, Honey’s potential ethical issues are dwarfed by those associated with Buy Now/Pay Later services. BNPL’s popularity is highest among young millennial and Gen Z consumers, not least because they’ve seen the effects of the 2008 financial crisis and many have watched their parents deal with snowballing credit card debt. In an overcompensatory swing in the other direction, credit cards have been demonized for lots of these young consumers; and thirty-second financial literacy tips from “debt-free at 23” influencers on social media have not adequately filled in the gaps. People in our generation are often extremely wary of acquiring and using credit cards, which results in deficient credit histories and delays many financial privileges that rely on credit scores. 

Researchers have found, however, that this skepticism does not extend to BNPL programs, possibly due to their “interest-free” advertising and accessibility for the underbanked. From TVs to Pelotons to $10 lunches, no one hesitates when offered the chance to pay over four installments, the opposite of delayed gratification: delayed financial outlay, for lack of a snappier term. This style of payment, though a fraction of a small percentage of credit card usage, grew one thousand percent from 2019 to 2021 (to $24 billion). Having tested one of the leading BNPL providers ourselves, it’s quite obvious why: enabling Klarna on an online purchase from Canada’s MEC required literally two taps, one to select the option and one to allow Chrome to provide a phone number. No further ID is requested, and the user never leaves the retailer’s website. The process is almost completely effortless, and it’s easy to see how someone who was just planning to browse and make a wish-list could be nudged into following through on a purchase. Furthermore, though every source we’ve read speaks about a verification (however cursory) of credit history before extending a micro-loan, we were able to purchase using BNPL with nothing of the sort. 

Setting that aside, one of the chief criticisms of BNPL is that while their users appear as credit-worthy as those who use traditional banking systems, they are more likely to become delinquent. Beyond that, BNPL tends to lead to more unnecessary retail spending, is not explicitly covered by critical legislation regulating lending, and does not actually, as some TikTok influencers claim, “free up money to be invested.” Unless someone is part of the lucky few who were caught up in the GameStop fiasco and made it out fruitfully, the likelihood of making a substantial profit on investments of a few weeks is laughably low. And of course, the delayed payments are still charged to a credit card, so the promises of zero interest rates only apply if payments are made on time. Otherwise, the feared 19.99% APR still applies.

Edited to add (Jan 2024): as retailers like Walmart introduce BNPL services when using self-checkout in stores, capped out in the thousands of dollars, federal agencies are warning that incomplete reporting of these micro-loans to credit reporting agencies could prevent lenders from knowing the full extent of borrowers’ debt obligations before approving new lines of credit.

Honey and BNPL services both advertise themselves as tools that understand many millennials’ tough financial position and can help out. A deeper look, though, reveals these services do not necessarily live up to their lofty goals: both have business models that seem to revolve around encouraging the kind of frivolous spending that leads to financial difficulties in the first place. One is left wondering if Honey and BNPL create more problems than they solve, by leading to more excessive spending than otherwise would have occurred. Spend wisely, and remember that life will go on without that Model X Smart Home Indoor Rowing Machine in Matte Black.