Buy Now, Pay Later Plans May Increase Consumer and Credit Card Debt

“Buy now, pay later” options are becoming increasingly popular, but analysts warn of the risks of default given the lack of credit checks and “opaque” debt reports.

Not being able to check consumers’ credit histories could cause lenders to underestimate borrower debt levels when assessing new loan applications, they said. There is also the risk that consumers will accumulate more credit card debt in order to pay off their “buy now, pay later” (BNPL) obligations, analysts have warned.

BNPL providers typically partner with retailers – both online and in stores – to provide consumers with the option of paying in installments, with benefits such as no late fees and limits on payment. loan often high.

These payment options are gaining popularity among younger consumers, especially for online shopping, and a growing number of businesses have started offering the service over the past couple of years.

In a recent report, Fitch Ratings said reports on the industry’s debt performance were “opaque.” Many of these providers do not report the use of these services to the credit bureaus, the rating provider said.

“As a result, BNPL’s debt is often not visible on the credit report and borrowers could try to obtain BNPL credit from multiple providers,” Fitch analysts wrote. “Lenders (including non-BNPLs) might underestimate a borrower’s level of indebtedness when taking on new debt.”

Stephen Biggar, director of financial institutions research at Argus Research, warned that defaults are “one of the main risks.”

“These companies don’t do any sort of credit history check on these people,” he told CNBC’s “Squawk Box Asia” last week. “In a downturn, they can be the first to buy now and not pay later.”

Traditionally, installment plans have been available in stores for decades. However, these were usually expensive items such as furniture, electronics, and appliances that cost thousands of dollars.

The latest “buy now, pay later” plans straddle a segment between credit cards and installment plans. Focusing on younger, more tech-savvy users, they’re offered for online purchases that can range from $ 10 to $ 20, or up to thousands of dollars.

Among the most popular providers is Affirm, an American part-time payment company. The maximum value that can be purchased on a single payment plan with Affirm is $ 17,500.

Many of these fintech apps offer sweeteners that traditional credit cards and installment plans don’t: they sometimes include no late fees, low or no interest, high loan limits, and no credit check required. Conditions vary depending on the supplier.

On the other hand, borrowing costs can skyrocket if consumers don’t read the terms carefully.

There are some potential pitfalls in the fine print: additional fees such as additional fees for rescheduling payments, and some providers charge high late fees.

Analysts also cautioned against the propensity for spontaneous purchases given the simplicity of the application process and lower borrowing costs than credit cards.

Use of these payment options increased during the pandemic as online shopping increased, Fitch said.

In the United States, those short-term installment-like loans jumped 215% year-over-year in the first two months of this year, according to data from Adobe Analytics. Consumers using these services placed 18% more orders compared to the same period in 2020, according to the data.

The volume of ecommerce payments in the United States made using BNPL reached $ 19 billion last year, more than double the $ 9.5 billion spent in 2019, Fitch said, citing Worldpay payment company estimates.

Vendors that have surfaced in this segment include Affirm, Quadpay, and Klarna.

More established financial firms have also jumped on the bandwagon: PayPal, Mastercard, American Express, Citi, and JP Morgan Chase all offer similar loan products, while Apple is reportedly looking to offer such a service as well.

Fitch warned that such “buy now, pay later” debt could build up and even spill over into credit card debt.

“BNPL users may find themselves unable to pay periodic repayments and may turn to credit cards or other forms of high interest debt to repay BNPL debts,” he said. .

US household debt rose to its highest dollar amount in 14 years during the second quarter, according to the Federal Reserve. Although this was mainly due to a sharp increase in the housing market, credit card balances also jumped $ 17 billion from the first quarter – for a total of $ 787 billion.

According to Fitch, the findings of the Australian Securities and Investment Commission in November showed that 15% of Australian consumers using such late payment programs had to take out an additional loan the previous year to repay their BNPL plan on time.

United Kingdom, Fitch quoted a major UK bank that reported that of its more than 660,000 customers who paid their BNPL providers, 10% were over their overdraft limit in the same month.

Biggar of Argus Research told CNBC that in the last quarter, trading losses for Square “had increased significantly.”

According to Square’s 2019 annual report, transaction and loan losses for the year ending December 31, 2019 were up 44% from the previous year.

Regarding the risks of consumer default, he said: “It is certainly a concern, as we look at the next possible downturn… these loans have to be backed by something.”

By comparison, credit cards have built-in “security” features, including cutting off access to the card, he said.

– CNBC’s Jeff Cox contributed to this report.