When Leondra Garrett wanted to stock up on three new pairs of shoes early last year, the North Carolina resident split a $161 online purchase into four installments through a “buy now, pay later” service, in what seemed like a convenient deal.
Now, she admits she should have read the small print about missed payments.
When the buy now, pay later (BNPL) provider tried to withdraw a payment from Garrett’s bank account a few months later, she didn’t have enough funds to cover it. Soon after, the 42-year-old was charged $40 in penalties and her credit score dropped 10 points to 650, a reading generally classified as ‘fair’.
“It’s important for consumers to always read the fine print and we don’t always do it,” said Garrett, a community organizer from Charlotte.
So-called buy now, pay later services – offered by providers such as Affirm Holdings Inc, Klarna, Afterpay Ltd and PayPal Holding Inc’s “Pay In 4” – have blossomed across retail websites during the coronavirus pandemic as people have turned more to shopping online.
Yet the ease with which many shoppers can make purchases is worrying some regulators around the world, who fear consumers may be spending more than they can afford.
Nearly 40 percent of US consumers who used “buy now, pay later” have missed more than one payment, and 72 percent of those saw their credit score decline, according to a study by Credit Karma, which offers customers credit score checking for free.
The study, conducted for Reuters, surveyed 1,038 adult consumers in the United States to gauge interest in “buy now, pay later” and found 42 percent of respondents had used the service before.
“The percentage of consumers missing payments is remarkable and not as low as you would expect,” said Gannesh Bharadhwaj, general manager for credit cards at Credit Karma.
“When you make something so convenient, people may not be really thinking, ‘Do I have the budget? Can I afford this payment?’ You get more of that impulse-shopping behavior that leads to realizing they may not be able to make the payment.”
A lower credit score signals to lenders that a consumer may be higher risk and makes it harder for the consumer to borrow, whether to secure a mortgage or a new credit card. It can even make it more difficult for a consumer to set up utility accounts or find housing, as landlords will generally conduct credit score checks before renting out apartments.
Management consultants Oliver Wyman estimate BNPL firms facilitated between $20 billion-25 billion in transactions in the United States last year, although analyst estimates on the size of the BNPL industry vary because it is relatively new and some of the companies are private. Individually, they described explosive growth last year as their services became more prevalent.
Australia-based Afterpay said it saw active US customers more than double to 6.5 million in the fiscal year ended June 30, 2020, and its sales more than tripled in the July-September quarter from a year earlier.
Over half of Afterpay’s customers in the United States are millennials, aged 25 to 40 yearsold, it said.
BNPL models vary, with some companies earning most profits by collecting fees from merchants at the point of sale, and others charging interest and late fees to consumers. They say their services help merchants to boost sales and consumers to buy things they need, and cause less financial damage than credit cards because of restrictions they impose.
Nonetheless, regulators in Britain and Australia are reviewing or tightening rules around the industry. BNPL service providers, classified as fintech companies, should be subject to stricter rules more like banks, some regulators say.
