In our 2021 and 2022 blogging about buy now, pay later (BNPL), we have told an on-the-one-hand, on-the-other-hand story.
On the one hand:
- Interest-free loans are a bargain that help consumers spread out the costs of large-dollar purchases.
- BNPL is a low-cost substitute for credit card debt.
- Consumers without credit cards or without a credit history can borrow to smooth out ups and downs in income.
On the other hand:
- BNPL encourages consumers to make purchases they may not be able to afford in the long run.
- BNPL inspires consumers to buy more than they otherwise might.
- Consumers may incur late fees, and their credit rating may be affected.
Two papers, each analyzing large data sets of consumer transactions, add to this weighing up by finding a relationship between use of BNPL and incurring overdraft fees. These papers compare pools of consumers who have used BNPL to pools of consumers with similar characteristics who have not used BNPL.
- "Buy Now Pay (Pain?) Later
" finds that consumers have increased likelihood of overdraft fees after a first BNPL purchase and also are more likely to experience increases in credit card interest and fees.
- "Buy Now, Pay Later Credit: User Characteristics and Effects on Spending Patterns" reports that consumers who are more likely to incur overdraft fees are more likely to use BNPL.
Both papers find that total spending increases after an individual starts using BNPL.
Neither paper can establish, however, which comes first: the choice to use BNPL or the tendency to overdraft. As deHaan and coauthors write, "the results cannot differentiate between a causal effect of BNPL versus consumers experiencing a coinciding shock (e.g., a layoff) that causes both BNPL adoption and declines in financial health."
For a pay-in-four purchase, payments are made at the time of purchase and then automatically over the next six weeks. The CFPB has reported 
that nine in 10 BNPL payments are made with a debit card. Automatic debit payments imply that the harmful effects and the full costs of BNPL can occur at not only the BNPL lender but also at the customer's financial institution, where overdrafting could occur. This makes it difficult for those effects to be fully quantified. These findings on overdrafting pose a challenge for consumer protection and consumer education.
These papers add to our understanding of consumer finance and consumer decision-making. I encourage you to read them.
By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed