Our Take on Payments blog has seen numerous posts over the last year about how the COVID-19 pandemic has altered consumers' payment habits. A combination payment/credit product, buy now, pay later (BNPL) appears to have gained widespread adoption independent of the pandemic. In its simplest form, BNPL allows the consumer to make a purchase and spread payments over a period of time. Unlike the traditional layaway process, where the buyer gets the product after he or she has made all the payments, with BNPL, the consumer gets the purchase at the time of the initial payment. There are numerous variations of BNPL that can generally be segmented according to the payment schedule timeframe and whether the consumer is being charged interest.
This concept is not new. When I was a payments consultant doing work in various Latin American countries 25 years ago, retailers commonly offered this installment payment product as an alternative to a traditional credit card, for which many of its customers couldn't qualify. In the United States, a variety of providers such as dentists and orthodontists have offered the product to help patients pay for expensive dental work. Auto shops have offered BNPL to help customers pay for a set of tires or extensive repairs.
But what is different and what has led to its increased popularity in the United States is how fintechs have partnered with merchants to offer BNPL as an integrated part of shopping on merchants' websites. A December 2020 survey
of approximately one thousand adults in the United States indicated that just over 40 percent of them had used a BNPL service. The survey also found that the product was most popular with Gen Z and younger millennials, and female consumers were a little more likely to use the service, although this slant appears to be the result of an initial push by fashion and cosmetic retailers. The use of debit instead of credit cards as the payment source is also a major change in ecommerce payment habits.
As with any credit-like product, BNPL has pros and cons. Critics of the product categorize it as a way for consumers to buy things they can't afford. The December 2020 survey found that more than a third (38 percent) of the people using the service fell behind on their payments at least once. Of those with a late payment, 72 percent indicated it made their credit score drop. Furthermore, some providers perform hard credit checks to determine if the customer should be approved for the offer, which can also lower the consumer's credit score. For those products with four or fewer payments, the product is largely unregulated. However, its growing popularity is gaining regulators' attention, both here in the United States and in other countries. As with any product, consumers should clearly understand any associated fees or penalties, as well as dispute rights in the event the product is defective.
Proponents of the product say it helps a consumer on a budget to make larger-dollar purchases and position it as a preferred alternative to a credit card, which can have a higher interest rate. A July 2020 study of the market found that more than three-quarters of the customers using the BNPL service had the funds available to pay for the full purchase.
A recent Consumer Reports article makes the following recommendations for consumers considering using a BNPL product:
- Evaluate your spending limits and determine if the purchase is a "want" or a "need."
- Understand the terms and conditions of the service, especially with regards to dispute rights and procedures and fees and other charges.
- To avoid missing or having a late payment, set up automatic payments or alerts to remind you of an upcoming payment deadline.
- Determine if this is the best credit product for your purchase.
While BNPL ecommerce products are still in their early days in the U.S. market, all indications point to dramatic growth in the years ahead. As always, we would like to hear your perspective on this product and its impact on consumers' payment habits.
David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed