The growth of point-of-sale installment payment options, often known as buy now pay later (BNPL), have offered consumers an alternative to credit cards, providing them flexibility of breaking up payments into smaller amounts over time so they don’t need all the cash for a purchase. Theoretically, consumers avoid interest on both the amount that’s due and paying the full purchase amount or being charged a high rate of interest with credit cards. While BNPL may seem like a low-risk alternative, the reality is much different for low-wealth consumers, who make up the majority of BNPL customers.
According to the CFPB’s 2023 Making Ends Meet Survey, the profile of a typical BNPL consumer is “much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, and use high-interest financial services such as payday, pawn and overdraft compared to non-BNPL borrowers.” Alarmingly, consumers are not only using BNPL for discretionary items but also increasingly for necessities like groceries.
The risks of BNPL have not been fully realized but many consumer advocates are calling for stronger and clearer regulation. The product itself is not terrible. In fact, the use of alternative data points to support underwriting is innovative and could be used for good – like helping people consolidate heavy debt loads as opposed to increasing it. Unfortunately, BNPL marketing expansion continues to charge forward on a different path – facilitating purchases that help people feel good about themselves. That’s the subtext. It’s a symptom of our society where people are using consumption therapy to numb themselves of everything happening around us.
In December 2023, the Office of the Comptroller of the Currency (OCC) issued a bulletin to assist banks in effectively managing risks associated with BNPL loans and offering the product in a safe and responsible manner. As consumer debt persists to unfathomable record levels and delinquencies continue to rise, we hope to see progress made for the better in 2024.