ETA Expert Insights: Buy Now, Pay Later

By the ETA Retail Technology Committee

Buy Now, Pay Later (BNPL) is an increasingly popular form of short-term financing that allows consumers to take the merchandise home and​ ​pay for ​​it in installments over a short period. Shoppers generally are promised​ no interest or fees – as long as payments are made on time. ​​BNPL is integrated into the online or in-store checkout process and offered by a third party who partners with the merchant or payment services provider, allowing for the fulfillment of goods or services just as would regularly occur by paying in full. Klarna, Affirm, and Afterpay (Block) are just three of the leading non-bank BNPL providers in the market today. Many banks and networks offer BNPL services as well.

The continuing expansion of e-commerce, along with younger consumers’ desire to manage expenses ​and their preference for seamless payments, have driven the growth of BNPL options. With the holiday season and current economic conditions, BNPL usage is anticipated to grow, as it is an ​affordable​​​ and convenient option to purchase ​​​goods​ and services.​

BNPL is a small portion of the US payments system, totaling 0.4% of total retail transactions in 2021. But, US spending has rapidly increased – up 230% since the start of 2020.

​In a 2022 survey by Ascent, 50% of consumers stated they had used a BNPL service. According to Juniper Research, 360 million consumers used BNPL in 2022, which is expected to increase by over 900 million by 2027. BNPL features like 0% interest and often no fees​​ make it a competitive payment option​​.​ According to a 2022 Morning Consult poll, adults reported that zero to low-interest rates were the essential feature when selecting a BNPL payment option. According to Afterpay, consumers saved up to $459 million in fees by purchasing with the BNPL company in 2021.

​Its popularity has led to more providers entering the market, new brand partnerships, and enticing consumer benefits.

Regulatory Concerns Around BNPL
Lawmakers and regulators such as the Consumer Financial Protection Bureau (CFPB) have raised concerns about BNPL products. While consumers may view BNPL products as comparable alternatives to more traditional credit products, the CFPB has warned consumers of potentially inconsistent disclosures and protections. Potential red flags stated by the CFPB include hidden fees, lack of transparency, and not-as-strong underwriting by the BNPL provider on the borrower’s ability to repay. In particular, a BNPL provider may lack visibility into a borrower’s other BNPL liabilities with other providers. Therefore, a consumer with multiple outstanding BNPLs with merchants may have a large amount of total outstanding liability with different payment dates throughout the month that require close monitoring to avoid the risk of default.

The CFPB has vowed to regulate BNPL products with similar oversight and regulation as credit cards.  Accordingly, BNPL providers should be prepared to deal with and manage​, or at least understand, that BNPL products are likely to involve​ regulatory risk​s​ akin to the offering of credit cards.  ​​​

​​​It’s important to note that the CFPB’s report on non-bank BNPL states that BNPL delivers clear consumer benefits, from lower costs to a simple repayment structure. According to the report, BNPL “imposes significantly lower direct financial costs on consumers than legacy credit products.” The CFPB also found that “BNPL is typically a no-interest product…fees are relatively low in absolute terms and do not compound as does credit card interest.”​​

​​​​​The CFPB’s report mirrors polling conducted by Morning Consult, finding that BNPL helps consumers lead healthier financial lives. According to that poll, 82% of BNPL users trust the service, and 79% have a positive experience. Zero-to-low interest rates were the most important feature in the survey when selecting a BNPL payment option.​​

​​​​​BNPL Response to Regulatory Concerns​​​​

• ​​​​​Complying with applicable consumer protection laws BNPL providers “are subject to…federal and state oversight.” That includes applicable lending and licensure laws enforced by the CFPB, Federal Trade Commission, and state regulators. All BNPL products are subject to consumer protection laws and regulations, including anti-money laundering, fair lending, credit reporting, debt collection, privacy, treatment, and electronic fund transfers.​​ 

• Promoting consumer financial health and well-being The BNPL’s business model depends on consumer success.​​BNPL gives consumers an alternative payment option with zero-to-low interest. If a consumer misses a payment, BNPL restricts the use of their services until missed payments are fulfilled to prevent debt accumulation.
  The Financial Health Network found that most Americans were only encouraged to spend what they had initially planned if BNPL was offered as a payment option. Researchers at M.I.T have found that credit cards can increase a “willingness-to-pay” by anywhere from 50 to 200%. Morning Consult found that 77% of adults reported using multiple BNPL companies at some point and said it made it easier to pay for their purchases.​​

• Limited, one-time late fees For those BNPLs that charge late fees, they only charge a one-time, capped late fee and pursue no further recourse. According to the Financial Health Network, 96% of BNPL users had no difficulty making payments, and only 4% were late or missed one or more payments. In contrast, consumers who fall behind on credit card payments face compounding interest and late charges; 26% of credit card users paid late fees in 2019. 

• Ensuring transparency Nearly all consumers understand the terms and conditions of BNPL. The Financial Health Network found that 99%t of BNPL users understood the terms and conditions, and Morning Consult found that 94% of users understood the terms and conditions of the service.​​ 

• Safeguarding consumer data BNPL companies believe that consumers are entitled to high levels of data stewardship and privacy and do not sell consumer data to third parties. Additionally, they think of credit reporting innovation that prioritizes the best consumer outcomes. BNPL companies are in active conversations with credit reporting agencies to modernize their scoring models and ensure that prompt repayment of BNPL products does not negatively impact credit scores. ​​​​​​​​​​​​ ​​​​​     ​

​​​​​Conclusion
​​​​​​​​As consumers’ desire to ​better ​manage their cash flow, as well as ​convenience​ factors,​ continue to rise along with inflation and the cost of goods, it is anticipated that BNPL will continue to grow in popularity. The ease for merchants to offer BNPL and the adoption rate by brick-and-mortar stores will also impact growth. It remains to be seen whether regulations will stifle its popularity.​ Like with any financial product, it will be necessary for consumers to manage their BNPL usage to avoid penalties and get all that the product has to offer.