- For new users of buy now-pay later services, bank overdraft charges and credit card interest and fees pile up more rapidly than for consumers who don’t use installment payment methods when making purchases, according to a recent study of BNPL and its effect on consumers.
- The Oct. 26 study by a group of researchers in the U.S. and Singapore parsed bank and credit card transaction data tied to 10.6 million U.S. consumers. Researchers determined “consumers experience increases in bank overdraft charges, credit card interest charges, and credit card late fees shortly after BNPL adoption, consistent with declines in leading indicators of financial health.”
- Four professors contributed to the “Buy Now Pay (Pain?) Later“ study, including one at the University of Washington Foster School of Business; two from the University of California, Irvine and another from the Singapore Management University.
The study showed BNPL services inspired consumers to spend beyond their means, and frequent users displayed larger declines in financial health, according to the study. “BNPL is just another version of easy credit, and we suspect that some people are being harmed by this,” one of the researchers, Foster School of Business accounting professor Ed deHaan, told a University of Washington online publication.
BNPL has exploded in popularity in recent years: Spending with the payment tool is projected to reach $1 trillion by 2025, the study noted. BNPL users, to some degree, turn to the payment method over credit cards, supporting the notion of BNPL as a disruptor, researchers said.
As inflation stretches consumer budgets, more consumers may take advantage of the payment method for holiday shopping. About 20% of consumers plan to use BNPL to pay for purchases this season, according to a poll by The Strawhecker Group and the Electronic Transactions Association. A Deloitte survey put that figure even higher: It found 37% of respondents expect to use BNPL for holiday shopping.
Despite the appeal, BNPL “seems to have all the leading indicators of a financial product that could get people into trouble,” deHaan told the UW News blog. The study’s findings echo similar determinations from the Financial Health Network earlier this year, which pointed to the payment tool’s ability to motivate consumers to make purchases they otherwise wouldn’t have.
deHaan and his study co-authors warned “regulators should take seriously the concern that BNPL negatively affects many users’ financial health.”
Regulation has been a closely watched topic for the burgeoning BNPL industry. In September, the Consumer Financial Protection Bureau issued its long-awaited report on consumer use of BNPL financing. That report, which gathered information from BNPL providers Affirm, Afterpay, Klarna, PayPal and Zip, documented an almost ten-fold increase since 2019 in consumers’ use of BNPL.
CFPB Director Rohit Chopra said at that time that the agency is considering “interpretive guidance” to ensure BNPL companies are held to the same legal standards as those applied to the credit card industry. In Australia, one of the regions where BNPL took off before it hit the U.S. market, lawmakers are currently considering stricter regulation of the industry, the Sydney Morning Herald reported.
Earlier this year, U.K. economists discovered a segment of BNPL users tap credit cards to cover their installment payments, raising concerns those consumers could be entering a “debt spiral,” according to their working paper.