Buy Now Pay Later Services Could Put Some Americans Deep Into Debt

CNN Business

Buy now, pay later installment plans have become popular among consumers who want to spread the cost of large purchases. But now rising prices are causing some cash-strapped buyers to turn to these alternative payment methods for everyday purchases, such as their daily coffee, filling gas station or grocery shopping.

This is a concern for economists and consumer advocates, who say that the increase in the use of these services, coupled with a lack of transparency and few regulatory oversight, leaves them wondering how much debt Americans are actually taking on.

While other household debt, such as credit card spending and car loans, is collected and tracked by the Federal Reserve, Buy Now, Pay Later (BNPL) data is not included because financing is typically provided by non-bank sources and has not yet been reported. comprehensively to credit bureaus.

That means there is no public database of BNPL-related consumer debt, transaction volume, default rates, and fees and interest charges.

A customer holds a fuel cap at a Shell gas station in Hercules, California, US, on Wednesday, June 22, 2022.

“There’s no question that there’s a big gap in our understanding of people’s financial situation if you don’t count Buy Now, Pay Later,” said Matt Schulz, lead credit analyst for LendingTree. “And that’s a problem for credit rating companies, credit bureaus, and for lenders.”

From Affirm and Apple to PayPal and Zip, BNPL transactions are currently valued at at least $100 billion a year — a figure that analysts say could skyrocket to $1 trillion to $4 trillion within a few years. These services split a purchase into four or more installments over a period of several weeks or months. They are typical offered with zero or minimum interest, and often come without a credit check.

To make money, the BNPL providers charge traders between 1.5% and 7% of the transaction price, according to research by the Kansas City Federal Reserve. For some retailers, the cost is worth it, according to research from RBC Capital Markets, which found that BNPL’s online offering increased average ticket sales by 30% to 50% and increased the proportion of customers who ended up making a purchase.

Despite its rapid growth, BNPL has raised red flags for economists, regulators and attorneys general. They have warned that because the services are not regulated as credit products, this has resulted in a Wild West-style market with fluctuating terms and conditions and few checks and balances.

One major drawback is the possibility of getting into debt quite easily without realizing it, said Terri R. Bradford, a payment systems research specialist for the Kansas City Federal Reserve.

The installment process makes it seem like someone is paying practically nothing for the goods or services they buy, she said.

“So the possibility is that, in your mind, you could think of anything you buy in those four installments and as a result, end up incurring more debt than you would if you had to pay them off in full every time,” he said. they.

“The ability to pile up your debts by using multiple ‘buy now and pay later’ loans through multiple service providers is one of the biggest risks I see,” she added.

Tada Images/Adobe Stcoko

The three major credit bureaus have said they will include BNPL activity on credit reports, but they still have to rely on the providers for that information.

The Consumer Financial Protection Bureau said it plans to address these concerns, in addition to investigating unclear terms, possible data collection and lack of other protections. The agency has gathered information from BNPL providers and expects to publish its findings later this year.

However, the fear is that potential solutions won’t come soon enough, said Marshall Lux, a Harvard Kennedy School research associate who wrote a recent study on Buy now, pay later. These easy-to-use options explode just as people’s financial situation deteriorates — creating a perfect storm that will endanger some of the most vulnerable Americans, he said.

“With everything going on in the economy, this isn’t getting the attention it deserves,” he said. “Meanwhile, young and low-banked people are being seriously injured, potentially ruining their creditworthiness for years to come.”

Typical BNPL consumers are younger — mainly Gen Zers and Millennials — and have credit histories that are considered subprime, Lux noted, citing research from TransUnion. They tend to use the services to avoid credit card interest, as well as make purchases that don’t fit their budget, according to Lux and the TransUnion survey.

“People buy more than they should, and they admit it. Whether it’s aggressive marketing, whether it’s impulse buying, or it’s a belief that, “I’ll have more tomorrow,” they use a lot of these [services],” he said.

The biggest red flag for Lux, a former chief risk officer for Chase, is what people buy with these services.

“They buy cleaning supplies, they buy socks, they buy sneakers, they buy everyday household items,” he said. “When People Start” [using revolving credit for] everyday purchases like groceries, you know there is a problem.”

BNPL providers say they see their offering as a safer and more sustainable option to traditional lines of credit.

“The product and company are ultimately built entirely around the premise of consumers’ long-term success and ability to repay,” said Libor Michalek, president of technology, risk and operations at Affirm. “And if they can’t, that’s where we share in the negative outcome.”

In an emailed statement in response to questions from CNN Business, a Klarna spokesperson wrote:

“Our interest-free products are designed to keep people out of debt. We conduct strict eligibility checks on every purchase, continuously review our lending criteria and spending limits, and restrict use of our services until missed payments are settled.”

A Klarna app icon on a mobile phone in London, UK, on ​​Thursday, January 21, 2021.

Some consumers use BNPL services in hopes of trying to stick to a budget or balance their finances from month to month, said Charlotte Principato, financial services analyst for Morning Consult.

“What it indicates to me is that this is a means to an end,” she said. “It’s a deliberate choice to go a little further with money and still achieve the goals you want and still get the things you think you need.”

That’s especially true for the multitude of Americans who don’t have a steady month-to-month salary, she said.

“They have to work with imperfect data about what their paycheck will be each month and still manage to cover the rather fixed costs and still make the discretionary purchases that everyone should be allowed to make,” she said.

For people like Linda Ramirez, historically high inflation meant that there was no room for maneuver even for the grassroots.

The single mom, who lives in a small town in South Texas, has to travel 90 minutes every day. At home she has three adolescents growing up.

“I feel like it’s doubled, everything’s doubled [in price]’ said Ramirez. “So I pay $50 to $55 to refuel my vehicle; and groceries, the same. Here in Texas, a carton of eggs has doubled from $3 or $4 to $7 or $8, depending on where you go.”

To increase her budget, she uses BNPL for discretionary purchases and also for some necessities, including a recent $400 grocery bill.

For Ramirez, spreading costs through a Buy Now Pay Later app was a better alternative to putting it on a credit card, taking out a loan or forgoing payment on a utility bill. If all payments are made on time, most BNPL services do not charge interest or late fees.

“I don’t want to do this forever, but it’s good to know that if I ever get into a rut in the future, I can always use this again,” she said.

Zach Wasser of CNN Video contributed to this report.

Correction: An earlier version of this article contained wrong estimates for the size of the BNPL industry. Transactions were projected to be at least $100 billion by 2021.

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