The allure of “Buy Now, Pay Later” (BNPL) schemes is undeniable. With the promise of instant gratification and the ability to defer payment, consumers are increasingly turning to this modern-day layaway. However, a recent Federal Reserve Bank of New York study suggests that BNPL may be a gateway drug into debt, particularly for those already on shaky financial ground.
The study, which draws on consumer survey data collected in October, reveals a stark divide in BNPL usage. While financially stable individuals may use BNPL as a convenient, interest-free loan for larger purchases, financially fragile consumers—those with credit scores below 620 or recent loan delinquencies—are more than three times as likely to use BNPL multiple times a year. For these individuals, BNPL functions similarly to credit cards, the very debt instrument it claims to replace.
The numbers are telling: nearly 60% of financially fragile BNPL consumers have used the service five or more times a year, with nearly 30% conducting 10 or more transactions annually. This is in stark contrast to the more financially stable users, where just over 20% used BNPL five or more times, and only 10% reached the 10-transaction mark. The financially fragile are also more likely to use BNPL for smaller, out-of-budget purchases under $250, potentially leading to a cycle of debt as they struggle to keep up with multiple installment payments.
The rise of BNPL is not without its benefits. Providers like Affirm, Klarna, and Afterpay offer an alternative to traditional credit, with the potential for lower fees and no interest on certain plans. They argue that BNPL is a safer option that encourages responsible spending and timely repayments. However, the lack of formal regulations and transparency raises concerns about the true cost of this convenience.
Critics point out that BNPL can make products seem cheaper than they are, enticing consumers to overspend. The absence of a central repository for monitoring BNPL debt means that household debt levels could be higher than reported. This “phantom debt” is particularly concerning as credit card delinquency rates have spiked to 8.5% of balances in recent years.
The Consumer Financial Protection Bureau (CFPB) has taken note, suggesting that BNPL loans should be governed by the Truth in Lending Act, which already regulates credit cards and other short-term loans. The call for better integration with existing credit reporting infrastructure is growing louder as the industry expands.
Despite the potential risks, the BNPL industry has seen a boom, particularly during the pandemic. The convenience of splitting payments into smaller installments has resonated with consumers, especially Gen Z, who have embraced BNPL with open arms. But as the industry grows, so does the scrutiny. New York Governor Kathy Hochul’s proposal for state-level BNPL regulation is a sign of the times, aiming to cap fees and ensure that companies evaluate users’ ability to repay loans more rigorously.
As we navigate the evolving landscape of consumer finance, it is clear that BNPL has carved out a significant niche. Yet, the New York Fed study serves as a cautionary tale. It underscores the need for more research to fully understand the implications of BNPL on consumer debt and financial health. For now, consumers would do well to approach BNPL with the same caution as any other form of credit, recognizing that the convenience it offers comes with strings attached.
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