(Reuters) – When Leondra Garrett wanted to stock up on three new pairs of shoes early last year, the North Carolina resident split an $ 161 online purchase into four installments through a “buy now, pay later” service at It seemed to be a convenient service arrangement.
Now, she admits she should have read the fine print on missed payments.
When the provider buy now, pay later (BNPL), tried to withdraw a payment from Garrett’s bank account a few months later, she didn’t have enough funds to cover it. Soon after, the 42-year-old was charged $ 40 in penalties and her credit score dropped 10 points to 650, a reading generally rated “reasonable”.
“It’s important that consumers always read the fine print and we don’t always do that,” said Garrett, a community organizer in Charlotte.
So-called buy now, pay later services – offered by providers like Affirm Holdings Inc, Klarna, Afterpay Ltd and PayPal Holding Inc’s “Pay In 4” – flourished on retail sites during the coronavirus pandemic, as people began to do more online shopping.
However, the ease with which many buyers can shop is worrying some regulators around the world, who fear that consumers may be spending more than they can afford.
Nearly 40% of American consumers who used “buy now, pay later” missed more than one payment, and 72% of them saw their credit score drop, according to a study by Credit Karma, which offers customers credit score verification free.
The study, conducted for Reuters, surveyed 1,038 adult consumers in the United States to assess interest in “buy now, pay later” and found that 42% of respondents had used the service before.
“The percentage of consumers who do not pay is remarkable and not as low as you would expect,” said Gannesh Bharadhwaj, general manager of credit cards at Credit Karma.
“When you do something so convenient, people may not be really thinking, ‘Do I have the budget? Can I pay this payment? ‘You get more of that impulse buying behavior that leads to the realization that they may not be able to make the payment. “
A lower credit score signals to creditors that a consumer may be at greater risk and makes it more difficult for the consumer to borrow, either to secure a mortgage or a new credit card. It can even make it harder for consumers to open utility bills or find housing, as homeowners often conduct credit score checks before renting apartments.
Management consultants Oliver Wyman estimate that BNPL companies facilitated between $ 20 billion to 25 billion in transactions in the United States last year, although analysts’ estimates of the size of the BNPL industry vary because it is relatively new and some of companies are private. Individually, they described explosive growth last year, as their services became more prevalent.
Australia-based Afterpay said it saw active customers in the U.S. more than double to 6.5 million in the fiscal year ended June 30, 2020, and its sales more than tripled in the July-September quarter compared to previous year.
More than half of Afterpay’s customers in the United States are millennials, aged between 25 and 40, he said.
BNPL models vary, with some companies making the most of their profits by charging merchants’ fees at the point of sale and others charging interest and late fees from consumers. They say their services help merchants to increase sales and consumers to buy things they need, in addition to causing less financial damage than credit cards, due to the restrictions they impose.
However, regulators in Britain and Australia are reviewing or tightening industry rules. BNPL service providers, classified as fintech companies, should be subject to stricter rules, more like banks, say some regulators.
It is unclear how buy now and pay later fits into United States regulations, because companies offering these services do not have bank licenses, some do not charge interest and laws vary by state. However, some experts hope that the sector will be further examined during the Biden government.
“One of the questions with the new administration is: what is the position of the Consumer Financial Protection Bureau going forward? – that we expect to be more aggressive, ”said Mark Palmer, financial analyst at BTIG Research.
Affirm, based in San Francisco, saw its revenue increase 93% to $ 509.5 million in the fiscal year ended in June. It allows buyers to split purchases over periods ranging from six weeks to four years, with interest rates ranging from 0 to 30%.
Affirm shows customers how much a loan will cost in dollars and does not charge late fees or compound interest. While missed payments can affect credit scores, Affirm says it has been working with borrowers who went through difficult times during the pandemic.
“We approve borrowers only for what they can comfortably pay,” said Silvija Martincevic, Affirm’s commercial director. “The reason why our technology is significant is that we use machine learning to make underwriting decisions.”
At Australia’s Afterpay, customers are prevented from using their services after they miss a payment.
The company says 95% of its global transactions are paid on time and late fees contribute less than 14% of the company’s total revenue.
The PayPal ‘Pay in 4’ service, launched widely in the United States in November, allows customers to split purchases from $ 30 to $ 600 into four interest-free payments. Late fees may apply for missed payments, depending on the user’s state of residence, according to their website.
The PayPal product ‘Pay in 4’ in the United States does not report negotiations or arrears to credit bureaus, said Greg Lisiewski, global vice president of Global Pay Later at PayPal.
“We are working with the industry and consumer credit agencies to develop the appropriate structure,” he said.
Sweden-based Klarna saw rapid growth last year, especially purchases in the $ 100 to $ 200 range, said its US chief David Sykes.
Most of Klarna’s loans are small, short-term and interest-free, which is safer for customers than credit cards, he said. Customers can delay a payment without penalty. Late fees vary by state, according to regulations, up to a maximum of $ 21 and the company is launching a 25% limit.
“Nobody is in debt to Klarna,” said Sykes. “We are not taking out multi-year loans to buy a car or a house.”
Smaller loans with shorter durations have benefits, but are not without risks, experts say. Customers may be taking on more debt than they can bear, even if they come in small portions.
Tamika Rivera, a 35-year-old insurance broker from Springfield, Massachusetts, uses a variety of buy now, pay later and have not paid services. In one case, she did not have enough money to cover a $ 43 sweater purchase, which resulted in a $ 35 overdraft fee from her bank.
“These services are convenient, but there are some negative things that can happen,” said Rivera.
Alan McIntyre, head of global banking at Accenture, says the trend of the credit impact of buying now and paying later is yet to be seen.
“The optimistic view is that Generation Y does not want to go into debt and wants to build a better budget – this is a deferred debt and you are not tempted to roll over,” he said.
“The pessimistic view is that about 40% of people use it because they have not been able to access traditional credit – either because they have crossed the credit limit or because of a bad or non-existent credit history – and some of these loans may not have a good season . “
Reporting by Anna Irrera; Editing by Lauren Tara LaCapra and Susan Fenton