New data showing rising delinquencies among consumers using buy now, pay later platforms will provide communication to those calling for regulatory oversight of this popular consumer finance method.
According to a survey of 1,044 U.S. adults commissioned by Credit Karma, one-third of those using BNPL have fallen behind on their payments. And 72% say their credit scores have declined. The survey also found that 44% of adults have used BNPL to make a purchase.
Buy now, pay later is a branch of fintech that supports consumer purchases that are paid off in a few installments, often free or interest and fees. Merchants generally pay the BNPL platforms a fee per transaction, while the platforms assume the risk in case of default.
The model has taken off in recent years, accelerated by the pandemic. As was everything related to eCommerce. BNPL is especially popular among Millennial and GenZ consumers.
Notably, these younger consumers were more likely to fall behind on payments than older BNPL users. According to the Credit Karma data, more than half of Millennial and GenZ consumers have missed at least one BNPL payment. This compares to 22% of GenX BNPL users.
The BNPL market has become globally hypercompetitive and has recently produced some big-dollar M&A. The most notable deal to date was Square’s acquisition of Australian-American BNPL Afterpay for $29 billion. PayPal also recently acquire the Japanese BNPL Paidy for about $3 billion.
Is BNPL Really Better than Credit?
We recently spoke with Tariq Sheikh, Founder and CEO of Postpay, a Dubai-based BNPL platform founded in 2019. Afterpay recently invested $10 million in Postpay. The Middle East buy no pay later space emerged almost overnight. Between 2019 and 2020 the Middle East region went from having no players to several. In addition to Postpay, these include Tamara, Tabby, and Spotti.
Sheikh argues that BNPL represents a much lower risk to the consumer than high-limited revolving credit ever will.
“When we talk about buy now pay later, we’re talking about $200, $250, you know, at a cap, maybe $300. If you really go far up, maybe $500,” Sheikh said. “But the limits are a lot lower than what we talk about when you talk about credit limits. So even if we go and dig into a credit bureau and the debt burden ratio, $200, $300 is not going to make a huge difference for the vast majority of the population.”
However, Sheikh did acknowledge that with so many new players emerging, the industry is only just now having discussions about collective safeguards to prevent consumers from making multiple BNPL purchases across different platforms.
“Technically, if they’re not all integrated into the same system, then yes, you could end up getting into a situation,” Sheikh acknowledged. “So it’s definitely noted and something that I’m also in conversations with other buy now pay later founders and CEOs, on how to bring it together. Because I believe that that’s probably the next step, not only for debt burden but also for fraud.”
David Galvan, Mastercard’s Vice President Digital Partnerships also agreed that this lack of integration among BNPL players adds to the risk that consumers get overextended on BNPL obligations.
“That’s one of the big holes,” he said.
Galvan said that these concerns over consumers getting in too deep with BNPL are beginning to draw regulatory scrutiny.
“There’s no consumer oversight,” Galvan said. “In Europe, they’re starting to think hard about that. In the UK, especially, they are thinking about how they regulate buy now, pay later. It hasn’t hit the U.S. yet. But I suspect at some point it will.”
Buy now, pay later will be a key focus of this panel at next week’s Localogy 2021 conference in Hollywood, CA.