Reports Question BNPL Services as Consumers Find Debt Amid Inflation

● Surveys find consumers feel the flexible payment option is now a necessity and more regulation on the BNPL industry is needed.

Recent reports have stated that consumer behaviors are likely to be susceptible to change under record-high inflation levels.

According to a new study conducted by Qualtrics on behalf of Credit Karma, inflation coupled with ongoing economic struggles from the pandemic and emerging behavior is the rise of buy now, pay later. The study found nearly 60 percent of consumers feel that inflation makes them more likely to use BNPL to pay for purchases.

In fact, the amount of American consumers who have used BNPL services to pay for an item they need has risen to 61 percent from 44 percent in just September. Looking more closely, the survey findings show that 53 percent of shoppers who have used BNPL say they use them to pay for items out of necessity with another 45 percent of respondents saying they are most likely to use BNPL services when finances are tight.

“The buy now, pay later industry has experienced massive growth over the last few years, and consumers are finally starting to become more savvy when it comes to using these products to fund their purchases — especially when it comes to making on-time payments toward their loans,” said Colleen McCreary, consumer financial advocate at Credit Karma. “I've always said BNPL services are a great tool for consumers who wish to spread their payments out over time. However, like any loan product, it can be a dangerous path for those who do not borrow responsibly.”

Findings in the report showed that for respondents who have used BNPL to pay for an item, 40 percent currently have an outstanding balance — with the average balance being $665.

“Previously, we found consumers were missing payments and, while that has improved, we're now seeing people use debt to pay off debt, which can be a vicious cycle,” McCreary said. “If you're planning to use BNPL, make sure you budget accordingly. Otherwise, you might find yourself taking on more debt than you can reasonably afford.”

The company noted in its report that most consumers are being intentional when using BNPL for purchases, with 61 percent of respondents saying they decide ahead of time if they will use BNPL to pay for an upcoming purchase. Still, 38 percent say the decision to use BNPL is typically made at the point of checkout on a retailer's website.

At the same time, these consumers who go shop directly on BNPL apps and services were found more likely to use the services to shop from department stores (40 percent), specialty stores (20 percent) and e-commerce stores (31 percent). Meanwhile, a group of consumers are also using BNPL at warehouse stores (18 percent), discount stores (17 percent) and supermarkets (13 percent).

Meanwhile, a new report from

Marshall Lux and the Center for

Business and Government at the

Harvard Kennedy Business School finds that the BNPL industry is in urgent need of regulation to support transparency and sustainable growth.

Citing that two-thirds of BNPL users are subprime, authors of the report said, “Weak regulatory oversight including a lack of standards for the disclosure of fees, payments, data collection and credit reporting” may be what is leading to problems for the growing BNPL industry.

“There is a lot about this that is positive, but better oversight should lead to a more sustainable business model for the BNPL industry and an improved experience for all concerned,” said Marshall Lux, the paper's principal author and a fellow at the Kennedy School. “BNPL's real innovation has been at the point of sale where the convenience and ease of financing purchases has accelerated online merchant sales and made credit available to those who might otherwise be excluded.”

According to the research, globally BNPL products are expected to account for $680 billion in transactions by 2025 or about 12 percent of all e-commerce sales on goods. And while many of the users are young consumers the authors of the report said the “unprecedented nature of the industry and lack of oversight makes it difficult to properly evaluate the risks including significant subprime borrowing and total consumer debt burden.”

“While there are many good actors and the industry offers access and convenience for consumers, it is naturally engaging in what we call ‘regulatory arbitrage,' which has allowed it to generally avoid the kind of oversight required of credit card companies, banks and other traditional lenders,” Lux said. “This, combined with the fact that the BNPL industry has yet to experience a full credit cycle, is a potential source of future problems for both consumers and lenders.”

The report provides five regulatory interventions it believes can help BNPL products continue to create value for merchants and consumers including making mandatory fees and rights disclosure at point-of-sale, creating credit bureau reporting standards, instituting data privacy standards, including services and/ or charge dispute settlement procedures and installing stress testing and stress scenarios to help improve potential impact of economic shock.