(Reuters) – When Leondra Garrett wanted to stock up on three new pairs of shoes early last year, the North Carolina resident split a $ 161 online purchase into four installments through a ‘buy now, pay later’ service, into what appeared to be a convenient deal.
Now she admits she should have read the fine print on missed payments.
When the buy now, pay later (BNPL) provider tried to withdraw a payment from Garrett’s bank account a few months later, she didn’t have enough money to cover it. Shortly after, the 42-year-old was fined $ 40 in penalties and her credit score dropped 10 points to 650, a reading generally classified as “ fair. ”
“It’s important for consumers to always read the fine print and we don’t always do it,” said Garrett, a community organizer from Charlotte.
The so-called buy now, pay later services – offered by providers such as Affirm Holdings Inc, Klarna, Afterpay Ltd and PayPal Holding Inc’s “Pay In 4” – have popped up on retail websites during the coronavirus pandemic as people shop more online.
Still, the ease with which many shoppers can make purchases is worrying some regulators around the world, who fear that consumers may be spending more than they can afford.
According to a study by Credit Karma, nearly 40% of US consumers who used “buy now, pay later” missed more than one payment, and 72% saw their credit rating decline, according to a study by Credit Karma, which shows customers free credit score.
The study, commissioned by Reuters, surveyed 1,038 adult consumers in the United States to gauge interest in “buy now, pay later” and found that 42% of respondents had previously used the service.
“The percentage of consumers missing payments is remarkable and not as low as you might expect,” said Gannesh Bharadhwaj, credit card general manager at Credit Karma.
‘When you make something that easy, people might not really think,’ Do I have the budget? Can I pay this payment? ‘You get more of that impulsive shopping behavior that makes you realize they might not be able to make the payment. “
A lower credit score indicates to lenders that a consumer may be at higher risk and makes it more difficult for the consumer to borrow, whether it is a mortgage or a new credit card. In fact, it can make it more difficult for a consumer to set up utility bills or find a home, as landlords will generally run credit scores before renting out apartments.
Management consultants Oliver Wyman estimate that BNPL companies facilitated between $ 20 billion and 25 billion in transactions in the United States last year, although analyst estimates of the size of the BNPL industry vary because it is relatively new and some of the companies be private. They individually described an explosive growth last year as their services become more common.
Australia-based Afterpay said it more than doubled active US customers to 6.5 million in the fiscal year ended June 30, 2020, and sales more than tripled from a year earlier in the July-September quarter.
More than half of Afterpay’s customers in the United States are millennials between the ages of 25 and 40.
BNPL models vary, with some companies making the most profit by collecting fees from merchants at the point of sale, and other companies charging consumers interest and late fees. They say their services help merchants boost sales and consumers buy things they need, and cause less financial damage than credit cards because of the restrictions they impose.
Nonetheless, regulators in Great Britain and Australia are reviewing or tightening the rules in the industry. BNPL service providers, classified as fintech companies, should be subject to stricter rules, more like banks, some regulators say.
It’s unclear how Buy Now and Pay Later fits into US regulations, because the companies that offer these services don’t have bank charters, some don’t charge interest, and laws vary by state. However, some experts expect the sector to be scrutinized more closely during Biden’s administration.
“One of the questions with the new administration is: what position will the Consumer Financial Protection Office take in the future? – which we expect to be more aggressive, ”said Mark Palmer, financial services analyst at BTIG Research.
San Francisco-based Affirm saw its revenue increase 93% to $ 509.5 million in the fiscal year ending June. It allows shoppers to split their purchases in terms of six weeks to four years, with interest rates ranging from 0 to 30%.
Affirm shows customers how much a dollar loan will cost and does not charge late payment or compound interest fees. While missed payments can affect credit scores, Affirm says it has worked with borrowers who went through tough times during the pandemic.
“We only approve borrowers for what they can easily afford to repay,” said Silvija Martincevic, Affirm’s Chief Commercial Officer. “The reason our technology is so important is that we use machine learning to make adoption decisions.”
At Afterpay in Australia, customers are not allowed to use the services after they miss a payment.
The company says 95% of its transactions worldwide are paid back on time and late fees contribute less than 14% of the company’s total revenue.
The PayPal ‘Pay in 4’ service, which launched widely in the United States in November, allows customers to split $ 30 to $ 600 purchases into four interest-free payments. According to the website, late fees may apply for missed payments depending on the user’s state of residence.
The PayPal ‘Pay in 4’ product in the United States does not report any transactions or late fees to the credit bureaus, said Greg Lisiewski, PayPal’s global vice president of Global Pay Later.
“We are working with industry and consumer credit agencies to develop the right framework,” he said.
Sweden-based Klarna has seen rapid growth over the past year, particularly purchases between $ 100 and $ 200, said US head David Sykes.
Most of Klarna’s loans are small, short-lived, and interest-free, which is safer for customers than credit cards, he said. Customers can postpone one payment without penalty. Late fees vary by state in accordance with regulations, up to a maximum of $ 21 and the company implements a limit of 25%.
“Nobody gets into debt with Klarna,” Sykes said. “We do not provide multi-year loans for a car or a house.”
Smaller, shorter-term loans have advantages, but they are not risk-free, experts said. Customers may be in more debt than they can handle, even if it comes in bite-sized portions.
Tamika Rivera, a 35-year-old insurance agent from Springfield, Massachusetts, now uses multiple purchases, pays for services later, and has missed payments. In one instance, she didn’t have enough cash to buy a $ 43 sweater, which resulted in a $ 35 overdraft from her bank.
“These services are useful, but there are some negative things that can happen,” Rivera said.
Alan McIntyre, head of Accenture’s global banking practice, says the credit impact of the buy now, pay later trend remains to be seen.
“The optimistic view is that millennials don’t want to go into debt and build a better budget – this is a deferred write-off and you’re not tempted to pass it on,” he said.
“The pessimistic view is that about 40% of the people who use it do so because they couldn’t access traditional credit – either because they have exceeded their credit limit or because of a bad or nonexistent credit history – and some of these loans are maybe not good season. “
Reporting by Anna Irrera; Edited by Lauren Tara LaCapra and Susan Fenton