Examining buy now, pay later, the trendy financing craze that’s teaching Millennials important lessons about debt—and fine print.
Want to go on a vacation but worried it’ll leave you short on cash? Well, I’ve got the solution for you: buy now, pay later.
It’ll transform that multi-thousand-dollar trip into just a couple hundred dollars a month (for the rest of your life). Unless, of course, you miss a payment. Then that’ll cost you much, much more than the trip itself.
What Is Buy Now, Pay Later?
Buy now, pay later (BNPL) is a short-term financing solution that allows consumers to make purchases without upfront payments. Rather, payments are made over time in specified installments, like credit. Popular providers include Affirm, Afterpay, Klarna, Sezzle, and many others.
But BNPL isn’t credit. One big difference is that consumers incur no interest with BNPL. That’s because the retailer receives full payment at the time of purchase from the BNPL provider who is then responsible for charging the customer according to schedule. The merchant is never affected by the customer’s repayment plan.
So how do these BNPL providers make money? They have several revenue streams, but the most lucrative is the merchant discount rate. To use a BNPL system, retailers must pay BNPL providers a significant fee. Many merchants are willing to pay, though, because the BNPL system encourages consumers to make big purchases that otherwise would have given them pause.
Over the past 2 years, BNPL services have exploded; for many Americans, the onset of the pandemic meant pinching pennies to make ends meet. BNPL seemed like the perfect solution to get them through unprecedented times. And others who wanted to redo their homes to accommodate workspaces and comfy living rooms looked toward BNPL services to make hefty furniture purchases a little less daunting. Because of the pandemic, the success of popular BNPL solutions has soared.
Who’s Interested In BNPL?
In 2020 alone, Americans spent an estimated $25 billion using deferred payment systems. And there’s no sign of it slowing down: about 60% of consumers say they’re planning to use Point of Sale financing over the next six to 12 months.
BNPL solutions appeal most to Millennial and Gen Z consumers who lack the necessary funds to make big purchases. Breaking up costs into smaller installments may seem less threatening to these credit-wary groups of consumers. Without the threat of interest and no credit checks, it’s no wonder BNPL use skyrocketed up to 41% in the past 3 years!
However tempting this seemingly perfect solution may be, it doesn’t come without consequence. The fine print on most BNPL provider websites states that missed payments can negatively affect credit scores, which could harm chances of being approved for new credit. BNPL providers can also begin charging interest once a payment is late.
That should be a red flag for a third of BNPL users, who consider their financial health to be “dire” or “struggling”. These are the very people who can’t afford to miss a payment. But alas, 40% of consumers who have used BNPL services have fallen behind on one or more payments.
A Familiar Tune
The whole draw of BNPL services is to lessen financial burden temporarily. But the danger lies in the immediacy of those purchases outside consumers’ comfort levels without proving they have the funds to do so.
Based on history, we know this behavior has consequences. Remember conspicuous consumption of the 1920s? It was facilitated by the then-new idea of buy now, pay later. BNPL fueled bad spending habits and was ultimately one of the factors that led to the Great Depression:
“Buy now, pay later became the credo of many middle class Americans of the roaring twenties. For the single-income family, all these new conveniences were impossible to afford at once. But retailers wanted the consumer to have it all. Department stores opened up generous lines of credit and installment plans were offered to buyers who couldn’t afford the lump sum, but could afford twelve easy payments. Consumer debt more than doubled between 1920 and 1930.”
That’s not to say the 2020’s will necessarily result in the same fate as the century prior, but the point remains salient: this system has young Americans—many of whom are already in the throes of student loans—skating on very thin ice.
And as of right now, the BNPL space is entirely unregulated. The Consumer Financial Protection Bureau has taken no action to protect businesses, banks, or consumers beyond releasing a statement telling all to proceed with caution.
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