Buy Now, Pay Later (BNPL) checkouts like Affirm, Klarna, and AfterPay make up 3.6% of debit transactions.1 But is BNPL simply an upcycled layaway or are there other credit concerns to consider?
Unlike layaway, the buyer gets the item immediately upon making the first installment with Buy Now, Pay Later. BNPL is a revamped type of credit, offering zero interest for the first six months, no hidden fees, and most BNPL programs don’t even involve a soft credit pull, making it like a credit ghost. It conceptualizes credit without affecting credit scores. Buy now, pay later gives buyers access to credit to manage cash flow for emergencies or increased spending - without needing to apply for a loan. In a sense, BNPL can take the friction out of credit brokering.
The convenience and transparency are undeniably wins for consumers. But does this type of credit advance buyers’ financial wellbeing? Without the proper education and mindset around BNPL, buyers can get into some budgetary trouble, purchasing items they cannot truly afford. Research indicates that 18% of users do not make their payment on time and 5% do not make the payment at all.2 Unintentionally, BNPL could spur rolling credit.
The majority of this type of credit is brokered by fintechs so there is some concern about the future of lending for credit unions and community banks. Plus, the majority of fintechs are not FDIC-insured which raises potential fear of mimicking the Silicon Valley Bank Collapse, and they don’t report to the three main credit bureaus so users don’t make any credit score gains (or losses.)
Additionally, the CFPB recently uncovered malpractices in refund and dispute practices for BNPL and has not been hesitant to regulate this credit in the name of protecting borrowers.3
Disclosing the Fine Print
The CFPB is paying specific attention to how BNPL providers provide proper disclosures for products returned or disputed. In 2022, the CFPB noted that 13% of BNPL transactions were disputed or returned.4 Presumably, that percentage has increased proportionally with the widespread adoption of BNPL.
Similar to product refunds on vehicle protection products, the CFPB is and will continue to follow how BNPL impacts borrowers financial wellbeing over time.
Two years ago, the BNPL industry was predicted to exceed $1.2 trillion by this year.5 Even before year close, we know that 1 in 5 Americans used BNPL, which is up nearly 6% from last year, and each BNPL transaction is slightly north of $100.6 Does this amount indicate the overall credit health and financial wellbeing of Americans? You can bet your bottom (buy now, pay later) dollar that it does.
This shift represents both a challenge and an opportunity for financial institutions. While BNPL may reduce the demand for traditional lending, the shift also opens avenues for new revenue generation, such as interchange fees and deposit growth.
The Bottom Line
BNPL’s proliferation is only getting started. If your institution is concerned about the decline in traditional lending, it may be time to reassess how diverse your liquidity is and expand your deposit channels to stay competitive in this evolving market.
1https://pscu.com/insights/blogs/pscu-payments-index-january-2024-holiday-season-revealed-growth-in-buy-now-pay-later-bnpl-activity
2https://www.philadelphiafed.org/-/media/frbp/assets/consumer-finance/reports/bnpl-survey-insights.pdf
3https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-to-ensure-consumers-can-dispute-charges-and-obtain-refunds-on-buy-now-pay-later-loans/
4https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-to-ensure-consumers-can-dispute-charges-and-obtain-refunds-on-buy-now-pay-later-loans/
5https://pscu.com/insights/blogs/what-credit-unions-should-know-about-bnpl
6https://capitaloneshopping.com/research/buy-now-pay-later-statistics/