‘Buy Now Pay Later’ Is Having A Moment As Recession Changes Shopping Habits #BitcoinFixesThis #GotBitcoin

Fintech companies have brought back an old-fashioned way of lending, and now even Apple and Goldman are getting in on the action. ‘Buy Now Pay Later’ Is Having A Moment As Recession Changes Shopping Habits #BitcoinFixesThis #GotBitcoin

You’re shopping online, about to hit the checkout button, when something catches your eye. It’s an intriguing offer. Instead of buying your item the old-fashioned way with your credit or debit card, you can pay for it in an even more old-fashioned way, familiar to anyone who shopped at department stores before plastic became ubiquitous: on an installment plan.

“Buy now, pay later” programs are growing fast, both on e-commerce sites and at physical retail checkout counters in the U.S. Stores generally offer the programs through third-party financial technology companies including Affirm, Afterpay, and Klarna.

Unlike credit cards, on which a borrower paying a minimum could carry a balance indefinitely, these loans are designed to be paid off in a set number of payments—often four. And they’re linked to a specific purchase rather than being a general line of credit.

In general, these programs make the lion’s share of their money on fees from retailers, rather than from interest paid by consumers. Stores are willing to pay because the programs make it easier for customers to say yes to items with price tags that might otherwise make them queasy.

“We are in the business of turning browsers into buyers, which is fundamentally a merchant service,” Affirm Holdings Inc. Chief Executive Officer Max Levchin told Bloomberg TV in July. His company gets a bit under half its revenue from merchant network fees, with a smaller chunk coming from interest income.

Americans spent an estimated $20 billion to $25 billion using deferred payments in 2020, according to a March report by analytics firm CB Insights. Worldwide, that same report projects that transactions through such plans could grow 10 to 15 times by 2025, topping $1 trillion.

According to Bloomberg Intelligence, buy now, pay later’s penetration in the U.S. may be 3% of e-commerce, but there’s room to grow—it’s about 10% in Australia.

Silicon Valley giants are trying to muscle in on the business pioneered by the fintechs. PayPal Holdings Inc. rolled out its own buy now, pay later feature, Pay in 4, last year.

Now Apple Inc. is looking to offer its own spin, with plans to build the functionality into its Apple Pay platform, Bloomberg News reported.

Banking giant Goldman Sachs Group Inc. will be the behind-the-scenes lender for the new Apple Pay product. “Apple and PayPal getting into this is an indicator that this kind of flexibility—this kind of ‘fintech-ification’ of our everyday commerce experiences—isn’t going to go away anytime soon,” says Lily Varon, a senior analyst at Forrester Research Inc. “This isn’t a blip.”

The pandemic lockdown fueled an e-commerce spending spree that seems to have accelerated the adoption of buy now, pay later. But the programs may also appeal to younger consumers who are wary of credit cards. Although buying on installment is very much a form of borrowing, it’s set up to feel easier to swallow.

Many plans charge no interest. Afterpay Ltd. has no credit check, while some other programs do only “soft” checks that don’t affect a consumer’s credit score. Having a set period to pay back may also feel more manageable.

The big opportunity for growth in the business is “either people that don’t really have credit or people that don’t really like using credit cards,” says Dan Dolev, an analyst with Mizuho Securities USA.

Installment companies say they’re more transparent and simpler than credit cards, and take steps to protect vulnerable borrowers. Afterpay, for example, cuts off further purchases as soon as a payment is missed. “Creating opportunities for consumers to buy that make them feel safe and smart and responsible is a good thing,” Affirm’s Levchin told Bloomberg TV.

Taken as a whole, though, the explosion of new programs means consumers have a lot more ways to put off payments and get into debt—and a lot more complexity to navigate.

Each program has its own set of rules on fees, rates, and credit reporting. Afterpay charges late fees of up to $8. Affirm has no late fees, but unlike Afterpay it may charge interest on some purchases, depending on the retailer.

Afterpay’s installment plans are designed to be paid off in four chunks over six weeks, while Affirm offers different schedules that may stretch out as long as 60 months.

It’s expected that Apple Pay will offer both a short-term pay-in-four plan and longer-term options. “It’s not clear to me that consumers can easily delineate between the different products that are out there,” says Chuck Bell, programs director in Consumer Reports’ advocacy division. “There will likely be more oversight at some point, because I think the problems are not going to go away.”

In July, the U.S. Consumer Financial Protection Bureau, the watchdog overseeing consumer lending practices, published a blog post about buy now, pay later programs.

While it didn’t criticize the practice, it advised consumers to look out for late fees and noted that since some programs are linked to a consumer’s debit card, there’s a risk of automatic installment payments triggering bank overdraft fees if the money’s not there.

Installment pay companies have come in for more scrutiny in other countries where they’ve gained a foothold. Sweden recently passed a law requiring that non-debt payment options, when there are any, be presented first online.

The U.K.’s financial regulator published a report that said the industry “poses potential harms to consumers and needs to be brought within regulation.” One risk it highlighted: Consumers could have multiple outstanding transactions across several platforms, adding up to high levels of indebtedness.

Forrester’s Varon says consolidation in the industry is inevitable, given the sheer number of players worldwide and the hunger for expansion. Affirm earlier this year completed the acquisition of Canada’s PayBright. And Apple and PayPal have paved the way for more traditional financial firms to enter the fray.

“They’ll probably see more banks moving into the buy now, pay later space,” says Anisha Kothapa, a senior analyst at CB Insights. She points to Goldman Sachs’s MarcusPay offering and installment options being developed by Visa Inc.

As companies in the sector get more experience with their customers, they’ll develop an ability to better underwrite credit risk, says Zachary Aron, principal in the payments and banking consulting practice at Deloitte. That will enable them to offer more tailored loans.

“Those are ways we really think financial institutions can be on the side of the customer,” Aron says. “Being able to use that information as education, coaching, guidance, support.” Not to mention making it even easier to click “buy.”

Updated: 9-15-2021

How Old-Style Buy Now, Pay Later Became Trendy ‘BNPL’

Millennials and Gen Zers have an addictive new way to buy stuff that would look familiar to their great-grandparents. “Buy now, pay later” is a type of consumer credit that really got going in the 19th century when Singer sewing machines were sold for a “dollar down, dollar a week.”

But the modern fintech twist in “BNPL” is that it’s aimed at people making impulse purchases of fashion or jewelry or electronics rather than sofas or refrigerators.

It’s delivered through apps that are wildly popular, leading to dizzying valuations of startups such as Klarna, Affirm and Afterpay. Regulators from the U.K. to Singapore worry that young borrowers are getting in over their heads.

1. How Did It Originate?

The “installment plan” is the precursor to today’s BNPL craze. Paying off purchases weekly or monthly evolved from 1840 onward, as makers of furniture, pianos and farm equipment looked to make products more attainable.

Cars later brought installment credit further into the mainstream, though credit cards eventually became the preferred way to spread payments on smaller purchases.

2. Why Not Use Credit Cards?

They tend to be disliked by the young people flocking to BNPL; Britain’s Financial Conduct Authority cites data showing 25% of users are between 18 and 24 years old, and half are 25 to 36. As a group, young shoppers are wary of providers that profit when customers don’t pay their balances. They prefer the feeling of control they get from fast BNPL payment schedules, often spread over four to six weeks. Because of these, and because purchases are generally cheap, they’re usually interest-free.

3. What’s New Here?

Most BNPL isn’t about buying big-ticket items; it’s about using an app to snap up that must-have jacket in the expectation that you’ll pay it off quickly. The average spend on a transaction in the U.K. using Klarna Bank AB’s app is 75 pounds ($99).

4. Why Is It So Popular?

The apps are simple and typically involve only minimal credit checks, or none at all with Afterpay Ltd., a Melbourne-based firm that offers payments spread over six weeks. Retailers — which pay the BNPL provider a small percentage of the transaction value, as they do with credit cards — frequently tell shoppers there’s “no need to wait until payday.”

5. What About Late Payments?

San Francisco-based Affirm Holdings Inc. doesn’t charge late fees, nor does Klarna on its “Pay in 30 days” product, though many of their peers do. BNPL customers who don’t pay bills are blocked from further purchases and may be passed on to debt collectors.

6. Who Dominates?

Stockholm-based Klarna is the BNPL beast: With a $45.6 billion valuation, based on a June 2021 fundraising round, and 90 million users, there are huge expectations about an initial public offering, possibly within the next couple of years. Klarna’s biggest rivals, Affirm and Afterpay, have millions of customers, too, and the competition is intensifying as banks, credit card companies, fintechs and shopping sites team up to go after the business.

U.S. tech entrepreneur Jack Dorsey’s Square Inc., a mobile payment company, agreed in August to acquire Afterpay for $29 billion. PayPal Holdings Inc. agreed to buy Japanese BNPL provider Paidy Inc. for $2.7 billion in September.

7. How Big Is BNPL?

Global sales using BNPL were $93 billion in 2020 and could top $181 billion by 2022, according to Bloomberg Intelligence. That’s still a small percentage of online retail — 1.6% in 2020 — but the share was growing fast. The U.S. is a juicy prospect because of lower BNPL penetration of the market there. Lifting that to levels seen in Australia and the U.K., among the most developed markets, would push yearly BNPL sales in the U.S. from about $20 billion to $100 billion.

8. What’s The Worry?

That it could be a form of irresponsible lending. Some regulators worry that painless borrowing is a “gamification” of shopping similar to Robinhood Markets Inc.’s stock trading app, creating a sense that spending isn’t real.

Consumers could load up on debt using different apps and then overdraw their bank accounts or take on credit card debt to service their BNPL accounts. The possibility that BNPL leads people into a chain of borrowing elsewhere could create hidden risk for the banking system.

The Australian Securities and Investments Commission found that, over a year, 15% of BNPL users had to take out another loan to make their payments, and 1 in 5 cut back on buying essentials. Britain’s FCA says the sector must be regulated, Australia has a new code of practice designed to prevent customers from borrowing more if they’re having difficulty with repayments, and California has fined unlicensed lenders.

Updated: 9-16-2021

Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later.’

Retailers big and small are using installment plans to wring more sales out of shoppers who can’t get credit cards

Alexis Luedtke got her first “buy now, pay later” plan in 2019 after she was rejected for a credit card. She has used at least five more since to buy face cream, T-shirts and birthday gifts.

Installment plans are back in style. PayPal Holdings Inc. last week said it was buying Japanese installment payment startup Paidy Inc., following Square Inc.’s $29 billion deal for Afterpay Ltd. Macy’s Inc. and Bed Bath & Beyond Inc. have added the option at checkout over the past year. Even Amazon.com Inc. is doing it.

One Reason: shoppers like Ms. Luedtke who don’t qualify for credit cards. Buy-now-pay-later companies say they rely less on—and in some cases bypass altogether—traditional credit scores and reports. Doing so allows them to approve more consumers.

Shoppers gain the ability to buy things even without cash on hand—translating to higher sales for retailers.

Afterpay said it expects the company’s U.S. merchants will see an $8.2 billion increase in sales this year because of payment plans. Affirm Holdings Inc. last year said purchases made with its payment plans were 85% larger, on average.

Shoppers spend more at Macy’s when they use installment plans offered through Klarna Bank AB, Macy’s CEO Jeff Gennette said on a recent earnings call. Klarna also is helping the retailer attract younger customers, he said.

“The value that most retailers see in buy now, pay later is customer acquisition,” said David Sykes, Klarna’s North America head.

Ms. Luedtke, 26, has credit cards now but still prefers installment plans. Just last month, she used them to buy about $40 of Peter Thomas Roth skin-care products and $65 in clothing from Shein.

“It definitely influences how much more I buy or would spend,” she said. “It’s easier to pay $200 over so many weeks compared to $200 right now.”

Buy now, pay later is a new twist on an old idea. Big retailers have for decades offered installment plans for big-ticket items like washing machines. Today, these plans come in a variety of flavors. Afterpay offers payment plans that shoppers usually attach to their debit cards. Others, like Affirm, also facilitate new loans.

Interest rates and other terms vary by payment-plan provider. Affirm interest rates range from 0% to 30%, with some 43% of its transactions during its last fiscal year not charging interest at all. The company doesn’t charge late fees. Afterpay doesn’t charge interest but does collect late fees.

Merchants take no credit risk with these plans, but the fees they incur can be higher than on credit-card purchases—often between 3% and 5% of the purchase price, according to people familiar with the matter.

Buy-now-pay-later companies say they can approve more customers than banks, including people who have thin or no borrowing history. Some 53 million adults in the U.S. lack traditional credit scores, according to FICO score creator Fair Isaac Corp. Installment plans are safer, they say, because they are often smaller than credit-card spending limits and approved on a per-transaction basis.

Affirm said that it had a net charge-off rate of 1% in the quarter ended June 30, down from 2% a year earlier. Afterpay said it wrote off 0.6% of the total dollars it processed in payments during the company’s fiscal year ended June 30, up from 0.4% the year prior.

Working with a web of retailers, buy-now-pay-later companies can create self-contained payment ecosystems. They factor payment behavior into future underwriting decisions. Customers who pay late or not at all risk losing the installment option at other participating retailers.

“Most merchants want a partner who has real advantage and real ability to underwrite,” said Affirm CEO Max Levchin. “These are not deeper approvals, but they are different approvals.”

Amazon and Walmart Inc. are both working with Affirm. Both have said they want their financial partners to extend credit to more of their customers.

Amazon is reviewing proposals, as it weighs whether to replace its longtime card issuer, JPMorgan Chase & Co. Amazon is looking for “commitments to underwrite competitively to widen the acquisition funnel,” the retailer said in a request for proposals reviewed by The Wall Street Journal.

A desire to boost loan approvals was among the reasons Walmart in 2018 decided to end its decadeslong credit-card partnership with Synchrony Financial. (Capital One Financial Corp. now issues Walmart-branded credit cards.) The retailer made Affirm loans available to most of its customers the following year.

“Our goal is financial inclusion for all,” said Julia Unger, Walmart’s vice president of financial services.

Some banks now offer installment options on their credit cards. Citigroup Inc. saw a sevenfold increase in the dollar amount of credit-card purchases converted to installment loans in July, compared with the same month a year prior, said Gonzalo Luchetti, head of Citigroup’s U.S. consumer bank.

Synchrony, the largest U.S. store-credit-card issuer, will launch a buy-now, pay-later plan in October. Capital One will test out its own offering later this year, CEO Richard Fairbank said at a conference Monday.

Wells Fargo & Co. and Bank of America Corp. are exploring adding installment plans on their credit cards, according to people familiar with the matter. Visa Inc. said it has been testing out ways for shoppers to check if they qualify for installment plans when they enter their card numbers at checkout.

Updated: 9-18-2021

When To Buy Now, Pay Later, And When To Just Pay Now

For those who choose to pay in installments, make sure to read the fine print.

Digital buy now, pay later services are surging in popularity. While they offer consumers appetizing convenience, these services also leave some with regrets.

Companies such as Affirm and Klarna Bank AB enable shoppers to purchase products online, have them delivered as usual, then pay for their order in installments. Sometimes these services come with interest and sometimes they are interest free.

This app-based version of layaway—making small payments for an item over time—has skyrocketed in usage among both consumers and retailers. Afterpay Ltd. , one of the most popular platforms, said sales among its U.S. merchant partners will increase by $8.2 billion this year thanks to payment plans.

Research firm Kaleido Intelligence estimates that by 2025, online consumers around the globe will have nearly doubled the amount of money they spend using buy now, pay later services to $680 billion.

As these apps grow in usage, so do complaints. Regulators in the U.K. have curbed the ways in which buy now, pay later companies can advertise their services.

Last year, a California oversight board required several of these companies to refund consumers hundreds of thousands of dollars.

A recent national survey of nearly 3,500 adults found that one in five Americans made a purchase using a buy now, pay later service in the past year. The survey, conducted by research firm Momentive, also found that one in six Americans who used such services regretted doing so, citing high interest rates, minimal options to build their credit, or simply having bought things they couldn’t really afford.

‘What jumped out at me right away is that the appeal of buy now, pay later is the same as the potential problems.’
— Jon Cohen, chief research officer at Momentive

Buy now, pay later services say they are a better alternative to traditional banking and credit institutions, offering access and flexibility to credit-spare consumers. An Affirm representative said that it underwrites loans for individual purchases rather than extending a single line of credit, a process that is partially based on a consumer’s ability to pay it back.

Klarna said that its policy of revoking access after missed installments—and increasing purchase limits according to on-time payment behavior—is designed to encourage responsible spending.

Here’s what you need to know about buy now, pay later apps and the important differences between the services.

Make The Payments, or Pay Interest

Payment schedules vary among the services, but generally the cost of a purchase is split into four interest-free installments paid over six weeks.

Afterpay customers are required to repay in full within six weeks. When customers miss a payment, the company revokes access to the Afterpay platform and charges a late fee for the missed installment. The company said 95% of transactions don’t incur late fees.

Affirm allows the flexibility of spreading purchases anywhere from six weeks to 60 months, with 0% to 30% interest, the company said, depending on the merchant, product and its underwriting process. The company said its biweekly payments are always interest-free.

Affirm’s interest rate and options are determined by purchase amount, merchant terms, credit usage and other existing loans the consumer might have with the company. If you purchase a $1,000 sofa with Affirm and choose to pay it off over a year, you could be offered a 16% interest rate. That means you would pay about $97 per month.

Keep track of your purchases carefully, said Chelsea Ransom-Cooper, managing partner and financial planner at Zenith Wealth Partners. Using this method of payment for multiple, concurrent small to midsize purchases can stack up quickly, said Ms. Ransom-Cooper.

Repayment for most of the services is automated by default. Klarna requires users to connect their debit card, credit card or bank account, for example. Most services also send text reminders of an upcoming charge.

When to Use It

Only use buy now, pay later for things you can’t pay off on your monthly credit-card bill, said Ms. Ransom-Cooper.

“Leaning on these apps for emergency purchases can be a helpful way to give yourself a little more time than your credit card will,” she said.

Another benefit of these services are the favorable terms of borrowing for those with little credit or a short credit history, especially for larger purchases, according to financial analysts.

If used responsibly, buy now, pay later services can “level the playing field” for those shut out of credit access, said Sheridan Trent, a research analyst at the Strawhecker Group, a consulting firm that focuses on electronic payments.

Know What You’re Not Getting

Even though consumers are encouraged to essentially borrow money and pay it back in a timely and responsible manner—as they would with a credit card—those payments don’t necessarily help them build credit history, said financial analysts and authors.

“You’ve taken out a loan that, because it’s not a revolving credit line, the chance for it to be negatively on your credit, as opposed to positive, is higher,” said Grant Sabatier, co-founder of BankBonus.com and author of “Financial Freedom,” referring to Affirm loans.

Affirm doesn’t report payments on its four biweekly payment zero-interest loans, it said, or when consumers are offered a three-month payment option with no interest. Afterpay doesn’t work with credit bureaus at all. Sezzle Up explicitly informs users that it will report on-time payments to Equifax and TransUnion.

Missing A Payment

Just as with a credit card, there are consequences to late payments for buy now, pay later services.

Affirm doesn’t charge late fees, but late or partial payments can hurt your credit score, and may prevent you from using the service in the future. Sezzle Up also reports delinquencies.

Klarna and Afterpay revoke access to their platform until payment is made. Both companies also charge late fees, tacked onto your next payment. Afterpay charges $8, or 25%, of the purchase, whichever is less, while Klarna charges a maximum $7, or no more than 25%, of the past due amount. Klarna said it will contact users to collect payment before charging a late fee.

Financial planners stress the importance of keeping track of your installment payments, as you would any bill.

“Documenting the payment schedule will help you factor the payments into your budget,” said Ms. Ransom-Cooper.

Kristen Euretig, a certified financial planner and founder of Brooklyn Plans, said new clients of hers who use buy now, pay later apps often pay the first installment and forget about the remaining charges during the intake session.

“It’s not something that occurs to people,” she said. “Student loans, of course. Credit cards, yes. And then this is technically a debt that needs to be repaid. So it seems to not stick in people’s minds the same way.”

Try Not To Make It A Habit

Buy now, pay later apps are built to encourage repeat purchases by making it easy to buy items without paying full price immediately, said Mark Palmer, managing director and fintech analyst at financial-services firm BTIG.

“It becomes almost part of their lifestyle as a consumer to purchase things using buy now, pay later and get access to them weeks before they would be able to otherwise,” said Mr. Palmer.

The services are designed to remove as much friction from the checkout process as possible, which can make spontaneous purchases easier and faster, says Ms. Euretig.

“It’s very savvy,” she said. For most of the services, the pay later button is right next to the buy button. This makes it just as easy for a consumer to choose either option.

“There’s an exit door from the realization that you can’t afford this right now.”

Updated: 9-21-2021

Even Goldman Sachs Is Jumping Aboard Buy Now, Pay Later

Investors are flocking into fintech apps offering short-term, interest-free loans for fashion and beauty products. Haven’t we seen these risks before?

People can be just the worst borrowers, failing to pay what they owe especially if defaulting doesn’t cost them their house or their car. That’s why credit cards charge eye-watering interest rates and late fees.

It’s also why cards and other unsecured consumer debt cause the biggest losses for banks during major downturns — and why central banks assume that consumer defaults bring the most pain in financial stress tests.

So it’s a bit of mystery why “Buy Now Pay Later” apps — which let users pay for purchases next month of in a few installments, without charging interest and often no late fees either — are the hottest thing in fintech. Investors have been throwing money at firms like Sweden’s Klarna and Australia’s Afterpay, driving valuations to dizzying heights.

Goldman Sachs Group Inc. and PayPal Holdings Inc. have also jumped into the fray, each striking $2 billion-plus takeovers this month.

It’s still too early to assess the true credit risks in these new technology-driven firms. But there are reasons to suspect that in tough times bad debts could bite hard.

Apps like Klarna and Afterpay mostly offer very short-term, interest-free loans for fashion and beauty products. The loans are interest-free because the shop pays a fee of a few percent to get its money straight away and to cover payment processing.

Retailers like Yoox or Net-A-Porter are also willing to pay because the apps draw in customers and encourage them to spend.

Use of the apps has been growing fast, especially during the pandemic. European transactions are up almost 100% in the past year and Klarna’s U.S. volumes jumped more than 300% in the first half of 2021.

Investors are flocking in. In Europe, Buy Now Pay Later firms have raised more than $2 billion from venture capital and private equity this year alone, according to Morgan Stanley.

This is pushing valuations to staggering levels. Mostly, they’re quoted as multiples of revenue because many of these firms don’t turn a profit. For example, Sweden-based Klarna was valued at $46 billion after it raised more venture capital funding this summer, according to Bloomberg Intelligence. That is 30-times its last 12 months’ revenue.

U.S.-listed Affirm Holdings Inc. trades at an even steeper 36-times revenue, while Australia’s Afterpay, which is being bought by Square Inc., now trades at nearly 40-times revenue. These are huge premiums on firms when the risk of big default losses is still highly uncertain.

Established finance companies are jumping in too. This month PayPal struck a $2.7 billion deal for a small Japanese Buy Now Pay Later firm called Paidy. And last week, Goldman said it would pay $2.2 billion for a home-improvement lender called GreenSky in its quest to conquer Main Street.

To be fair, though, GreenSky lends to homeowners in a slightly more traditional way, providing bigger loans over longer periods, and with interest, for things like new bathrooms or windows and doors.

Also, Goldman is paying about 30-times earnings over the past 12-months, according to Bloomberg data, as opposed to 30-times its revenue.

Most Buy Now Pay Later apps offer what looks like credit-card lending, but with smaller loans of up to a couple of hundred dollars on average, depending on the country. The question is whether the credit risks are any different.

Klarna and peers argue they are. Users can only increase the amounts they borrow slowly based on good behavior. They have to repay when the money is due, usually after just 30 days, or in installments over a couple of months.

Afterpay makes new customers pay a quarter of any purchase upfront until they have a track record. If you don’t repay when you’re meant to, you get stopped from using the app, which should mean less risk for investors.

Credit cards, on the other hand, will give you a limit of, say, $2,500 straight away — an invitation to splurge. Customers can keep spending until they hit their limit, and the bank will just charge late fees for failure to repay, on top of hefty interest.

But banks do a thorough credit check before giving out a card. Buy Now Pay Later firms generally don’t, which might make them more risky, according to Morgan Stanley analysts.

The bigger risk, however, is that a high portion of these small loans go bad at the same time. Not only are many of the borrowers young — typically half are under 45 years old; at Klarna the average age is 33 — but the consequences of failing to pay are minimal. No interest and often no late fees means it’ll be easy to let the payment slide, especially if you’re in a pinch.

Unexpectedly high correlations among defaulters have caught lenders out before: Think of mortgages in 2008, especially in the U.S.

When the next recession comes, and there isn’t the kind of income support people have had during the pandemic, on-trend investors might find they’re the ones who have to pay later.

Updated: 10-6-2021

Most Shoppers Worldwide Keen on ‘Buy Now, Pay Later’ Loans

Most shoppers plan to use “buy now, pay later” loans in the next couple of years, according to a report that highlights the surge in new financial products that sidestep the world’s biggest lenders.

A poll of more than 6,300 people globally found that 20% have already taken out buy-now, pay-later loans, while about 60% think they will try the service within two years. This compares to about 45% who said they will use cryptocurrencies soon, according to a report published Thursday by technology consultancy Capgemini SE.

Fintech firms such as Klarna and Afterpay Ltd. have grown into multibillion-dollar companies by offering customers the option to pay in installments when they shop online. Buy-now, pay-later specialists have already diverted as much as $10 billion in annual revenue away from banks, according to research in July by McKinsey.

This boom has attracted scrutiny from regulators, who are concerned about money-laundering and the risk of unaffordable borrowing. Meanwhile, traditional financial giants including Goldman Sachs Group Inc. and Mastercard Inc. are trying to muscle in on the market.

About two-thirds of bank executives polled by Capgemini said challengers such as PayPal Holdings Inc., Stripe Inc. and Square Inc. were bigger competition than long-established lenders.

Overall, non-cash payments rose a meager 8% in 2020 after years of double-digit expansion were slowed by the pandemic, Capgemini said. Still, the report predicts that the rebounding global economy will fuel demand for alternatives such as cryptocurrency, wearable payments and digital wallets.

Updated: 12-19-2021

Equifax To Add More ‘Buy Now, Pay Later’ Plans To Credit Reports

Short-term payment plans for small-ticket items are growing quickly, creating a blind spot for lenders.

A popular kind of “buy now, pay later” plan is coming to credit reports.

Early next year, Equifax Inc. will begin recording installment plans that allow shoppers to make four biweekly payments instead of covering the full cost at checkout. The move is meant to give lenders a fuller picture of people’s financial commitments, including how much they owe on these plans.

These “pay-in-4” plans have exploded in popularity in recent years. They are often used for small-ticket items such as clothing and makeup and are typically billed directly to a shopper’s debit or credit card. A $200 shopping trip, for example, requires $50 upfront and three more $50 payments billed every two weeks.

Buy now, pay later is booming in the U.S. High-end and discount retailers alike offer the plans at checkout online. Some merchants also offer them in stores. But the plans often don’t show up on credit reports, creating a blind spot for lenders that use the information on the reports to gauge an applicant’s ability to repay.

“Responsible lending benefits from a complete picture of a person’s financial obligations,” said Equifax Chief Executive Mark Begor.

Billions of dollars of obligations go unreported. Buy now, pay later company Afterpay Ltd. , for example, did $9.8 billion in pay-in-4 plans in North America during the 12 months ended June 30, more than double a year earlier.

Klarna Bank AB transactions during the first half of the year in the U.S. totaled $3.2 billion, up from $722 million during the same period in 2020. The majority are pay-in-4 plans.

The payment plans are small—the average Afterpay transaction is $150—but they can add up if shoppers use them frequently.

Credit-reporting firms have faced technical challenges adding short-term installment plans to credit reports. Most credit reports aren’t set up to display biweekly payments.

And there is often a lag between when consumers open accounts and when lenders send that information for inclusion in people’s credit reports. The lag can outlast a fast repayment period.

Some buy now, pay later installment loans for big-ticket items are recorded on credit reports in the same section as personal loans. Far fewer of these smaller, short-term plans, which in most cases don’t require credit checks, are reflected in credit reports.

TransUnion said it doesn’t include these plans on its credit reports but is working with buy now, pay later companies to enable reporting next year. A small number of buy now, pay later companies submit information about these plans to Experian PLC, which then includes that data in credit reports. Experian is working with buy now, pay later firms to add more of this information to its reports.

Afterpay and Klarna, two of the biggest players in the business, don’t report their pay-in-4 plans to U.S. credit-reporting firms.

Affirm Holdings Inc. said it reports the full payment history of some of its loans, including on-time payments and delinquencies. The company doesn’t report its pay-in-4 product. All three said they have been talking to the firms about potentially reporting these plans.

One stumbling block: The frequent opening and closing of accounts can drag down credit scores. The buy now, pay later companies want to make sure customers who pay their bills on time aren’t penalized for frequent use of their short-term payment plans.

Equifax will add the pay-in-4 data to credit reports beginning at the end of February. Both positive and negative information, on-time payments and defaults, will be included in reports and reflected in consumers’ credit scores, Equifax said.

Buy now, pay later plans are especially popular among people with limited credit histories who don’t qualify for credit cards or other traditional credit. These consumers, Equifax said, should get a boost from the plans’ inclusion on credit reports if they pay their bills on time.

People who have thin credit files or who have no more than two years of credit history saw an average FICO credit-score increase of 21 points, according to an Equifax study, compared with an average of 13 points for the typical borrower.

The credit report will include when the payment plan was opened, the scheduled payment the consumer has agreed to make and the actual payment that is made.

Updated: 7-8-2022

‘Ape Now, Pay Later’ Loans Bring BNPL To The NFT Market

DeFi lender Teller is offering buyers the option to pay for popular NFT collections in installments.

Buy now, pay later is coming for NFTs.

Decentralized finance lender Teller announced Thursday the launch of a new BNPL feature for some the most popular nonfungible tokens, including Bored Ape Yacht Club, Doodles, Meebits, Cool Cats and others. The service is participant-driven, meaning users will directly lend to and borrow from each other.

Teller’s new service has been coined “Ape Now, Pay Later” and is built on the Polygon blockchain network. Similar to apps like Affirm or Klarna, buyers would need to put down a minimum of 25% of the price tag to purchase an NFT, then pay for the remainder in installments.

The announcement comes in the midst of what’s been dubbed “crypto winter,” with prices for crypto assets plunging and several lenders struggling to survive. Meanwhile, the market for NFTs — which peaked during last year’s crypto bull market — has also been spiraling downward, with prices slumping and sales falling to their lowest level in a year.

The price floor on Bored Ape Yacht Club’s NFT collection was about 90 Ethereum (about $109,000) on Friday, a 40% drop since May, according to data from NFT Price Floor.

In order to secure financing with the new BNPL program, borrowers can submit loan requests through Teller and lenders will provide funding on a case-by-case basis, the company said in a press release.

Lenders can earn interest of up to 30% annually, and the market participants themselves will determine creditworthiness, the annual percentage rate and the loan terms.

Buy now, pay later options have proliferated in the past year with apps from companies like Afterpay Ltd., Affirm Holdings Inc., Klarna Bank AB — and soon Apple Inc. — offering layaway plans where customers can take their purchases home right away and then pay for them in installments, usually between three and six in total.

Some of these companies are suffering from the uncertain economic outlook, with rising rates and recession fears hitting their ability to raise money.

Klarna had to lay off about 10% of its staff and is in talks to raise new equity at a valuation as low as $6 billion, a fraction of the $45.6 billion it was valued at last year.

Updated: 7-13-2022

When A $490 Glock Can Cost $1,123: The Company Behind ‘Buy Now, Pay Later’ For Guns

Credova makes it easy to finance a firearm quickly, in retail stores as well as online, but paying it off may be more onerous.

Last year, Jennifer White, a 44-year-old single mother in Georgia, wanted to buy a $415 Glock G44 for self-defense. Through the website Guns.com, it was possible to finance the pistol without adding a penny to her credit card balance, which she’d just finished paying off.

With a 10-round magazine plus shipping, taxes, and some other fees, the total was $490. Nothing was due up front. The payments were about $87 a month, and White figured it would take her about five months to pay it off.

The financing was arranged through Credova Financial LLC, a financial technology company in Bozeman, Mont., in the burgeoning “buy now, pay later” business.

Like better-known BNPL businesses such as Afterpay Ltd. and Affirm Holdings Inc., Credova works with both online and brick-and-mortar retailers to give consumers the option at checkout to break up their purchases into smaller payments.

But Credova is different from most other BNPL companies because it not only allows but embraces gun sales, alongside other sporting goods.

Its seemingly frictionless payment option—the Guns.com site says customers can get “approvals in seconds”—shows how gunmakers and retailers are using the instant-gratification techniques of internet marketing to satisfy the American appetite for firearms.

Guns.com says Credova customers can “get protected now, pay later.” The retailer Grabagun.com, which also uses Credova, has trademarked the slogan “Shoot Now Pay Later.”

BNPL programs represent a sliver of US gun purchases: Most of the biggest companies, including Affirm, Afterpay, Klarna Bank, and Zip, don’t finance guns.

And even consumers who finance instantly online have to get a background check through a licensed dealer and pick up their gun at a physical store. Still, adding BNPL to the mix makes gun-buying easier—and that’s Credova’s stated mission.

“We’ve made it extremely easy to go through the checkout process, no different than maybe just using a credit card at checkout to get a loan with us,” Dusty Wunderlich, Credova’s chief executive officer, said in a shooting-sports trade show interview posted on YouTube in January. He added that Credova looks beyond credit scores, at things such as checking account data.

“We try to do that so we’re not saying no to consumers just because of a credit score.” Credova declined to comment for this story.

BNPL’s popularity in general has raised concerns about consumers taking on debt too easily, but its emergence in gun retailing also has public-health implications.

Mass shootings in Uvalde, Texas, and Highland Park, Ill., have called attention to how easy it is to legally buy guns in the US, though neither incident has been linked to BNPL financing. The Uvalde killer used a debit card.

In addition to such high-profile events, research shows that the presence of firearms in a home increases the chances of suicide and homicide without a quantifiable benefit to a gun owner’s safety, says David Hemenway, a professor of health policy at the Harvard T.H. Chan School of Public Health.

Offering instant credit on firearms is “a little like lowering the price in the sense that it makes it more likely that people will be able to buy,” he says.

Paying off the gun may be a different matter, because there’s a potential catch to promises of fast financing. Some of the deals Credova offers are more complicated and potentially much more expensive than the payment plans BNPL is best known for.

A popular offer these days is “pay-in-four,” a loan that’s paid in four installments over a couple of months, with no interest. Credova in June announced it was starting to offer pay-in-four through certain merchants, without saying whether those included gun sellers.

The financing White got wasn’t a short-term loan but a 12-month “closed-end consumer product lease” on her gun. At the end of the lease she can make a final $73 payment to own the gun outright, at which point she will have paid $1,123 —the equivalent of 129% interest. Credova on its website refers to such excess costs as “leasing fees.”

White says it came as a surprise to her when she realized her automated payments had started to add up to more than $490. “You’re assuming when you finance something you’re buying it for the stated price,” she says.

A copy of White’s agreement, which was emailed to her and which she shared with Bloomberg Businessweek, says she signed it electronically when she confirmed its terms.

It lays out the terms and the total cost over the life of the contract. If she had paid off the gun in the first 30 days of the lease, her cost would have been $490. Once that deadline passed, she could buy out the lease early, but it would cost 75% of the remaining payments.

Other gun owners have taken to social media to urge people to read their Credova agreements with care. “This is my fault for not reading more carefully,” wrote one pseudonymous poster on the r/Firearms Reddit forum, who said he was able to pay off his gun in time to get out of a lease.

“Please, don’t make a mistake like I did and use this company. If you have to finance a gun, then you probably can’t afford that gun.”

Along with its new pay-in-four product, Credova also puts some customers into longer-term installment plans that may charge interest. It’s not alone in this. Big BNPL companies including Affirm and Klarna offer longer-term loans, particularly for big-ticket items such as furniture and exercise equipment.

Affirm’s platform also works with third-party lease-to-own providers such as Katapult Holdings Inc., which can offer financing to customers who don’t qualify for Affirm’s other offers.

Retailers tout the idea that Credova financing can be interest-free. “90 Day Interest Free Financing*” says a banner on Guns.com. The asterisk notes that not all customers will get this offer and that it depends on their credit profile.

An FAQ section on the site further explains that if buyers don’t pay off the gun in 90 days, they’ll be responsible for any interest accrued in that time. Credova’s June statement said it would be phasing out such 90-day interest-free promotions in favor of pay-in-four.

On its website, Credova positions itself as a BNPL company for “the outdoor lifestyle,” financing not only guns but also gear for hunting, fishing, camping, and other sports, and even for pets. But guns are a distinctive part of Credova’s business.

“Financial services in the shooting sports industry is a real problem,” said Wunderlich in the trade-show interview. “We’re trying to address this demand for good financial services products and back the industry as well.”

Credova is part of an expanding network of often-obscure companies performing different roles in online finance. Like other BNPL companies, Credova is an intermediary. Its pitch to stores is that its technology can help them turn browsers into buyers.

In June, Credova said it was offering long-term installment plans through Cornerstone Bank in North Dakota, with annual percentage rates of as much as 36%.

Another cog in Credova’s network is debt collector Monterey Financial Services in Oceanside, Calif. That’s where White’s lease ended up. According to her contract, the lessor on her pistol was Guns.com, but the retailer says it doesn’t decide the individual rates agreed between Credova and customers.

White’s payments were immediately assigned to Credova, and then they went to Monterey, which specializes in buying up or servicing consumer debts on everything including timeshares, hearing aids, and jewelry. Monterey has worked with Wunderlich in the past.

A different business Wunderlich ran until 2017 also offered leases on pets and other big-ticket items such as wedding dresses, often to people who might not qualify for traditional credit, according to a Bloomberg article. Monterey handled many of that company’s leases.

A spokesperson for Monterey says the company isn’t involved when sales are made and doesn’t set the terms of the contracts it collects on. One thing that distinguishes Monterey from its competitors, according to a 2021 investor document deep in its website, is that “it will make unlimited phone calls in order to collect monthly payments.”

Monterey says this means it doesn’t have preset caps when it’s collecting on behalf of outside clients, and that its communications comply with federal and state laws and regulations.

The document also says the company is always looking for new markets to diversify into: “Monterey considers every Business to Consumer opportunity.”

Updated: 8-2-2022

How ‘Buy Now, Pay Later’ Compares To A Credit Card

These apps are popping up everywhere. But if you aren’t careful, they can trip you up.

When you buy online these days, you’re likely to encounter a new kind of payment option—to “buy now, pay later”—a way to make your purchase without a debit or credit card.

These installment plans, also known by the initials BNPL, have multiplied, with Afterpay, Zip, Affirm and Klarna among the most popular names, popping up whenever you go to hit the checkout page and sometimes before.

If you already have a good credit score, the services promise a potentially cheaper alternative to credit cards, with the prospect of interest-free payments for people who pay on time.

For people without access to traditional credit cards, buy-now-pay-later services, which bypass full credit checks, offer a new way to buy on credit.

Yet the opportunity to purchase a product in multiple installments, instead of in full at the point of purchase, comes with its pitfalls if you’re not aware of their rules and how they work.

How Buy Now Pay Later Apps Work

Buy now, pay later functions like an unsecured loan. Apps typically allow you to split purchases into four installments, interest free. PayPal’s version, “Pay in 4,” offers this option, as does Klarna.

The services vary in their features; Afterpay and Klarna offer payment plans that shoppers usually link to their debit cards, while Affirm also facilitates new loans.

BNPL kicks in when you check out and usually requires you to make a down payment, often 25%. Each purchase requires a separate approval, which usually takes seconds.

Even if the merchant hasn’t signed on with a buy now, pay later provider, you can still use the service through browser extensions or the mobile apps themselves.

Affirm issues app-based, single-use virtual cards. You apply for a preapproved amount based on what you plan to spend on your purchase; the card is good for 24 hours.

The Klarna Card works more like a traditional credit card and is taken by merchants who accept Visa.

Free for the first year, afterward the app-based Klarna Card costs $3.99 a month to maintain. Another similarity to credit cards is that it offers rewards if you spend with its affiliated merchants, including Amazon, Starbucks and Adidas.

BNPL also offers some flexibility beyond the four-payment option. Affirm offers monthly payments, while Splitit, a service that offers merchant-branded installments, gives you up to 24 months.

Buy Now, Pay Later Vs. Credit Cards: Which Should I Choose?

One major difference between credit cards and BNPL is that, when you borrow with a credit card you can pay down as little or as much as you want each month, as long as you make a minimum monthly payment. Buy now, pay later installments, set at the time of purchase, are fixed. Many will require you to make your payments every other week.

That can prove advantageous. Let’s compare a buy now, pay later purchase of $1,000 with one made via credit card. Since buy, now pay later services work in different ways, we included several possibilities.

If You Pay The $1,000 Off In Four Months, You Would Pay:

*Credit Card: $36 In Interest, Based On Recent Average Rates

*Bnpl: $0 In Interest

If You Pay The $1,000 Off In 12 Months, You Would Pay:

*Credit Card: $102 In Interest, Based On Recent Average Rates

*BNPL Possibility 1: If you fail to make your installment payments on time with Klarna, you would owe late fees. These would be capped at $21, but you would be restricted from using the service again until you paid off the debt. Affirm does not charge late fees, but could also cut you off from further loans.

*BNPL Possibility 2: Some services charge interest if you fall behind on payments. With PayPal Credit you would pay $155 based on published rates.

*BNPL Possibility 3: Some buy now, pay later services allow you to sign up to pay over periods longer than the standard four months. In that case a credit card-like interest rate applies and you could pay anywhere from $60 to $200 at today’s rates.

One key to making buy now, pay later work in your favor is to set up automatic payment deductions from your debit card, bank account or credit card. Keep in mind, though, that if you use a credit card to pay off a buy now, pay later balance, you’re just shifting consumer debt from one bucket to another, and so may incur interest charges.

Be Aware Of BNPL Risks

While the prospect of making four equal, easy payments can have its advantages, you should pause before leaping into buy now, pay later. According to a LendingTree survey of more than 1,500 shoppers, 70% of women and 66% of men said they overspent using buy now, pay later.

And in a survey of more than 2,000 consumers by C+R Research, 59% said they purchased an unnecessary item they couldn’t otherwise afford, while 57% regretted purchasing an item because it was too expensive.

It’s important to note that services such as PayPal Credit charge retroactive interest rates if you’re late on your payments. Retroactive means you will pay interest that’s calculated from the original date of purchase. PayPal Credit charges 25.49%.

Late fees are also another hazard. PayPal charges up to $41, while Afterpay charges $10, Klarna up to $7, and Zip between $5 and $10. (Affirm does not charge late fees.)

Buy now, pay later can also lure you into a false sense of security as the apps track how much you’re spending or your current loan balance.

But of course they don’t tell you what you can afford based on your bank balance or budget, which could be a pitfall for anyone unfamiliar with credit, says Gabriela Slemer, chief executive of Finasana, a money, investing and financial wellness website.

“At the end of the day, BNPL is still debt,” Slemer says. “Every time you get into the habit of funding your lifestyle with money that isn’t yours, it can be dangerous territory because you’re essentially delaying the financial burden, not getting rid of it.”

More than half the C+R survey respondents also reported that they fell behind on a payment, and this is where BNPL loans can get especially hazardous. As the Consumer Financial Protection Bureau notes, each lender has different fees and policies.

There is less standardization than in the credit card industry, in large part because buy now, pay later is relatively new.

And while BNPL services promote their soft credit checks, information on delinquent payments is reported to the major credit bureaus and delinquent accounts may be subject to action by a debt collector.

“Missing just one payment by 30 days can drop your credit score by 90 points, and it will typically take nine to 18 months to bounce back,” says Andrew Latham, a certified financial planner and the managing editor of SuperMoney.com, a comparison shopping site for financial products.

Updated: 8-13-2022

Affirm CEO Says Next Recession Will Silence Fintech Lender’s Doubters

With shares of the buy now, pay later company down 77% from November, Max Levchin says firm’s lending models will set it apart.

Max Levchin says the market is wrong about Affirm Holdings Inc., the buy now, pay later company he co-founded a decade ago. It might just take a recession to prove it.

Affirm’s stock is down 77% since hitting its peak in November, compared with a 9% decline in the S&P 500 during the same period. Investors are worried about future costs of borrowing, growing competition and whether Affirm’s borrowers will fall behind on payments during a downturn. The company’s total valuation stands at about $11 billion, down from a peak of $47 billion.

Mr. Levchin is confident that Affirm has safely cracked the code to underwriting more consumers than banks would. Like many lenders, Affirm tightened underwriting standards early in the pandemic. Last year, it began loosening them.

“I can swear on a stack of Bibles or your preferred book of choice, until we get through a full recession, I will get partial credit when I show the numbers that I said I will,” he said in a June interview with The Wall Street Journal. “But once we’re back in a rapidly expanding economy and we’re still here, still lending money, still controlling our delinquencies, I think I’ll get full recognition.”

Affirm is one of the largest buy now, pay later companies in the U.S., offering payment plans that enable consumers to divide the cost over time for purchases big and small, including makeup, clothing, furniture, travel and workout equipment.

Walmart Inc. and Amazon.com Inc. are among the hundreds of thousands of merchants that offer Affirm plans to shoppers.

Unlike credit cards, buy now, pay later plans are for a specific item, and the payments have a clear end date. Some plans don’t charge interest, helping to fuel a rise in their popularity over the past few years. Affirm said it doesn’t charge late fees.

Affirm grew rapidly in recent years while touting its ability to approve more people who might be shut out by traditional lenders, including those with limited or no credit histories. The stock closed Friday at $39.19, up from a low of $14.63 in May but still well below its peak of $168.52 in November.

Mr. Levchin said investors are lumping in his company with other fairly new fintechs despite big differences in their overall lending models.

Affirm underwrites consumers based partly on their credit reports and scores. It also analyzes other information, including where they are shopping and what they are trying to buy.

Items such as jewelry are potentially more prone to fraud, because a buyer could resell it at a profit and then default on the loan. Furniture and other big items that are used every day tend to be lower-risk.

The company typically charges merchants higher fees if they want Affirm to approve somewhat-riskier consumers. Those who miss a payment on an Affirm plan typically can’t be approved for another one until they have caught up.

Riskier borrowers or those financing an expensive item can be required to make a down payment on an Affirm loan, but others can walk away with a new mattress for $0 down.

Affirm has been offering more payment plans for small-ticket purchases. That move, as well as easing underwriting standards since last year, helped increase Affirm’s volume growth—and placed the company at the center of mounting concern regarding consumer credit.

While missed consumer-loan payments overall have hovered near record lows for much of the pandemic, they recently began rising at a sizable clip at Affirm and other fintech lenders.

Rising interest rates are another challenge. Because Affirm isn’t a bank, it can’t fund itself with deposits. Instead, it relies on securitization deals, warehouse lines mostly from banks and selling loans to a range of investors, including insurance companies and asset managers. About 20% of its funding has variable interest rates, the company said.

Cushioning the impact of rising rates and delinquencies is that most of its payment plans are short-term, according to Affirm. They range from six weeks to five years, but average five months.

The stakes are high if delinquencies surge. Affirm borrows from roughly 20 banks, pension funds and other companies, and its most-conservative lenders generally require that its three-month average for payments that are late by at least 30 days doesn’t exceed 6%. That figure was around 2% as of May, up from roughly 1% during its 2021 fiscal year, and in line with where it was prepandemic.

That is “my primary thing that I watch like a hawk,” Mr. Levchin said.

Competitors include Afterpay, Klarna Bank AB and PayPal Holdings Inc. Some big banks have introduced programs that look like installment plans. Mr. Levchin said Apple Inc.’s recent decision to enter the sector confirms that these types of payment plans will gain more traction.

Affirm remains committed, Mr. Levchin said, to the same broad vision it had when it launched: to chip away at credit-card use.

“I think the biggest ill in this world is revolving credit,” he said.

A slowdown in retail sales could pose another challenge, especially since buy now, pay later firms often charge merchants higher fees than credit-card companies do. Merchants also have to pay more to offer Affirm payment plans that charge no interest, especially when rates are rising.

Mr. Levchin said merchants and manufacturers will continue to want the Affirm plans as a way to boost their sales.

“In a recession,” he said, “0% is very attractive.”

Updated: 12-1-2022

This Holiday Season Buy Now, Pay (And Worry) Later

It’s appealing to postpone paying for gifts and things this year as budgets tighten. But as the temptation grows so do the risks.

Consumers are spending record amounts shopping online this holiday season. With budgets strained by rising prices, more are opting to load up their carts now and pay later.

Sure, buy-now, pay-later, or BNPL, services appear more consumer-friendly than credit cards: Shoppers can make a partial payment upfront and the rest in four or six interest-free installments, and fees for late payments are typically capped.

Those perks have drawn in borrowers with fewer financial resources. On average, BNPL customers have weaker credit scores and lower incomes than consumers using other forms of payment when shopping. Still, as the economy turns and the temptation to postpone paying for things grows, so does the risk of overextending.

BNPL is still a niche product comprising about 5% of all e-commerce sales in the US, but purchases using this option jumped 85% over the Black Friday shopping weekend compared to the week before, according to Adobe Analytics.

By 2024, Insider Intelligence estimates online shoppers staggering payments will spend more than $1,100 annually per user compared with $958 in 2022.

Despite the growth potential, the industry is under pressure. The main players — Affirm Holdings Inc., Afterpay, Klarna Inc., and PayPal Holdings Inc. — have struggled this year as consumers pull back on discretionary spending.

At the same time, higher interest rates make it more expensive for BNPL providers to borrow the money they lend to shoppers. That can only mean trouble for their customers as firms either become more selective about who they lend to or, more likely, impose fees or other charges to turn a profit.

There are early signs of stress among BNPL borrowers. Charge-offs (when the debt is so far past due that lenders write it off) for BNPL are outpacing credit cards.

In 2021, the number of individual borrowers with at least one loan written off rose to 3.79% from 2.93% a year earlier, according to the Consumer Financial Protection Bureau. The charge-off rate for credit cards last year averaged 2.16%.

What’s more, the charge-off rate may be understated because of how it’s calculated by some providers (in the absence of regulations), according to Michael Taiano, a senior director at Fitch Ratings.

Late payments are climbing too. Affirm had a delinquency rate (payments overdue by 30 days or more) of 3.8% for the quarter ending Sept. 30, up from 2.6% a year earlier.

At Afterpay, loans with payments past their due date by more than 60 days reached 5.9%. Credit-card delinquency rates for some of the largest issuers were just 1.6% as of Sept. 30, according to calculations by Taiano.

Retailers give BNPL companies about double the fee they pay credit-card firms because shoppers are more likely to complete a purchase if they can break up payments without an additional interest burden, meaning fewer abandoned shopping carts. But once the sale is done, the retailer is off the hook should the shopper default.

The deal might be good for retailers but could backfire for consumers. There’s no real regulation around what BNPL lenders have to tell agencies that calculate credit scores. So punctual payments usually don’t boost the score.

Some providers, however, still report late payments, which could harm a person’s ability to be approved for a mortgage or auto loan down the road. Among borrowers who had at least one late payment, 15% said the information was reflected on their credit report, according to a recent survey by Consumer Reports.

Four easy payments for an Apple Watch or Dyson Airwrap sounds tempting during the holiday season. But think before you click. Paying later may end up costing more than you think.

Updated: 5-2-2023

Is Buy Now, Pay Later A Good Option For Your Groceries? (Podcast)

With the economy in flux and prices continuing to rise, more consumers are saying yes to buy now, pay later offers. And not just for instant gratification on big-ticket items like a couch or a laptop. Struggling families are using it to spread out payments for essentials like food.

Bloomberg reporters Augusta Saraiva and Paulina Cachero join this episode to talk about the popularity of buy now, pay later services–and the fees for those who fall behind on payments. And we hear from a single mother who reluctantly uses the services to help make ends meet.

Updated: 5-29-2023

Don’t Get Stung By Buy-Now- Pay-Later Services: ‘It Is Kind Of A Recipe For Disaster If Not Managed Carefully’

Consumers may not fully understand their obligations,’ the authors of a new report wrote.

Although they are marketed as having no fees and no interest, some buy-now-pay-later products do include such charges — but it can be hard for consumers to know what they are getting into.

That’s according to new research by Consumer Reports, which looked at major companies’ lending, privacy and consumer-protection policies. The study found that providers of buy-now-pay-later services were not always clear about disclosing late fees and interest, and the authors noted that it can confusing for borrowers to determine which ones have such charges and which don’t.

“Consumers may not fully understand their obligations,” the authors wrote. “A consumer could, for example, intend to choose a zero interest pay-in-four loan option, but decide that six payments is more suitable, not realizing that the six-payment plan is subject to interest.”

The buy-now-pay-later option — referred to in the payments industry as BNPL — is a new spin on the concept of layaway. It allows consumers to receive their purchase immediately but to divide their payment into installments paid over a longer period with little or no interest — as long as they make the payments on time. BNPL providers include Afterpay, Klarna, Affirm AFRM, 11.75% and PayPal PYPL, 1.29%.

Typically, BNPL payments span six weeks, but some providers also offer longer-term loan products for bigger dollar amounts.

It may be difficult for consumers to keep track of the total amounts they owe BNPL lenders, Delicia Hand, director of financial fairness advocacy at Consumer Reports, told MarketWatch.

“This is a transaction-by-transaction payment and credit product, so ostensibly, I could be using five or six buy now pay later products or 50 different transactions. That is a significant shift to how consumers are obtaining something that is creditlike and using it,” Hand said.

“It is kind of a recipe for disaster if not managed carefully,” she added, noting that the transaction-by-transaction nature of buy-now-pay-later purchasing may complicate matters for consumers who are already juggling multiple bank and credit-card accounts.

Almost all BNPL providers have more than one product offering: a short-term one that can be paid over several weeks and a longer-term one that can be paid over several months.

The Consumers Reports authors said the distinction between short-term plans (most common are the pay-in-four plans that spread out four payments over six weeks) and the longer-term plans (such as monthly payment plans that can stretch out over six months or longer) can be confusing for consumers, even when laid out side by side.

“It also is not always apparent the exact terms of the BNPL and can seem tricky as far as when exactly you can be charged interest or a fee and how that will work,” one participant in the report said.

“It would have been nice if the exact details were more clearly stated as you go through the registration process because to me, it felt like they were keeping their cards close to their hand and not making it obvious to try and take advantage of someone not knowing exactly what they were getting into.”

Here are details on popular plans for some BPNL companies.

PayPal

PayPal’s monthly payments plan can stretch over six, 12 or 24 months, with an APR ranging from 9.99% to 29.99%, depending partly on a person’s credit history and their transaction history with PayPal. The borrower is able to see three different APRs based on varying loan lengths when they check out. Some merchants might offer a 0% promotional APR, according to information provided by PayPal.

Affirm

Affirm’s monthly product also charges interest, with APRs that range — based on the applicant’s credit — from 0% to 36%, depending on the amount and length of the loan. The monthly payment plan can stretch to 60 months. An Affirm spokesperson said the company makes sure its pay-over-time process doesn’t have any late or hidden fees other than the ones consumers see at checkout.

“This includes underwriting every transaction before extending credit, giving consumers control over their privacy choices and providing consistent and transparent disclosures at checkout,” the spokesperson told MarketWatch by email.

Klarna

Klarna offers similar options, with a pay-in-four plan, a plan that’s interest-free and is paid within 30 days, and longer financing options of up to 24 months that charge interest, with APRs ranging from 0 to 29.99%.

Klarna’s pay-in-four product does not charge any interest but will charge a late fee of up to $7 if a customer is 10 days late in making a payment, according to its website. The borrower’s financial institution might also charge interest or fees. Klarna immediately restricts the use of its services to users who miss a payment.

Sezzle

Some recently added long-term financing options weren’t included in Consumer Report’s investigation. Those include Afterpay’s options of up to 12 months and Sezzle’s long-term monthly plans for larger purchases. Sezzle told MarketWatch that it also offers pay-in-full and pay-in-two products, which operate similarly to its pay-in-four product, which the report did include.

If a customer is late in making an installment payment, Sezzle provides a grace period before restricting a user from making additional purchases, the company told MarketWatch. A user who misses a payment must pay a reactivation fee to use Sezzle in the future, Consumer Reports noted.

Afterpay

Afterpay charges a fixed late fee for its pay-in-four option. The late fees “don’t seem to make up a significant portion of its revenue,” the Consumer Reports team found.

Afterpay didn’t respond to a request for comment from MarketWatch.

Zilch

Zilch offers a pay-in-four option with no late or hidden fees, and it also has a pay-it-all-now option that gives customers 2% cash back. Both types of payments need to go through Zilch’s virtual card. Online payments made using the company’s Mastercard could incur fees, Consumer Reports authors noted, as its “business model is unclear.”

The commission Zilch gets from merchants when a consumer makes a purchase is passed along to consumers, and spokesperson for Zilch told MarketWatch that although the model is unique, there is “nothing unclear about it.”

“We pass a share of this commission on to our customers in the form of free credit, savings, deals and discounts,” the spokesperson said in an email.

Perpay

With Perpay, payments come directly out of a user’s paycheck. The company charges both late fees and interest, according to Consumer Reports, although Perpay says on its website that it will not charge “any additional fees as a result of missed or late payments.” Perpay also offers a digital card.

Perpay did not respond to a request for comment from MarketWatch.

Zip

Zip only offers one payment option, a pay-in-four plan. If a user does not pay their total minimum payment in full by the deadline, the company will charge a late fee of up to $7. It will also charge interest.

Zip did not respond to a request for comment from MarketWatch.

Updated: 11-27-2023

More People In US To ‘Buy Now, Pay Later’ For Holidays

SAN JOSE, California: This holiday season, more U.S. consumers are expected to use “buy now, pay later” payment plans, which are short-term loans that often come with low interest rates and allow shoppers to make an initial payment at checkout, then pay the outstanding amount in installments.

The payment method appeals to shoppers who purchase multiple gifts for family and friends during the holidays, especially those who are balancing other debts, such as student loans and credit cards.

Younger consumers and those with difficulty accessing credit are reported to be more likely to use ‘buy now, pay later.’

According to a recent Adobe Analytics report on online shopping, short-term installment loans accounted for US$6.4 billion of online spending in October, up six percent year-over-year.

Overall, Adobe forecasts that 20 percent of Americans plan to use ‘buy now, pay later’ to purchase holiday presents.

Vivek Pandya, lead analyst for Adobe Digital Insights, said, “Rising interest rates, inflation in food prices, and resuming student loan repayments have increased costs for consumers, but data has shown that the consumer remains resilient heading into the big holiday season and they are embracing every opportunity to manage their budgets in more efficient ways.”

Most “Buy now, pay later” models involve lenders running a soft credit check on applicants, then asking for a down payment at the time of purchase along with an agreement to make between four and six payments at two-week intervals. Zero-interest loans are common initial offerings.

However, if customers pay late or miss payments, they can be shut out from using the app or charged interest or fees.

Retailers have discovered that customers offered “buy now, pay later” options are likelier to have bigger cart sizes or convert from browsing to buying.

Federal Reserve studies have found that customers spend some 20 percent more when buy ‘now, pay later’ is an option.

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