Buy now, pay later services are becoming increasingly indispensable for many consumers—whether they’re looking to make big-ticket purchases or seeking to divide their grocery expenses into more manageable installments.
However, with BNPL’s rapid adoption across all age groups, there’s growing scrutiny regarding the absence of regulatory oversight in this sector—and the pressing need for it. This concern arises as more consumers discover themselves overwhelmed by debts they hadn’t initially anticipated.
The Appeal of BNPL
The ability to not pay for a purchase in full is appealing to many consumers, particularly those who are financially vulnerable. According to data from the Federal Bank of New York, U.S. consumers with lower credit scores represent a disproportionate share of BNPL users. Interestingly, while lower-income consumers are less likely to be offered BNPL services, usage is actually highest among those with a credit score under 620.
To illustrate the necessity for regulation in this space, 37% of respondents surveyed by the Fed admitted to using BNPL services despite being delinquent in their payments. What’s even more concerning is that 41% of respondents reported using these services after having their credit application rejected.
This highlights that credit is being extended to all consumers—regardless of their ability to pay it off. However, what firms are overlooking is that without proper regulations in place, while BNPL certainly enhances financial inclusion, it also leads many consumers into credit overextension and unmanageable debt accumulation.
“This research substantiates the claim that BNPL lenders are an attractive option for higher risk lending segments,” Ben Danner, Senior Analyst of Credit and Commercial at Javelin Strategy & Research noted late last year. “If BNPL vendors have built their books on a portfolio of high-risk loans, an economic downturn could lead to significant rates of delinquencies and charge offs. BNPL vendors may need to tighten their underwriting to prepare for the pending recession.”
This isn’t just something that’s becoming a significant issue in the U.S. This is being felt worldwide. In Latin America, for example, consumers face limited access to financial services. Over the past few years, BNPL services have played a big role in financing expensive purchases, particularly in Brazil and Mexico—the two largest markets in terms of people and sales volume—where the majority of consumers lack credit cards. BNPL firms like Klarna have set roots there, developing financial infrastructures to better understand the market.
Similar movements have been made in Africa. Last year, Mastercard teamed up with Lipa Later, a Kenyan BNPL company, to promote BNPL adoption. In doing so, both companies are also reaching underbanked individuals who lack access to various financial services.
Moreover, BNPL has gained traction in Europe and the U.S., with an increasing number of consumers embracing these services.
All Aboard the BNPL Train
Understanding the long-term impacts of BNPL services may pose a challenge, yet their allure to consumers persists as more retailers hop on the BNPL bandwagon, offering this service at the point-of-sale.
Last year, IKEA announced that it was partnering with Afterpay on BNPL, letting consumers to finally pay for that coveted couch they’ve been eyeing in smaller installations—or really any other furnishing needs they may have.
Around that same time, e-commerce giant Amazon also announced that it would let retailers integrate Amazon Pay—its BNPL service—within their checkout to reach a new audience of buyers looking for flexible options.
What’s more, Affirm and Booking.com announced their partnership aimed at providing travelers with greater flexibility in planning their upcoming trips.
These initiatives represent just a fraction of the efforts witnessed over the past year, underscoring companies’ recognition of the potential of these services and their utilization as a means to target new potential customers—or even retain existing ones.
More Regulation Is Needed
Because BNPL has accelerated so much these past few years, there’s been a growing demand for regulation from various governments, including the British government, which aims to subject BNPL services to the same regulatory standards as credit products.
More recently, New York Governor Kathy Hochul announced her support for a plan that would mandate BNPL lenders to obtain a license to operate in the space. Her proposal includes measures to potentially prohibit abusive and excessive late fees, mandate lenders to clearly disclose loan terms, and require them to report their activities to credit bureaus.
And just last week, during the Consumer Bankers Association Live conference, Rohit Chopra, Director of the Consumer Financial Protection Bureau said that more BNPL companies have transitioned from operating solely at the point-of-sale with retailers to selling goods through their proprietary apps. These companies are increasingly leveraging personal data to stimulate more purchasing and borrowing. As a result, the CFPB said it’s keeping a watchful eye on the space and will continue to monitor it.
As Sophia Gonazalez, Senior Analyst of Debit at Javelin Strategy & Research noted last year, more regulation is needed:
“BNPL can potentially lower consumers’ credit scores. Since consumers can have multiple consecutive BNPL micro-loans spread across different providers, they can accumulate significant debt and risk missing payments, if not managed carefully. Although some BNPL players do not charge late fees, consumers may not realize that missed payments still show up on their credit reports. A missed BNPL payment will appear on a hard credit check when a consumer applies for a home mortgage or refinances a student loan.”
