Rise of ‘pay later’ option raises issues

Buying on credit, which slowed during the height of the pandemic, is back in vogue as many Americans struggle to afford what they need, let alone what they want, in this high-inflation era. Credit card balances are skyrocketing, but just as alarming is the rise of a new credit product known as “buy now, pay later.” About 4% of online transactions in North America are done this way, and usage surged nearly 70% over the week of Black Friday compared with the previous week. It is now offered for almost every purchase, including for gas and guns.

“Buy now, pay later” resembles once-popular layaway programs, except in reverse. When someone checks out, they are offered the option to purchase an item by paying about a quarter of the price on the spot. Shoppers make another payment two weeks later, a third payment two weeks after that and the final payment at the six-week mark. Consumers get approved (or denied) within seconds for these loans, making them fast and convenient. There’s usually no interest charged, and the debt must be paid off quickly. If used as intended, “buy now, pay later” can be a cheaper and easier alternative to a credit card. Many of the leading players have 4.5and 5-star rated apps, suggesting there are a lot of satisfied customers.

So what’s the problem? “Buy now, pay later” is largely unregulated, and substantial issues have emerged. Last year, 10.5% of users were charged at least one late fee, and several signs indicate delinquencies continue to rise in 2022. Users complain that it is difficult to get refunds and issues can ding their credit score in ways they didn’t realize. But the biggest concerns are that many of these financial technology companies are not doing a sufficient job assessing people’s ability to repay and are using shoppers’ data to suggest more products to buy — on credit.

The Consumer Financial Protection Bureau should act swiftly to put up guardrails to protect consumers and assure they fully understand the commitment they are making.

“People who turn to BNPL products are disproportionately financially vulnerable,” said Meghan Greene, senior director of research at the Financial Health Network, which has studied who’s using this credit. The plans are popular among younger, non-white Americans, data shows. Often, these consumers lack experience with credit and have lower credit scores or not much credit history at all. Nearly 70% of users say they spend more using these products than they would have otherwise. Companies offering these loans typically do not do extensive credit checks. It’s also nearly impossible to tell how many other “buy now, pay later” loans a shopper might already have with other companies because these loans are rarely reported to credit bureaus. All of this makes it easy for people to find themselves in situations where they are overextended.

New academic research on more than 10 million Americans reveals a related and worrisome trend: People using these products are more likely to experience “rapid increases” in bank overdraft charges and credit card interest. That’s because “buy now, pay later” companies typically have shoppers use autopay when they sign up, meaning they link a debit or credit card to the account.

The CFPB issued a major report in September outlining key concerns. In addition to worrying about consumers’ ability to repay, the agency flagged that these companies are shifting their business models — which currently rely heavily on fees charged to retailers — to look at ways to collect user data and market products to them. A Wired reporter who has also bought through “buy now, pay later” services described it like this: “you’re just in their email marketing loop until the end of time.”

“These firms aren’t just lenders, they are also advertisers and virtual mall operators,” CFPB director Rohit Chopra warned.

Consumer advocates are urging the CFPB to regulate “buy now, pay later” products under the same laws as credit cards. This would require more disclosures and statements, better procedures for refunds and more stringent underwriting standards to assess borrowers’ ability to pay. But leading companies offering these products have a point when they argue that “buy now, pay later” options should be regarded as distinct from credit cards. They aren’t usually charging interest, they stop making loans to people who repeatedly miss payments, and, by and large, surveys indicate that users understand the basic repayment terms.