On Layaway
Buy Now, Pay Later
During the Great Depression, the use of layaway allowed consumers to purchase things over time. It faded in the 1980s with the rise of consumer credit cards, and has made an occasional cameo during hard times like the 2008 financial crisis. The idea behind layaway is you put down a deposit and the store holds the item for you, and once you’re done paying it off they give it to you.
What if, rather than using a credit card or layaway, the store you’re buying from gave you access to a third-party service that gave you an unsecured loan to buy the thing you want? This is buy-now-pay-later, or BNPL, and it’s quietly become a huge industry. One of the biggest lenders in the US is Affirm:
Affirm has more than 12.7 million customers and extended around $3.9 billion of loans in the first three months of 2022.
That is…a lot! Affirm funds a chunk of its business through securitizations - bundling its loans together and selling the debt to investors. If this sounds familiar, it’s because securitization took down the global economy a little while back. Now, markets are a little worried because the value of Affirm’s securities is dropping.
We don’t give a shit about the vultures who buy securitized consumer loans, however, so let’s look at what Affirm actually does, and the BNPL business model more generally. Who are the lenders targeting?
“When you are originating to borrowers with low or thin credit — the younger demographic, essentially — that’s always a warning for us and something that could be an indicator of potential negative credit performance,” [Harry] Kohl said.
Offering loans to borrowers with bad credit does not sound like a great business model, but what do I know, right?
Affirm founder Max Levchin said last year that younger people were no longer willing to “tolerate getting into permanent debt” by using traditional credit cards and preferred to use BNPL to pay for their purchases.
There are two ways to process this statement. One is the way Levchin intends, which is to believe that young people prefer to take out installment loans to buy things rather than ‘tolerating’ getting into ‘permanent’ debt - whatever that means! - by using credit cards. A more realistic interpretation is that young people are savvy enough to understand they can take an unsecured loan to buy something and - critically - receive that thing before the loan is paid off and decide to do that rather than using their credit card.
Last year, Affirm’s delinquency rate went up as the estimated creditworthiness of its borrowers went down, indicating it was either acquiring more financially desperate customers, or ones who didn’t intend to pay off their loans.
More broadly, the BNPL industry is predatory subprime lending dressed up as fintech. Loan companies cut deals with merchants to receive between two and eight percent of purchases back in fees, while assuming the lending risk. Consumers who may be easily lured by a promise of 0% interest on a checkout page can suffer consequences - Affirm reports late payments to the credit bureaus on some loans.
Apple is getting into BNPL, even as firms like Klarna struggle to grow and justify their massive market valuations. The industry is still largely unregulated - most BNPL firms are not banks - and consumers can rack up large debts across multiple companies, like payday loan borrowers. Unlike China, which was eventually forced to crack down on microlending, US regulators have moved more slowly - California has classified the plans as loans, and the CFPB has opened an inquiry into the industry. Meanwhile, the ubiquity of BNPL plans on payment pages continues to grow, fueled by lenders seeking returns and merchants eager to find new revenue streams as retail buying slows.
Despite the billions sloshing around, BNPL doesn’t make lenders money - Affirm lost $520 million dollars in the last 9 months, and Klarna lost $265 million dollars in the first quarter of the year. Maybe the best thing for the industry is for lenders to go under - consumers already got their goods, the merchants already got paid. Fintech has an insatiable desire to reimagine subprime finance into something sexier than what it is - taking advantage of economically stressed people and pushing them to buy things they neither need nor can afford.
Stablegains
There is a certain amount of schadenfreude in stories like this:
Steve Insall has watched his life savings disappear by the second in an app on his phone.
He spent most of Tuesday, May 10, in his condo, trying to withdraw anything that remained of the $320,000 balance that was there just days before.
The app wouldn’t let him. While watching Bloomberg TV talk about a cryptocurrency he only learned of the day before, he tried to hide his panic from his wife.
“She was getting ready for work, the baby was eating on the highchair,” Insall said. “The 3-year-old was on an iPad. I was keeping it all inside.”
Steve! What are you doing my dude?
Insall is one of nearly 5,000 retail investors who made $47 million in deposits into Stablegains, a now defunct company that offered a crypto facsimile of a savings account with interest rates up to 15%.
Many Stablegains users — including bartenders, postal workers and general contractors — feel they were misled by Stablegains’ marketing, which stressed the safety, ease and promise of decentralized finance, or “DeFi” for short.
As Matt Levine points out, sometimes all you need to know about a company is in its name. Stable! Gains! What could go wrong? Last year, the company emerged from the ether and convinced start-up incubator Y Combinator to fund its mission- offering eye-watering interest rates to depositors:
In blog posts and on its website, the company compared its offerings to traditional savings accounts. Except where a brick-and-mortar bank like Citi was giving depositors less than 1% interest, Stablegains could offer up to 15%.
Basically, Stablegains would take your deposits and invest it in DeFi platforms that yielded outsized returns, and it was all totally reasonable and made complete sense. They claimed that by eliminating middlemen - banks, fund managers, etc - they could pay you, the savvy consumer, fifteen percent interest.
Problem is, Stablegains didn’t only park its clients’ money in relatively stable stablecoins like Coinbase because its USDC token doesn’t return fifteen or any percent interest. What the company did instead was invest heavily in the Anchor protocol, which was tied to Terra, which imploded last month.
And so, most of the $47 million those five thousand people deposited in ‘savings’ accounts is gone, and because Stablegains doesn’t have deposit insurance, there’s really nothing they can do about it. For less than a year, the company advertised itself like a bank, but for reasons that soon became obvious, there are reasons a bank doesn’t pay fifteen percent interest or invest all your money in highly volatile crypto assets.
Self Checkout
A new front in the war on shoplifting has emerged. A woman in Kentucky switched bar codes on an item she wanted to purchase, essentially stealing around $80 dollars’ worth of goods. Then this happened:
But instead of charging her with misdemeanor theft — standard for shoplifting crimes of less than $500 — a Pulaski County prosecutor persuaded a grand jury to indict Shirley for "unlawful access to a computer."
The prosecution and Walmart contended that when [Chastity] Shirley misled the self-checkout scanners, she was tapping unlawfully into the sophisticated computer system connected to them.
The offense was a felony punishable by five to 10 years in prison.
Shirley was found guilty, but a sympathetic judge suspended her sentence contingent on good behavior. Shirley understandably did not want a felony criminal record for a misdemeanor offense and appealed:
…the Kentucky Court of Appeals reversed her conviction, saying it would be "inherently unfair to convict somebody of a class C felony for theft of goods worth $80." The appeals court also said the crime didn’t meet the statute’s definition — using a computer without its owner's "effective consent."
Shirley, and millions of other Walmart customers — have the retail giant’s permission to use its self-checkout scanners to pay for merchandise, the appeals court reasoned.
That seems reasonable! However, the state Attorney General’s office announced it will take the case all the way to the state Supreme Court. What is going on here? It boils down to retail’s dependence on self checkout kiosks, and for-profit companies pressuring law enforcement to levy harsh penalties to deter theft:
Self-checkout theft has become so common that a whole new lexicon has sprung up to describe it.
Ringing up a $13.99 T-bone steak as if it was produce priced at 49 cents per pound, for example, is known as the “banana trick."
Sticking an expensive item in your basket without scanning it at all is called the "pass around."
One study found shoppers are four times more likely to steal from a self-check terminal than a human cashier because it provides the illusion of anonymity — and it is so easy.
Retailers have done this to themselves - first they eliminated cashier jobs to cut costs, and now rather than hire more security or human oversight, they are turning to the legal system to do their dirty work.
Law enforcement attempting to use anti-hacking laws is an ominous first step. Kentucky already has statutes in place to deal with shoplifting and recover stolen funds. Using cases like Shirley’s to test the waters for much more severe punishments sets a deeply worrying precedent, especially because such penalties would likely be used primarily to punish and incarcerate minorities and the poor.
Hospitals
It has been a rough couple of years for the American health system. Some of the damage was self-inflicted, as hospitals’ focus on profits left them vulnerable to increased demand during the pandemic.
If we want to learn lessons from the effects of the pandemic on the country’s hospitals, it’s important to have access to outcome data. So, of course, the government wants to block access to it at the industry’s behest:
The U.S. Centers for Medicare and Medicaid Services contends the rates of surgical complications were skewed by the unprecedented challenges of treating patients in the pandemic. The agency previously hid the data from public view for the first half of 2020, and it proposes to keep doing that through mid-2021. For now, hospitals also would not have to pay penalties that are ordinarily based on these measures and on the rates of five hospital-acquired infections — costing Medicare an estimated $350 million.
Hospitals and medical groups received billions from the federal government to keep their facilities staffed as COVID-19 cases overwhelmed them. Now, CMS wants to let the same hospitals off the hook for failure to provide adequate care during the pandemic.
Perhaps it’s not ‘fair’ to score hospitals dealing with a once-in-a-generation pandemic on things like infections or injuries from patient falls, but the data is important if we want to address the failures of the health care system and figure out how to make it better. Nurses and doctors are leaving hospitals at record rates, as regional hospitals close due to lack of staffing or funding. Hiding just how badly hospitals performed basic functions of patient care during 2021 doesn’t help anyone, other than the hospital industry and the government bureaucracy that allowed it to get to the brink of failure over the years.
Short Cons
Gizmodo - “…on Monday, GroupM—one of the biggest ad-buying brands around—published a new study that found that about $1 billion worth of streaming ads every year are playing after people have already turned off their TVs.”
The Atlantic - “As long as money was cheap and Silicon Valley told itself the next world-conquering consumer-tech firm was one funding round away, the best way for a start-up to make money from venture capitalists was to lose money acquiring a gazillion customers.”
WSJ - “As of this month, more than 350,000 requests for immigration histories were pending with the National Archives and Records Administration, which oversees the Federal Records Centers in Kansas City, though not all of those requests were for pending citizenship applications.”
ProPublica - “Ads from gunmaker Savage Arms, for example, popped up on the site Baby Games, amid brightly colored games for children, and on an article about “How to Handle Teen Drama” on the Parent Influence website.”
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