Analysts warn consumers on 'Buy Now, Pay Later' for daily spending


The popularity of Buy Now, Pay Later (BNPL) has been soaring among consumers. In the past, people mostly utilized it to spread out the cost of more expensive purchases. However, as the costs of living expenses get higher, people now use them to fund their daily spending.

Economists and advocates for consumers are concerned about this shift because of the lack of regulation surrounding BNPL. The Federal Reserve monitors other forms of household debts, such as credit card use and automobile loans, but not BNPL.

Inflation causes people to have “no wiggle room” for basic necessities. Linda Ramirez, a single mother from a small town in South Texas and a regular BNPL user, said that she doesn’t want to rely on BNPL “forever”. Still, she believed that it is a better alternative than using a credit card or taking a loan.

The current estimate for BNPL transactions is US$100 billion per year. That amount could grow from US$1 trillion to US$4 trillion per year only in a few years. These transactions are accumulated from many platforms, such as Affirm and Zip.

BNPL platforms usually enable customers to divide a purchase into several installments. Consumers can register a new account for every purchase or use the same account as long as they make payments on time.

Typically, the loans have zero to very low interests and no background credit check. The BNPL platforms make income by charging merchants instead. Kansas City Federal Reserve found that charges may vary from 1.5% to 7% per transaction. Merchants are willing to shoulder these charges because BNPL has been proven to boost sales.

Big warning in BNPL use

BNPL doesn’t provide public reports of transaction volume, debt levels of its users, delinquency rates, charges, and interest rates. It leads to a situation where the government can’t precisely calculate the amount of household debts Americans are getting into.

Matt Schulz, an analyst for LendingTree, said that “there's a big hole in our understanding of people's financial situations, if you don't include Buy Now, Pay Later”. Schulz further explained that it can affect other parties such as credit bureaus, credit scoring institutions, and lenders.

The biggest downside of using BNPL for consumers is getting into debt easily without full awareness. Users may think that they pay almost nothing for goods or services that they purchase with BNPL. Terri R. Bradford, a researcher from Kansas City Federal Reserve, also mentioned that “the opportunity to stack your debt by using multiple Buy Now, Pay Later loans through multiple service providers is one of the biggest risks”.

Young people and those who don’t have steady paychecks are especially vulnerable to the threat of BNPL. These people are at risk of buying more than what they are capable of due to marketing or personal urges. They can potentially ruin their credit scores for years to come if they aren’t careful.

Meanwhile, BNPL platforms simply stated that they provide more sustainable and safe financial services compared to traditional credit systems. Libor Michalek of Affirm argued that the success of their business depends on “the consumers' long-term success and their ability to repay”.

For now, these vulnerable groups use BNPL to balance out their financial situation from month to month. The credit system allows them to “make money go a little further” and fulfill their needs.