Buy now, pay later Consumer models are taking the US payments sector by storm.
BNPL appeals to US online shoppers who make modest initial payments up front and pay the remaining balances on scheduled due dates – often smaller payments made over four months.
Currently, standalone BNPL mobile apps such as Klarna, Afterpay and Affirm offer easy-to-use “buy now, pay later” services.
US consumers like these plans because they avoid large debt obligations and allow more flexibility in household budgets.
According to a May 2022 survey by Forbes Advisor, 59% of Americans have either used a BNPL payment plan or plan to do so by the holiday season.
However, BNPL comes with its fair share of risks.
“BNPL can be dangerous for younger consumers and others who aren’t used to reading the fine print,” said Mark Chorazak, a financial advisory partner at the law firm Shearman & Sterling. “All these tiny payments add up to the point where the piper needs to be paid.”
Look into the crystal ball
With BNPL firmly entrenched in consumer retailing, personal finance gurus are speculating as to what the method will be like in the next year or two.
Some of these speculations fall into the eye-opening category.
Take Debt.com Chairman Howard Dvorkin has been following BNPL trends since the buy-now-pay-latere revolution broke out. Here is his outlook on next steps at BNPL.
— More regulations. “Even with that [Consumer Financial Protection Bureau] With the announcement that it will regulate BNPL-related fintech companies, action to protect consumers cannot come sooner,” said Dvorkin. “With the bank holidays just around the corner, the ‘new stopover’ could mean a very traditional holiday season: a debt-laden one.”
— Credit bureaus plan to start reporting BNPL payments and non-payments. When credit bureaus engage with BNPL, consumers take even more risks. “This makes caution even more important when approaching BNPL as your credit history can limit your financial options,” Dvorkin said.
— plastic payments. Credit card companies are trying to compete with BNPL companies. This means that consumers should read carefully any buy-now-pay-later agreement they enter into with a credit card company. “These agreements will likely be stricter and involve more penalties,” noted Dvorkin.
— Higher card debt. BNPL users who use their credit cards to fund their purchases are likely to face turmoil in the event of an economic recession. “These users are almost always in debt, and while BNPL services are slow to send debt to be collected, credit card companies are fast,” added Dvorkin.
Many credit card companies like American Express (AXP) city (C) and Chase (JPM) have already launched their own BNPL services and industry experts expect this trend to continue.
“BNPL will be a crowded space with pure plays, unicorns like Grab, and financial institutions coming into play,” said Gayathri Gopal, Senior Consultant to the Board of Innovation.
Scroll to Next
But even if rewards and digital wallets are taken over by BNPL providers, credit card issuers will be fighting more for a differentiated advantage, Gopal told TheStreet.
“For example with Apple Pay Later (AAPL) Now consumers would use their existing line of credit to fund the installments,” she said. “What could have been a loan from the credit card company is a BNPL loan through Apple Pay.”
Additionally, BNPL does not typically report to credit bureaus, but that is changing.
“The leading providers such as Afterpay, Affirm and Klarna report some loans to the credit bureaus,” Gopal said.
“Your loans depend on the conditions of the respective provider [BNPL] could be reported to the credit bureau, affecting your credit score.”
Special focus on regulatory spotlight
Regulatory scrutiny could be the biggest BNPL issue going forward.
“The future for BNPL continues to look bright as forecast sector transactions are the fastest growing new payment option within the industry,” said Jason Bohrer, executive director of the US Payments Forum. “BNPL now represents 3% of total transactions in the US and [is forecast] to almost 10% by 2024.”
This growth has caught the attention of federal regulators, especially given that nearly every major payment network operating in the US has dedicated resources to support and grow its BNPL offering.
“As with most emerging technologies, the US Consumer Financial Protection Bureau is closely monitoring the dynamics associated with BNPL to ensure the appropriate guard rails are in place to protect consumers,” Bohrer said.
“Credit bureaus do not currently factor BNPL transactions into a person’s creditworthiness; However, they are considering the option of including BNPL data in the report as supplemental information until regulators have established a more definitive direction.”
Government regulators have certainly seen BNPL take different forms, especially since credit card companies started offering their own flexible payment options.
“These trends are likely to be more closely evaluated by regulators,” said Michael Hershfield, chief executive of Accrue Savings. “Credit reporting is one way to regulate the BNPL industry and it will likely influence a consumer’s decision to sign up. However, the full effect will depend on other potential changes to the application and approval process.”
The CFPB plans to start regulating BNP companies and will issue guidelines or a rule to align industry standards with credit card companies. “This will be a major blow to the sector, especially given Klarna, Affirm and Zip’s declining valuations,” Gopal said.
Depending on how aggressively the CFPB moves, the path could be very challenging for BNPL firms.
“Many companies would need to devote more resources to legal, compliance and risk to navigate the regulatory landscape,” Gopal noted. “Margins will erode and we could see more mergers and acquisitions in the industry.”