An industry report
in October suggested that use of buy now, pay later (BNPL) is due to grow substantially from last year, when consumers paid for about 10 percent of Black Friday purchases with BNPL. Meanwhile, just like the packages, the research is piling up on this sometimes praised, sometimes disparaged method of spreading out the cost of purchases. Here's an update on US consumers and BNPL.
Underserved consumers could gain access to credit. The New York Fed, using data from the Survey of Consumer Expectations, found "BNPL loans appear particularly attractive to those with unmet credit needs and limited credit access." About one-third of BNPL users either had a credit score of less than 620, reported having a credit application rejected, or were delinquent on a loan over the past year.
Consumers could borrow less expensively. Consumers who pay on time can borrow interest free, which may be especially important to consumers with lower credit scores. According to a report from the Consumer Financial Protection Bureau, BNPL borrowers who are revolving on at least one credit card "who have below-prime creditworthiness would face an alternative interest rate approximately between 19-23 percent if they made the same purchase on their credit card."
Most consumers say they pay BNPL on time. Responding to the 2022 Survey of Household Economics and Decisionmaking, 83 percent of people who used BNPL had paid on time in the past 12 months. The top reasons for using BNPL were wanting to spread out payments, convenience, avoiding interest payments, and "only way I could afford it."
BNPL appears not to affect consumers' credit profile in the short term. Using anonymized survey and credit report data, a paper from the Philadelphia Fed compares the trajectories of credit bureau variables of BNPL users and nonusers in 2020 and 2021 and finds "the only statistically and economically significant differences were in credit applications."
Consumers are holding more installment debt. The Fed's 2022 Survey of Consumer Finances, released in October, found in 2022 that 18.5 percent of families held other installment loans (the category excludes auto and education loans), up 8 percentage points from 2019, and that "the growing popularity of BNPL explains nearly all the growth in installment loan holdings." Seven percent of families reported a balance on a BNPL plan.
Consumers could overspend. An experiment at an e-commerce company found a 20 percent increase in spending when BNPL was offered. Supporting this, an examination of the transaction-level data of BNPL users finds "a permanent increase in total spending of around $60 per week,...concentrated in retail spending."
BNPL debt may not be paid off in six weeks. A finding that UK consumers were charging BNPL payments to their credit cards raised concerns about a "debt spiral"—that is, "transforming a 0% interest BNPL debt that amortizes over a few weeks or months into credit card debt: a product that typically incurs 20% interest rates and has decades-long amortization schedules."
I acknowledge the "on the one hand, on the other hand" aspect of BNPL. Taken together, however, the use of this lending mostly for retail purchases, its role in the increase in household use of installment debt, and the concentration of BNPL loans among people with lower credit scores make me feel Grinchy about BNPL this holiday season. How about you? Ready to hand over the lump of coal?
By Claire Greene, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed