Consumer credit and Buy Now Pay Later

Buy Now Pay Later (BNPL) has been described as a way to offer more inclusive and affordable consumer credit. But some fear that this easily accessible–and less regulated–credit can lead vulnerable consumers into debt. With both market and regulation developing fast the future is not yet clear. 

We recently had the opportunity to work with Filene Research Institute on a research brief analysing buy-now-pay-later solutions and their progress in the USA.  It shows that some consumers see this market as helping them to manage their spending, but also that low-income groups with volatile income are more likely to use BNPL services. 

This is a fast-changing market, and it is not our purpose here to update the statistics or to comment on the regulatory initiatives to reign it in. Instead, to understand BNPL today we need to look back at its history. Merchant based consumer credit is an old phenomenon. Payment in instalments of more expensive goods like furniture, electronics and cars has long been possible, often offered by the merchant in partnership with specialized financial providers. 

In some countries, including the United States, United Kingdom and Australia, there is also a history of “layaway” services, which permitted customers to choose a product in a store and ask the store to physically “lay it away” for them. The credit card market, which brings together millions of consumers, merchants and card issuers, is the modern manifestation of this service. In many ways, BNPL services are a digitalized version of their physical, in-person precursors. 

BNPL is a good example of so-called “embedded finance” in which the financial solution is an invisible enabler in the total consumer experience. For consumers, this creates a seamless and integrated shopping experience. Most BNPL companies do not charge interest or fees, and so their service can seem attractive as “free” credit. However, with many BNPL companies, missed or late payments incur a “late fee” that can be quite high. 

A user of the Facebook group “Beautiful Girls Thrifting” asks fellow members where she can use Klarna.

While Klarna started their BNPL-solution as an online phenomenon, it is increasingly also available at physical Point of Sale, usually via QR codes. With a typical BNPL service, a payment provider such as Klarna or Afterpay provides an app that connects with a number of merchants. Consumers shopping in store, online on the merchant website, or in the BNPL provider app will be met with an offer to pay using the app. 

The most common option is to “Pay in 4”, in which the consumer generally pays the first instalment at the time of shopping and the further three installments after 2, 4 and 6 weeks. There are, however, many models, and the possibilities are growing as fintechs, banks and card providers are changing their solutions to meet consumers' taste for seamless shopping.

BNPL has been particularly developed with young people in mind as they are more mobile in both shopping and finances. Many are likely to have thin or invisible credit profiles and do not carry a credit card. 

This does not, however, mean that BNPL is only relevant for the younger generation. A survey from March 2021 found that 56% of adults in the US had tried one of these services and half of non-users indicated they would be likely to  try BNPL within the next year. 

The survey further found that almost one third of people in the US who have used BNPL have also been late with at least one payment, and just over one third said that they are likely or very likely to incur a late payment within the next year.

As part of our study, we carried out digital ethnography of four different social media groups created by BNPL users. One of the first things we observed was that the vast majority of the groups’ members are women. Online customer groups provide mutual support groups for women who are trying to meet shopping goals and smooth consumption but are running into pain points. In the near absence of fast customer service, members turn to each other for help, often successfully. 

A member of the Facebook group AfterPay Craze vents her frustrations.

For example, this user reached out to others to complain when her credit limit dropped suddenly:

“Ok, so, can someone please help me……I use my Afterpay all the time and I have never missed a payment… I just opened the App and my Limit went from $1500 to $200!! Why?”

Others describe the pros and cons of the different BNPL services:

“I’m more of AfterPay and Sezzle combination. AfterPay is no money down. Sezzle allows Visa gift cards so you can shop anywhere. I have Klarna but I really don’t use it. The same with Zip . Klarna and Zip are only used for Amazon and that’s only until AfterPay brings Amazon back.”

This discussion of different solutions shows how  consumers vary in how they prefer to manage their finances. Some consumers see BNPL as a “way to smooth payments over time.” They feel that paying in instalments provides them with a better overview of their total spending as well as evening out payments to match income. This is easy to understand for more expensive purchases that are rare, and which customers might want/need a little sooner than savings allow.

We found that BNPL customers view services as being quite distinctive. They combine multiple ones to achieve their shopping and financial goals, and combine BNPL with other types of credit, such as credit cards. A customer might use one BNPL service over another because it gives them a higher credit limit, lets them buy a specific item like a gift card, or because they have technological issues with another BNPL service. 

This indicates that consumers strive to get the most out of available services. Our findings also indicate consumers fear running up debt and prefer inexpensive and transparent credit.

While some consumers need tools such as BNPL to smooth regular income and irregular expenses, other consumers need to do the opposite: smooth more volatile income streams with purchases. 

A growing group of people are precarious workers who are self-employed or who have gig jobs. In this case, consumer credit can help bridge dry spells in income. A recent study indicates that US consumers who used a BNPL service have lower income and more income volatility than those who held credit cards. 

The pain points that customers complain about are consistent. Many say that they lack insight into their credit limits with providers, and indeed that these sometimes change dramatically and inexplicably over short periods. Consumers also risk losing track of the amount of money they owe to different payment providers and end up over-indebted. For example, a Danish survey from 2022 of young people aged 18-30 finds that the use of BNPL is higher among people with other previous consumer debt, and that 25% regret their purchases later.

Customers also complain about issues with returning or exchanging items after purchase. It appears that the integration of credit into the shopping experience has not entirely solved this issue. The groups also discuss technical issues and help each other overcome them.

In most countries, including the EU, the UK and the US, efforts are being made to regulate BNPL services to protect consumers by creating transparency about price and to ensure an active credit assessment to avoid over indebtedness. We hope that this will support the development of a more efficient and inclusive market that takes account of both the many benefits BNPL provides to consumers and the potential risks. It is definitely a market to follow.