9 perspectives on buy now/pay later that have banks watching

August 22, 2022 6:10 PM

Enjoy complimentary access to top ideas and insights — selected by our editors.

Buy now/pay later lending continues to grow in popularity, with more than a third of U.S. adults taking advantage of these innovative credit products to finance day-to-day purchases.

Interest-free credit and fast approval make BNPL transactions an attractive payment option for shoppers, and provide an opportunity for consumers to build their credit history. However, there are concerns about BNPL, such as misleading and deceptive marketing practices leading to shadow student debt and the lack of regulation and consumer protections.

Read our roundup for nine perspectives on BNPL and the changing credit landscape.

PayPal Co-Founder And Affirm Inc. Chief Executive Officer Max Levchin Interview

David Paul Morris/Bloomberg

Grocery shoppers hunger for buy now/pay later, Affirm says

Consumers have a new option in the buy now/pay later market following the launch of Debit+ by fintech Affirm, and they are using it not for the typical discretionary purchases, such as shoes and clothing, but for food.

"We wanted to be the thing that people take to go shopping for their family, to give them financial flexibility," said Max Levchin, Affirm's founder and chief executive. The card gives shoppers 24 hours to split purchases of up to $1,000 into an interest-free loan repayable in four installments every two weeks.

While investors have been cautiously watching Affirm's market capitalization decline to approximately $6.5 billion from a high of $47 billion post-IPO last year, the outlook for the fintech looks brighter in the near term based on higher first-quarter earnings.

Read more:

Grocery shoppers hunger for buy now/pay later, Affirm says

Misinformation obscures buy now/pay later's benefits to consumers

The popularity of buy now/pay later is growing rapidly as millions of consumers discover how this payment option can help them manage their cash flow while avoiding interest and fees.

But many consumers who have grown up with traditional credit cards and products may not be taking advantage of the flexibility, price certainty and low fees of BNPL due to being misinformed about the product. For instance, BNPL providers earn most of their revenue from merchant partners, not from interest charges.

"Misinformation about BNPL products muddies the waters," said Penny Lee, CEO of the Financial Technology Association. "It obscures the fact that these products are safe, transparent and transformational for tens of millions of Americans."

Read more:

Misinformation obscures buy now/pay later's benefits to consumers

Buy now/pay later could help young consumers build credit histories

Buy now/pay later lending, which is typically used by consumers to manage their cash flow when paying for immediate, small-dollar purchases, may have an additional upside — helping consumers build their credit histories.

With the commonly used Pay-in-Four model of four interest-free payments over six to eight weeks, the product allows BNPL consumers, who tend to be disproportionately young and subprime borrowers, to establish their creditworthiness in a unique way.

But for this valuable data to help millions of consumers with slim credit build a history, the credit reporting industry, which plays a crucial role in driving credit inclusion, will need to mainstream the data and incorporate it in core credit reporting.

Read more:

Buy now/pay later could help young consumers build credit histories

Buy now/pay later is latest form of ‘shadow student debt’: Report

For-profit schools that offer buy now/pay later loans as a payment option are under fire from the Student Borrower Protection Center for misleading marketing and deceptive tactics, as well as catching the attention of the Consumer Financial Protection Bureau.

The SBPC's new report on education finance raises concerns about BNPL in largely unaccredited and loosely regulated for-profit schools, which fall outside the private education loan market that has distinct rules for disclosures and co-branding between lenders and schools

"Policymakers and law enforcement at all levels must wake up to the reality of BNPL as an emerging form of shadow student debt and use all of the regulatory, supervisory, and enforcement tools at their disposal to protect borrowers," said the report.

Read more:

Buy now/pay later is latest form of 'shadow student debt': Report

Is buy now/pay later losing its luster?

Stock prices for the leading buy now/pay later firms have declined steadily since the start of the year, signaling a slowdown in the rapid growth of the new payment option and causing concerns for investors.

However, consumers continue to embrace the new payment option. Almost $100 billion was spent on retail purchases using BNPL in 2021, an increase of more than 300% on the previous year, according to Cornerstone Advisors.

While the BNPL market has potential to expand further, increased competition from new players such as ACI Worldwide and the likelihood of closer regulation by the Consumer Financial Protection Bureau have investors wondering if the honeymoon is over.

Read more:

Is buy now/pay later losing its luster?

Consumer protections should apply to buy now/pay later firms, too

The short-term installment credit model of buy now/pay later has brought a new level of convenience and flexibility to shopping that has consumers adopting the payment option with relish and major merchants like Target and Walmart partnering with fintechs on installment financing.

But while BNPL fintechs offer interest-free financing and fast approval, they do not have the strict federal oversight that traditional banks are subject to and the robust underwriting practices they employ.

As a result, the Consumer Financial Protection Bureau started to investigate major BNPL credit providers earlier this year with a view toward determining what consumer protections need to be put in place to ensure families can safely benefit from innovative BNPL products.

Read more:

Consumer protections should apply to buy now/pay later firms, too

Regulate buy now/pay later. Now.

The promise of easy, risk-free credit has helped drive the popularity of buy now/pay later products with consumers, with annual growth pushing 350%, according to data for the year ending December 2021.

But while the concept of "free credit" sounds immensely appealing, particularly to consumers with cash flow issues and poor credit histories, the term itself should be raising a few alarm bells as well as the question, is this too good to be true?

The consumer protections that apply to credit card providers and other lenders are not required for BNPL products, so without regulation to hold BNPL providers to the same standard, consumers could run the risk, ironically, of "paying later."

Read more:

Regulate buy now/pay later. Now.

Discover says buy now/pay later won't cannibalize credit cards

The rapid growth and increasing popularity of buy now/pay later products does not pose a risk to Discover's credit card business, according to CEO Roger Hochschild.

The numbers support Hochschild's view, with overall loan growth rising 4% in 2021 and credit card payment rates higher than before the pandemic. Rather than see a threat, Hochschild believes Discover can capitalize on BNPL without destroying the company's own credit card volume.

"We are actively looking for opportunities to extend BNPL financing to customers through credit and debit cards," Hochschild said. "Over time, I think the consumer's desire to spread out payments — especially for big-ticket items — is real."

Read more:

Discover says buy now/pay later won't cannibalize credit cards

Buy Now/Pay Later carries myriad challenges for return policies

The interest-free financing and rapid approval for consumers offered by buy now/pay later products have been a boon for retailers, with consumers spending almost $100 billion in retail purchases using BNPL loans in 2021.

But while the ease and convenience of BNPL has boosted purchasing, what happens when consumers need to return some or all of the items purchased in an order before they have actually finished paying for them?

With returns and refunds already an complicated issue for retailers, the complexity of BNPL transactions needs to be managed carefully to prevent poor returns management resulting in lost business, says Ken Bays, Vice President of Product Management at Inmar Intelligence.

Read more:

Buy Now/Pay Later carries myriad challenges for return policies