Buy now, pay later consumer models are taking the U.S. payments sector by storm.
BNPL payment models are mostly resonating with U.S. online shoppers, who make a modest initial payment up front and pay the remaining balance on scheduled due dates – often four payments made over four months. Currently, BNPL mobile apps like Klarna, Afterpay, and Affirm offer easy-to-use BNPL services.
Some companies are going above and beyond in accommodating BNPL users.
Take Klarna, where Buy Now, Pay Later is just one of its offerings.
The firm also includes other payment options like Pay Now, which enables consumers to pay immediately and in full at checkout, the company told The Street in a statement.
Additionally, Klarna offers a Pay in 30 days option, a Klarna Card, and a Shopping App that allows consumers to pay with Klarna anywhere online, track returns and price drop notifications; manage returns; access financial overviews and budgeting tools, among other services.
No doubt, U.S. consumers like the “brass tacks” that comprise BNPL, especially avoiding big debt obligations, leaving more flexibility in the household budget. According to a May 2022 survey by Forbes Advisor, 59% of Americans have either used a BNPL payment plan or plan to do so by the holiday shopping season.
BNPL does come, however, with its fair share of risks.
"BNPL can be perilous for younger consumers and others who are not accustomed to reading the fine print,” said Mark Chorazak, a partner specializing in financial advice at the law firm Shearman & Sterling. “All those tiny payments add up. and at some point the piper has to get paid.”
Gazing Into the Crystal Ball
With BNPL firmly entrenched in the consumer retail experience, personal-finance gurus are speculating about what the method will look like over the next year or two.
Some of that speculation falls into the eye-opening category.Debt.com Chairman Howard Dvorkin has been tracking BNPL trends since the buy now, pay later revolution broke out. Here's his outlook on what's next with BNPL.
Debt.com Chairman Howard Dvorkin has been tracking BNPL trends since the buy now, pay later revolution broke out. Here's his outlook on what's next with BNPL.
--- More regulations. “Even with the [Consumer Financial Protection Bureau] announcing it will regulate BNPL-related fintech companies, measures to protect consumers can’t come sooner,” Dvorkin said. “With the holidays right around the corner, the 'new layaway' could mean a very traditional holiday season: one loaded with debt.”
--- Credit bureaus plan to start reporting BNPL payments, and nonpayments. With credit bureaus getting involved with BNPL, consumers take on even more risk. “This makes caution even more important when approaching BNPL, as dings to your credit can limit your financial options,” Dvorkin said.
--- Plastic payments. Credit card companies are looking to compete with BNPL companies. That means consumers should read, at length, any buy now, pay later agreements they enter into with a credit card company. “These agreements will likely be stricter and have more penalties,” Dvorkin noted.
--- Higher card debt. BNPL users who use their credit cards to cover their purchases will likely face turmoil in the event of an economic recession. “These users are almost always racking up debt, and while BNPL services are slow to send debts to collections, credit card companies are swift,” Dvorkin added.
Many credit card companies like American Express (AXP), Citi (C,) and Chase (JPM) have already rolled out their own BNPL services, and industry experts expect that trend to continue.
“BNPL is going to be a crowded space, with pure-plays, unicorns like Grab, and financial institutions entering the game,” said Board of Innovation senior consultant Gayathri Gopal.
Yet even with rewards and digital wallets being adopted by BNPL providers, credit card issuers will struggle more for a differentiated advantage, Gopal told TheStreet.
“For example, with Apple Pay Later (AAPL) now, consumers would use their existing line of credit to fund the installments,” she said. “What could have been a loan with the credit card company is a BNPL loan through Apple Pay.”
Additionally, BNPL firms aren't reporting to credit bureaus right now, but that could be changing.
“The leading providers like Afterpay, Affirm, and Klarna report some loans to the credit bureaus,” Gopal said.
“Depending on the terms and conditions of each provider, your loans could be reported to the credit bureau, impacting your credit score.”
While Apple is planning a BNPL release, that hasn’t happened yet. That release is "Coming in a future update for qualifying applicants in the United States for purchases online and in apps on iPhone and iPad,” Apple said in a recent statement.)
Klarna, denies they report BNPL activity to credit scoring agencies in the U.S. “As a matter of practice, Klarna does not report account information or repayment histories to any of the US nationwide credit bureaus,” a spokesperson told TheStreet.
The company did begin reporting to UK credit reference agencies in June. The company reports "purchases paid on time, late payments and unpaid purchases for Pay in 30 and Pay in 3 orders made on or after 1 June, 2022," according to a press release issued by the company.
Regulatory Spotlight in Particular Focus
Regulatory scrutiny may be the biggest BNPL issue going forward.
“The future for BNPL continues to look bright as forecasted sector transactions are the fastest growing new payment option within the industry,” said Jason Bohrer, U.S. Payments Forum executive director. “BNPL now represents 3% of the total transactions in the U.S. and [is forecast] to grow to near 10% by 2024.”
That growth has attracted the attention of federal government regulators, especially given that just about every large payment network that operates within the U.S. has dedicated resources to support and grow its BNPL offering.
“As with most new technologies, the U.S. Consumer Financial Protection Bureau is closely monitoring the dynamics associated with BNPL to ensure that the appropriate guardrails are put in place to protect consumers,” Bohrer said.
“Credit bureaus are not currently factoring BNPL transactions into an individual's credit score; however, they are weighing the option of including BNPL data as ancillary information on the report until more definitive direction is established by regulatory bodies.”
Government regulators have certainly seen BNPL take different shapes, particularly as credit card companies have begun to offer their own flexible-payment options.
“These trends will likely be more closely evaluated by regulators,” said Accrue Savings Chief Executive Michael Hershfield. “Credit reporting is one way to regulate the BNPL industry and it will likely influence a consumer’s decision to sign up. But its full impact will depend on other potential changes to the application and approval process.”
The CFPB plans to start regulating BNP companies and will issue guidelines or a rule to align sector standards with credit card companies. “This will be a huge blow for the sector, especially with the valuation of Klarna, Affirm and Zip plunging,” Gopal said.
Depending on how aggressively the CFPB moves, the path ahead for BNPL firms could be highly challenging.
“Many firms would have to spend more resources in legal, compliance and risk to navigate the regulatory landscape,” Gopal noted. “Margins will be eroded, and we could see more mergers and acquisition in the sector.”
