Buy now, pain later?

There can be a fine line between a user-friendly provider of credit and loan sharks. As ‘buy now, pay later’ apps proliferate, regulators have a crucial role to get the balance right
Buy now, pay later (BNPL) apps, which make it easy to make large purchases, free of interest if you make repayments on time, have been dubbed ‘buy now, pain later’, given the ease of use and lack of restrictions on an individual using multiple BNPL services and getting into debt.

Is the concern overblown, and do BNPL services help with financial inclusion? Findings are surprisingly mixed.

The concept behind the modern apps is not new. For many decades it has been possible to take out an interest-free loan for large purchases – in furniture retail, for example. What digital technology offers is ease and swiftness of transaction. Regulators are concerned that the frictionless nature of the exchanges, and the freedom to borrow from multiple providers, risk serious indebtedness for financially vulnerable citizens.

With a BNPL service, typically you put down 25% of a purchase immediately, with three remaining 25% tranches due at monthly intervals – free of interest if you make the payments punctually, but with fees if you do not. The provider makes money from merchant commissions as well as late-payment fees.

The US is the most mature market for BNPL services. The BNPL market grew tenfold between 2019 and 2021, accelerated by the Covid-19 pandemic, to $24.2bn from just $2bn.

There isn’t a provider in Qatar, but Tabby is a provider focused on the Gulf region, which has reached ‘unicorn’ status with a valuation of over $1bn. Others are Tamara and Postpay.

Should regulators be concerned about the impact of BNPL? Data on use and delinquency reveal a complex picture. In 2022 a report by the Consumer Financial Protection Bureau, indicated that a large majority of borrowers do not default, but also that the rate of default was increasing – from 7.8% of borrowers charged at least one late fee, to 10.5% in the period 2020-2021.

Klarna, one of the biggest providers of BNPL services, reported a credit loss rate of 0.41% in 2023, this compares with the national (for USA) credit card delinquency rate of 2.58%. This indicates that an established provider such as Klarna uses an established risk management framework, and has checks in place to prevent individuals becoming over-extended.

A Federal survey found that high-income households were the single biggest category of users of BNPL services, and confirmed that the largest providers, such as Klarna and Afterpay, have robust lending standards and low default rates. Such providers argue that their products offer cheaper alternatives to credit cards and bank loans, and are therefore fairer for low-income consumers.

While provision has been dominated by fintechs, more established firms including Apple and American Express are moving into the market.

Another survey by the consumer Financial Protection Bureau, however, found that users of BNPL were more likely to use other credit products such as credit cards, personal loans and student loans, and exhibit symptoms of financial distress. A study by the Bank for International Settlements found that the overall credit delinquency rate in the US for BNPL users was 18%, more than twice the rate of non-BNPL users (7%).

Unaffordable levels of debt can have lifelong effects, including on credit rating, ability to secure a mortgage to buy a house, and so on.

So while the vast majority of BNPL users do not end up in problematic debt, the small minority who do may build up significant levels of debt spread across multiple platforms, including traditional providers of credit.

Younger adults are heavy users of BNPL, and the most common purchases are furniture, electronics and apparel. BNPL services can be positive for financial inclusion as you do not need to have a bank account or take out a credit card. Retailers are attracted to BNPL for this reason, and because ease of use can boost sales, and also because use of the service can reduce what is known as ‘cart abandonment’, when shoppers fill up an online basket but abandon before payment, something that is more common if you have to complete credit card details.

Regulators need to ensure that retailers do not pass on the cost of their commissions to the BNPL provider to customers, as this could affect the inflation rate.

These findings indicate that there are diverse demographic and economic segments within the customer base of BNPL providers, and that regulators need to look at the picture as a whole, not just individual providers.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.