Q&A: How Buy Now, Pay Later Affects Financial Health


November 16, 2022

Buy it now, pay later spending is expected to reach $1 trillion globally by 2025, but little is known about its effects.Pixabay

“Buy Now Pay Later” platforms, such as Afterpay and Affirm, provide consumers with near-instant access to credit for retail purchases without a credit check. Whereas BNPL spending is expected to reach $1 trillion worldwide by 2025, little is known about its effects.

BNPL, which usually appears as an option during checkout on a retailer’s website, most often requires an upfront payment followed by three payments every two weeks. Although there are no fees if payments are made on time, missed payments may incur late fees from the BNPL provider and overdraft fees from the customer’s bank.

Total BNPL loans issued by the largest U.S. providers tripled in a single year, from $8.3 billion in 2020 to $24.2 billion in 2021. BNPL can benefit consumers without credit or replace high-rate credit cards or payday loans, but it could also allow customers to overspend and face financial consequences.

Previous surveys show that 70% of users say they spend more with BNPL than they otherwise would, 42% have missed payments, and 25% signed up for BNPL to avoid a difficult investigation, which can impact the a person’s credit score and stay on a credit report for up to two years. Soft checks do not affect credit scores.

Ed de Haan, an associate professor of accounting at the University of Washington’s Foster School of Business, has studied BNPL’s impact on financial health. His to research finds that compared to non-users, BNPL users faced rapid increases in bank overdraft fees and credit card interest and fees.

Ahead of the biggest retail spending season of the year, UW News sat down with deHaan to learn more about BNPL.

What are the risks involved with BNPL?

Ed de Haan: Fintech companies are doing amazing things and coming up with all kinds of products that could improve our lives and make us happier and better off. But there are also risks, especially when for-profit companies begin to enter the everyday economic spaces of households.

Here we have an innovation, Buy Now Pay Later, which, due to certain peculiarities of the regulatory system, does not fall under the existing regulations that we have for products such as credit cards. Therefore, it is a kind of carte blanche. It is not a product provided for by the financial regulatory system. What we’re seeing is that, in its current version, many consumers are adopting BNPL who don’t really have the financial literacy or access to resources to understand what they’re using, and they’re getting into trouble financial.

How can research contribute to the future of the BNPL as it continues to grow in popularity?

ED: It’s no surprise that some people have been concerned about BNPL’s effect on users for a number of reasons. We’ve seen time and time again that when we start giving easy credit to consumers, a lot of people use it very well. But there are a significant number of users who find themselves in financial difficulties. We have seen it with mortgages. We have seen this for credit cards. I recently taught my students a case about Sears credit cards in the 1990s and how the company got into a lot of trouble because of predatory lending and then unethical debt collection practices. We have plenty of evidence that this happens repeatedly. BNPL is just another version of easy credit, and we suspect it’s hurting some people.

Regulators are very clearly concerned about this because this product falls through the cracks of existing regulations. I think if anyone had anticipated BNPL it would have already been regulated. The current debate in the United States and around the world by regulators is not so much whether anything should be done to regulate BNPL, but rather how far those regulations should go.

Our analyzes point to fairly sharp and sudden drops in leading indicators of financial health for people who adopt BNPL. We can’t say anything in general about whether these people on the net are better off or worse off. It’s very difficult. For example, if they use this credit to pay for formula milk, they might be better off overall. But certainly BNPL seems to have all the leading indicators of a financial product that could get people in trouble.


To reach deHaan for more information, contact Lauren Kirschman at lkirsc@uw.edu.

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