BNPL: Biting Off More than We Can Chew?

By: Jake Sheckter  |  March 22, 2021

By Jake Sheckter, Staff Writer

If you’re like most of us, your shopping habits have changed drastically over the last year. Whether it was a result of brick-and-mortar retail shutting down or just a means of coping with monotonous quarantine, the shift towards online retail and e-commerce has taken an exponential leap. As Fintech companies such as Square (NYSE:SQ), PayPal (NASDAQ:PYPL), WePay, Stripe, and many others have been soaring since the start of the Covid-19 pandemic, many online Fintech businesses are providing increasingly enticing deals as a way to establish their competitive advantage. 

A recent service called “buy now, pay later” (BNPL) has been growing in reputation and gaining traction in the e-commerce market. BNPL products are being used as an alternative to credit cards, fueled partially by millennials who don’t like taking on new cards, and have exploded in popularity throughout the coronavirus pandemic. Brought to the spotlight by companies such as Klarna, a Swedish start-up, and Affirm, BNPL services allow customers to spread out the cost of their purchases over a period of (often) interest-free installments. Affirm Holdings Inc (NASDAQ:AFRM), a BNPL firm based in San Francisco that had their IPO on January 13, enables shoppers to split their purchases with terms that range between 6 weeks and 4 years and with interest rates of 0 to 30%. With other companies such as Afterpay Ltd (ASX:APT.AX) and PayPal Holdings Inc joining the BNPL space, customers are finding it increasingly easier to find their dream payment deal. But with all this payment structure freedom, have we bitten off more than we can chew?

Consumer groups and regulators around the world have warned that customers, especially younger online-shoppers, could be lured into a debt trap. The U.K consumer and product review company “Which?” believes BNPL products can encourage people to spend more than they can afford, being blinded by great payment plans and flexibility. Just over a month ago, Britain announced they would be cracking down on the (British) $3.7 billion BNPL industry, with the U.K Treasury stating that BNPL firms would fall under the supervision of the Financial Conduct Authority (FCA). This announcement reconfirms regulators’ opinions that certain Fintech companies should be treated more like banks, and less like online payment facilitators. 

According to a study by Credit Karma, “nearly 40% of U.S. consumers who used BNPL have missed more than one payment, and 72% of those saw their credit score decline.” The resulting lower credit score can warn lenders of a higher risk, making borrowing more difficult. This can have a negative cascading effect on trying to secure a mortgage, applying for a credit card, setting up utility accounts, and even finding housing as landlords often conduct credit score checks before renting. “When you make something so convenient, people may not be really thinking, ‘Do I have the budget? Can I afford this payment?’ You get more of that impulse-shopping behavior that leads to realizing they may not be able to make the payment,” said Gannesh Bharadhwaj, general manager for credit cards at Credit Karma.

This regulatory attack on BNPL firms has pushed several Fintech services to defend themselves and offer pre-emptive plans to reduce customer risk. Australia’s Afterpay has established precautionary measures, such as barring customers from using their services after missing a payment. The company says that 95% of its global transactions are paid on time and that late fees count for less than 14% of the company’s total income. As of now, officials are unclear how the push for BNPL regulation will affect the United States BNPL industry. This lack of clarity results from numerous factors; these companies don’t have bank charters, some don’t charge interest, and ultimately because certain e-commerce laws vary per state. 

The expanding world of buy now, pay later firmly demonstrates how far retail sellers will go to facilitate a comfortable payment structure for their customers, even if that creates potential for consumer debt, damaged credit scores, late charges, and even bank overdraft fees costing more than the deferred payments themselves. With the increased financial freedom BNPL firms provide, we must also keep in mind the importance of reading the fine print and maintaining responsible spending habits to ensure we aren’t causing our wallets and financial reputations unnecessary harm.