Over the past several years, “buy now, pay later” has emerged as a popular alternative to credit cards, and its adoption has only skyrocketed amid the COVID-19 health crisis. But while some insiders are enthusiastic about such services, others have warned of their potential to lead consumers into a debt spiral.
Just a little over a week ago, the United Kingdom’s Treasury announced that the BNPL industry will face regulations under the Financial Conduct Authority, which operates independently of the British government and is the conduct regulator for certain financial services firms and financial markets in the U.K. The decision followed the release of a 68-page FCA report that suggested more than one in 10 customers of a major bank using the service were already in arrears.
“‘Buy now, pay later’ can be a helpful way to manage your finances, but it’s important that consumers are protected as these agreements become more popular,” economic secretary to the U.K. Treasury John Glen said in a statement. “By stepping in and regulating, we’re making sure people are treated fairly and only offered agreements they can afford — the same protections you’d expect with other loans.”
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According to data from the FCA, the BNPL market in the U.K. is worth 2.7 billion pounds (or nearly $3.7 billion at current exchange), with roughly five million Britons using the service to do their shopping since the coronavirus pandemic touched down in Europe.
In the United States, companies like Afterpay, Klarna, Quadpay and Sezzle have gained traction with “buy now, pay later,” which allows customers to make purchases via installment plans over the course of weeks or even months, rather than immediate in-full payments. (Klarna, Clearpay and Paypal are among the BNPL service providers with a presence in the U.K. that are now subject to new regulatory oversight.) For consumers living paycheck to paycheck, it can help mitigate buying stress. For retailers, it can boost full-price selling and temper the need to significantly discount merchandise amid a pullback in discretionary spending.
However, according to Sumeet Gupta, digital transformation expert and senior managing director at U.S-based FTI Consulting, there are fundamental risks associated with consumers’ use of BNPL. First, consumers could face higher delinquency rates than other loan services. What’s more, BNPL lending standards may be looser than those of other loan instruments; without a hard credit check, it may be easier to convince unqualified consumers that they can incur debt that isn’t in fact in their best interest.
And perhaps the biggest challenge, according to Gupta, is centered around a broader lack of disclaimers surrounding BNPL. “Many retailers don’t explain how these fees are applied, or talk about the fact that if consumers miss payments, that could have an impact on their credit scores,” he explained. “Those things are problematic from a regulation standpoint … [and] there has been some chatter or sense that this service will be looked into [by regulators in the U.S. as well].”
A study by Credit Karma that was commissioned by Reuters found that nearly 40% of U.S. consumers who used a BNPL service have missed more than one payment — and 72% saw their credit scores decline. (In the study, which surveyed 1,038 adults, the personal finance firm reported that 42% of respondents had used BNPL in the past.)
As for whether BNPL companies should be concerned about potential regulations, experts say it’s too early to tell. However, for what it’s worth, insiders have indicated BNPL providers offer a much-needed service in the pandemic era. For struggling retailers, such services could help lower cart abandonment rates, which ultimately increases sales. BNPL can also motivate consumers to take the plunge on aspirational purchases once they realize they don’t have to pay a lump sum upfront. However, explained Aptos VP of retail innovation Nikki Baird, the service shouldn’t be seen as a long-term solution — for retailers, for consumers and for the economy as a whole.
“BNPL vendors are serving a needed purpose right now in a very challenging time, but their long-term prospects hopefully are not nearly as good as they are right now,” she said. “If we need them long term, then it implies that our economy has not recovered and retail can only be sustained through borrowing against future income. That would be very bad, indeed.”
