Warning: Consumers use “buy now, pay later” to cover their daily expenses

This worries economists and consumer advocates, who have little idea of ​​the erratic use of these services coupled with a lack of transparency Regulatory oversight, makes them wonder how much American debt really is.

While other household debt, such as credit card spending and auto loans, are recorded and tracked by the Federal Reserve, Buy Now, Pay Later (BNPL) data is not included because funding is typically provided by non-bank sources and is not yet reported extensively credit bureaus.

This means there is no publicly available database of BNPL-related consumer debt, transaction volumes, delinquency rates, and fees and interest charges.

“There’s no question that if you don’t factor in ‘buy now, pay later,’ there’s a huge hole in our understanding of people’s finances,” said Matt Schulz, chief credit analyst at LendingTree. “And that’s a problem for credit bureaus, credit bureaus and lenders.”

Red flags

From Affirm and Apple to PayPal and Zip, BNPL transactions are currently valued at at least $100 billion a year — a number that analysts say could grow to $1 trillion to $4 trillion within a few years.

These types of services split a purchase into four or more installments to be paid over a period of a few weeks or months. Customers can open a new account for each transaction or keep an account for their purchases as long as they make their payments on time. BNPL accounts are typically offered with no or minimal interest and often do not require a rigorous credit check.

To make money, BNPL providers charge traders between 1.5% and 7% of the transaction price, according to research by the Kansas City Federal Reserve. For some retailers, the cost is worth it, according to a study by RBC Capital Markets, which showed that online BNPL offers increase average ticket sales by 30% to 50% and increase the proportion of customers who ultimately make a purchase.
Despite its rapid growth, BNPL has raised red flags for economists, regulators and attorneys general. They have warned that because the services are not regulated as credit products, they have led to a Wild West-style market with varying terms and conditions and few checks and balances.

A key downside is the risk of getting into debt fairly easily without realizing it, said Terri R. Bradford, a research specialist in payments systems at the Kansas City Federal Reserve.

The installment process makes it seem like someone is paying virtually nothing for the goods or services they are purchasing, she said.

“So the possibility is that you’re thinking about everything you’re buying in those four installments, and as a result, you’re going to incur more debt than if you had to pay them in full all the time,” she said.

“The ability to stack your debt by using multiple buy-now-pay-later loans through multiple service providers is one of the biggest risks I see,” she added.

The big three credit bureaus have announced they will start including BNPL activity in credit reports, but they still have to rely on providers to get this information. Currently, some BNPL providers report when payments are missed or plans are paid out.

The Consumer Financial Protection Bureau launched an investigation into BNPL, raising concerns about unclear terms, potential data collection and the lack of other protections. The agency has collected information from BNPL providers and expects to publish its findings later this year.
But there is a concern that potential solutions may not come fast enough, said Marshall Lux, a Harvard Kennedy School research fellow who recently authored a study on “buy now, pay later.” These easy-to-use options are exploding as people’s financial health worsens — creating a perfect storm that will endanger some of America’s most vulnerable, he said.

“With everything that’s going on in the economy, this isn’t getting the attention it deserves,” he said. “Meanwhile, young people and the unbanked are getting hurt badly, potentially ruining their creditworthiness for years to come.”

Typical BNPL consumers are younger — primarily Gen Z and Millennials — and have a credit history that is considered substandard, Lux found, citing research from TransUnion. According to Lux and TransUnion’s survey, they gravitate to the services to avoid credit card interest, but also to make purchases that don’t fit their budget.

“People are buying more than they should and they admit it. Whether it’s aggressive marketing, whether it’s impulse buying, whether it’s believing I’ll have more tomorrow, they use a lot of them [services],” he said.

The biggest red flag for Lux, a former Chase chief risk officer, is what people are buying with these services and how customers can create “a spinning cycle of ever-increasing debt.”

“They buy cleaning supplies, they buy socks, they buy sneakers, they buy everyday household items,” he said. “When people start turning everyday purchases like groceries, you know there’s a problem.”

means for the purpose

BNPL providers say they view their offerings as a safer and more sustainable option to traditional lines of credit.

“The product and business are ultimately built entirely on the premise of consumers’ long-term success and ability to repay,” said Libor Michalek, Affirm’s president of technology, risk and operations. “And if they can’t, we share the negative result.”

In a statement emailed in response to questions from CNN Business, a Klarna spokesperson wrote:

“Our interest-free products are designed to keep people out of debt. We conduct rigorous eligibility checks on every purchase, constantly review our lending criteria and spending limits, and restrict use of our services until missed payments are met.”

A Klarna app icon on a mobile phone in London, United Kingdom on Thursday January 21, 2021.

Some consumers use BNPL services hoping to stick to a budget or balance their finances from month to month, said Charlotte Principato, a financial services analyst at Morning Consult.

“What it signals to me is that this is a means to an end,” she said. “It’s a well-considered choice of making money to go that little bit further and still get the goals you want and still get the things you need.”

That’s especially true for the multitude of Americans who don’t have a steady month-to-month paycheck, she said.

“They have to work with imperfect data on what their monthly paycheck is going to be and still manage to cover more fixed expenses and still make the voluntary purchases that anyone is allowed to make,” she said.

No leeway

For people like Linda Ramirez, historically high inflation has left even the basics running out of room to maneuver.

The single mom, who lives in a small town in south Texas, has to commute 90 minutes every day. At home she has three adolescents.

“I feel like it’s doubled, everything is doubled [in price]’ Ramirez said. “So I pay $50 to $55 to fill up my vehicle; and groceries, same. Here in Texas, a carton of eggs has doubled from $3 or $4 to $7 or $8 depending on where you go.”

To conserve her budget, she uses BNPL for discretionary purchases and also for some everyday necessities, including a recent $400 grocery bill.

For Ramirez, spreading the cost through a buy now, pay later app was a better alternative than charging a credit card, taking out a loan, or skipping a utility bill. If all payments are made on time, most BNPL services do not charge interest or late fees.

“I don’t want to do this forever, but it’s good to know I can use this again and again if I ever find myself stuck in a dead end future,” she said.

CNN Video’s Zach Wasser contributed to this report.

Correction: A previous version of this article contained incorrect estimates of the size of the BNPL industry. Transactions were forecast to be at least $100 billion in 2021.