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Buy now, pay later schemes are catching the eye of consumers, and of federal regulators

·5-min read
<span>Photograph: Dominic Lipinski/PA</span>
Photograph: Dominic Lipinski/PA

Industry says no-interest BNPL loans are more equitable than credit cards but consumers say they can be a spending trap


It is a shopper’s dream. A $250 coat can be bought for $50, hundreds of dollars of makeup can be sent to your door for just $20. The catch: you will eventually have to pay the full price of the purchase. But for now, only a fraction has to come out of your bank account.

So goes the enticing nature of buy now, pay later (BNPL), the payment method that allows consumers to pay for their purchases in installments, largely without interest. But the multi-billion-dollar trend has government officials – and even some consumers – worried.

The benefit to consumers is hazier. Consumers report a complicated relationship with BNPL companies, one that is often characterized by an instant high off a purchase, followed by a comedown once the payments are deducted from their paycheck every few weeks.

“Emotionally, when I get the package, I’m pretty happy,” said Sandra Lopez, 21, who lives in Atlanta. “Then it gets really stressful because you forget about the purchases. They come back at you. Once it’s payday, you’re again broke because you just feel like you don’t have any money … It’s not healthy.”

Lopez said she has accumulated $400 in purchases from Klarna, a Swedish finance company that is one of the leaders in BNPL. Lopez said those were largely impulse buys, and that it is easy to lose control when using BNPL, especially when companies offer enticing deals like free $5 gift cards to consumers.

“I know I’m making the purchases, but it’s also enabled my reach to even buy those items. Most of these items I wouldn’t be able to purchase with my credit card,” she said.

Nearly every major US retailer is now offering some type of BNPL service to its customers, a change seen only within the last three years. Since 2019, BNPL has grown 300% in the US, reaching 45 million active users in the country by 2021. BNPL accounts for 2.4% of US online retail and is expected to keep growing.

The top BNPL companies are some of the most lucrative in the financial tech industry. Square recently acquired Australia-based Afterpay for $29bn last year. Klarna was recently valued at $45.6bn.

The soaring rise of BNPL has caught the eye of federal regulators at the Consumer Financial Protection Bureau (CFPB), which in December started an inquiry into the risks and benefits of BNPL loans. The agency has asked the five largest BNPL servicers – Affirm, Afterpay, Klarna, PayPal and Zip – for their data and policies, citing concerns over a lack of consumer protection regulations.

In a letter urging CFPB to take action, a group of US senators from the Senate’s banking committee said that BNPL loans have “the potential to cause consumer harm”.

“BNPL providers currently operate without meaningful oversight. They are not generally subject to federal supervision that can spot unfair, deceptive or abusive practices or other violations of federal consumer protection laws,” they wrote.

Regulators in other countries such as the UK and Australia, where BNPL has also ballooned in users, are also considering regulation. BNPL represented 2.1% of all global e-commerce transactions in 2020, according to research from FIS, and is expected to double by 2024.

At a basic level, BNPL companies appear to have a mutually beneficial relationship with both retailers and consumers, often getting praise from both groups.

The payment method is targeted toward those who do not have a credit card as approval for a loan is nearly instant, with a soft check on a consumer’s credit history. BNPL is especially popular among millennial and Gen Z consumers.

For retailers, BNPL offers access to consumers who may otherwise not have made purchases. Consumers are also spending more when they use BNPL. Rue21, a clothing retailer, saw a 73% increase in the average purchase amount when the retailer started using Klarna, according to a case study published by the BNPL company. Other retailers have reported similar results.

“With Klarna, we continue to see higher spend per visit and increased acquisition of new younger customers. 45% are under 40,” Macy’s CEO Jeff Gennettte told investors last spring. “Our goal is to convert all of these new customers to Macy’s loyal customers, who return for future purchases.”

BNPL companies argue that they are offering a more equitable service than credit card companies and are offering consumers a fairer deal since they do not charge interest. Instead, BNPL companies operate on fees they charge retailers, which usually amounts to 1.5% to 7% of a transaction. In comparison, credit companies typically charge retailers 1% to 3% of a transaction.

“Credit cards drive inequalities. Those who can afford to pay off their balances each month reap rewards through loyalty schemes while those who can’t afford to simply get more into debt,” Klarna CEO and co-founder Sebastian Siemiatkowski said in a statement to investors. “The credit card model is simply unsustainable for customers.”

Siemiatkowski echoed recent reports that lavish credit card rewards are in a way subsidized by lower-income Americans who use cash or debit cards, but consumer advocates say that BNPL can also pose risks to consumers.

“If they work as promoted, they may be helpful for consumers to help break down payments into a few smaller chunks without interest and without the long-term debt and interest of credit cards,” said Lauren Saunders, associate director at the National Consumer Law Center. “But there are definitely a lot of potential downsides.”

Saunders said it is easier for consumers to take on debt with BNPL, loans are harder to track since they may not be all in one place, some companies charge late fees and consumers lack legal chargeback rights that protect them if they do not get the product they paid for.

It is also unclear what using BNPL will mean for consumers’ credit scores. Purchases are not reported to the credit bureaus unless a missed payment ends up going to debt collectors, which could make a report. But all the major credit bureaus have indicated they will begin working with BNPL companies to get BNPL transactions on consumers’ credit reports.

“Ultimately, we are concerned about how the product is developing and how the market is developing, and we hope that the CFPB will come up with substantive protections,” Saunders said.

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