I visited my family in New York last week. As I talked to my mother about my planned article on the latest credit financing craze — Buy Now, Pay Later installment loans — her Alexa Assistant was lighting up with excitement because we kept saying the word “buy.”
“Would you like to know about gifts you can buy for the holidays?” Alexa asked. “No, STOP, please,” with the “please” added intentionally. As much as I wanted to tell Alexa to stay out of our chat, I held back. I guess I’ve been out of the city too long. Anyway, what’s the point of fighting with a digital voice assistant? You’ll only later foolishly apologize to the snippy machine for being “rude.”
My mother and I continued to talk about Buy Now Pay Later (BNPL) loans. Alexa eventually lost interest. My own interest in BNPLs had been piqued earlier that day by a conversation I overheard on the Long Island Railroad (LIRR) train. A woman in a state of great excitement was showing her friend her new bracelet and talking about all this new stuff she bought, and how she didn’t need to use a credit card, and it was zero interest, and... yep, I’m no better than Alexa for eavesdropping.
Buy Now Pay Later is the option you see at the checkout of most online retailers when you buy something. As the name suggests, consumers receive their goods right away and pay for them later with equal-sized payments spread over time, and only the first payment due at the time of purchase. Typically, BNPLs have four or fewer installments, no upfront fees, and zero percent promotional interest rates when you make on-time payments.
BNPLs started popping up on online retailer’s sites around 2015. As online shopping has skyrocketed in the past few years, BNPL loans have too. According to the American Banker, in the second quarter of 2021, fintech providers (Affirm, Afterpay, Klarna, Sezzle, Zip) reported 350% year-on-year revenue growth for BNPL payments. BNPL has found its way to most major retail stores, as well. There are even BNPL virtual cards that you can download into your virtual Google Pay or Apple Wallet.
For all its innovation, installment loans are centuries old. An excerpt from the Singer & Co’s Gazette in 1856 reads, “Why not rent a sewing machine to the housewife and apply the rental fee to the purchase price of the machine?” The Singer Sewing Machine Company was one of the first major corporations to popularize mass consumer credit financing through its aggressive and highly successful installment-buying campaign: “dollar down, dollar a week.”
Some things have changed: The term “housewife” is thankfully outdated. Other things not so much — like sewing machines financing, today’s BNPL providers mainly aim their promotional campaigns at young women through partnerships with female-focused fashion brands. Cardify reported that 80% of all transactions are by younger millennials and Gen Zers, largely because they tend to use fewer credit cards, an outgrowth of the 2008 global recession debacle.
Most people love “free” credit: Almost half of all U.S. consumers have used BNPL since its debut just a few years ago. If BNPLs continue to grow at this pace, they may become as ubiquitous as credit cards. For sure, they are morphing the retail finance landscape as BNPL fintech providers form partnerships with dominant retailers, credit card companies and banks.
Now, what is it they say about things that are too good to be true? When giant corporations are tripping over one another to offer consumers credit, you can probably bet that they are not doing it for the consumer’s benefit.
A 2021 C&R Research study reported that 59% of BNPL users said they bought an “unnecessary” item, which they couldn’t have afforded otherwise. Consumer Reports found that 43% of people had fallen behind in their BNPL payments. Many consumers said they “lost track of the payments.” Others didn’t have the money to pay.
Seventy percent of BNPL users are in a lower-income bracket, according to Cardify. BNPL loans usually need to be repaid in a short-term frame, often in a matter of weeks or months. So, if you don’t have the income to pay today, the likelihood is slim that you will have the money in six weeks.
The penalties for missed or late repayment are steep, including high late fees (in some cases 25% of the purchase price), debt collection, blocked or suspended accounts and ruined credit. When a consumer’s bank account is linked to the BNPL purchase for autopay, a common practice of fintech lenders, insufficient funds can trigger spiraling bank fees, too.
The Center for Responsible Lending notes, “Unaffordable credit may provide a quick inflow of cash, but it exacerbates financial exclusion over the longer term, which, in the case of BNPL, can be just a few weeks or months down the road.”
I wondered if the lady on the LIRR train could make her repayments – was she still so excited about her bracelet, or was the shine wearing off?
Hey, Alexa, how do you say, Buyer Beware, in Latin – please?
The topics of Money Matters relate to compilations and reflections from Barbara Freeman’s extensive work with government and intergovernmental agencies and the nonprofit and private sectors across five continents. She is the founder and CEO of LaMedichi, a Roaring Fork Valley-based nonprofit dedicated to enabling people who are unbanked and underbanked to achieve financial security. To reach her, email Barbara at firstname.lastname@example.org.