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A new way to finance or a new way to go into debt?

Last week we talked about Buy Now Pay Later (BNPL) services and why they are an attractive option for many consumers. This week we’ll discuss some of the potential pitfalls consumers should know about before deciding to use these services.

Lack of regulations

BNPL is new enough that the Consumer Financial Protection Bureau (CFPB) is still actively monitoring the market and determining needed regulations to ensure that BNPL is ‘fair, transparent, and competitive.’

The CFPB noted these services aren’t just lenders but also advertisers and virtual mall operators that collect – and share – a lot of data on their users. Taking a page out of social media companies’ playbook, BNPL providers maintain detailed purchasing profiles on consumers that regular credit card companies aren’t able to compile. With the extra information on their customers, BNPL providers are able to target individuals that are most like to use their services, including those already struggling to pay their bills.

Increasing spending

BNPL services charge more to merchants than traditional credit cards, sometimes two to three times more. So why are so many retailers interested? It may be that they believe consumers are more willing to complete their online purchase with a payment plan. Afterpay’s website states that shoppers who use Afterpay spend 40% more and shop 50% more frequently than those who don’t use their service.

The accuracy of these statistics is unclear as the report it comes from was commissioned by Afterpay. However, studies have shown that consumers tend to spend more when using credit cards than they would with cash, so there isn’t a good reason to believe that BNPL plans would be much different in that respect.

This could lead to consumers getting into debt faster than they realize. And those who are more susceptible to using BNPL are those that can’t make purchases with a credit card.

Negatively impacting credit

Last week we noted that many services allow customers to open a BNPL plan without impacting their credit, but some services do still report to the credit bureaus. This includes some of the largest like Affirm. CNBC quoted one Affirm reviewer recommending caution to fellow customers: “Each loan, no matter how large or small, will count as a separate account on your Experian credit report….Experian’s average account age calculation on my credit file dropped from 11 years to about 2 years. Beware.”

Just like a missing credit card payment, if consumers are unable to make one of their payments their credit will be negatively affected. A survey by Credit Karma found that a third of BNPL consumers are behind on payments and a negative credit score can make it more difficult for those consumers to use finance options other than BNPL in the future.

Additionally, it is just as important to remember there is no guarantee that BNPL will help build consumers’ credit either, especially when using services that don’t report to credit bureaus.

No protections against fraud and financial abuse

BNPL doesn’t provide consumers with the same level of protection that credit cards do in case of lost shipments, return policies, defective goods, and – even more importantly – fraud.

With new technology comes new ways for scammers to use it to take advantage of others. However, as these companies work independently, there isn’t much data on how the industry as a whole is impacted and researchers are left to rely on anecdotal evidence to measure changes.

In addition to fraud, a recent story in The Guardian reported on the ways BNPL has been used to commit financial abuse due to the sheer ease of opening accounts.

These are just some of the situations readers should be aware of so that they can make informed financial decisions.


  • Julianne Culey

    Julianne is the Assistant Director of the Reynolds Center with expertise in marketing and communications and holds a master's in Sociology from Arizona State University.

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