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BusinessUnited States of America

Calls grow to curb finance industry's 'buy now, pay later'

Timothy Rooks
January 10, 2023

Companies like Klarna and Affirm offer short-term credit for shoppers. What does this mean for retailers and how is it impacting buying habits and buyers' credit in the long run? Regulators are getting more interested.


If you haven't heard about online "buy now, pay later" options you will soon. Buying on credit is nothing new. In-house charge programs took care of customers long before credit cards became the norm. Layaway gave shoppers the possibility to leave a deposit and pick up merchandise when it was paid in full.

Recently more online shopping has led to a massive uptake in buy now, pay later (BNPL) options offered by companies like Affirm, Afterpay, Klarna, PayPal, Sezzle and Zip. They can be used to buy goods and services. Anything from clothing to airline tickets. Increasingly people are using them for necessities like groceries and car fuel.

Growth brings scrutiny from regulators

Buy now, pay later services are short-term loans. Many shoppers see them as an alternative to credit cards at checkout. They are a way to stretch out payment.

The system is based on an old trick: Just four easy payments. "This has been a long, time-tested method for increasing sales," said Rohit Chopra, director of the Consumer Financial Protection Bureau. "While major providers don't currently rely on charging interest, they make money through fees charged both to sellers and to consumers who don't pay on time."

His remarks accompanied a market monitoring report put out by the Washington, DC-based government agency that tried to better understand the financial product and start to formulate regulatory guidelines.

The agency looked at five companies that gave out 180 million pay-in-four loans in the US totaling over $24.2 billion (€22.8 billion) in 2021, a nearly tenfold increase from the 16.8 million loans they handed out in 2019. The average purchase was $135.

The report highlighted uneven oversight and pointed to other problems with the services like a lack of consumer protection, good dispute resolution and data protection. Returned products, which make up a large part of goods bought online, were also often hard to process.

A sign offering Buy Now, Pay Later from afterpay
Buy now, pay later options are showing up everywhereImage: Richard B. Levine/imago images

Paying in four installments

The most common BNPL offer is a "pay-in-four" option, meaning 25% down at purchase then three equal payments due every two weeks. Approval is usually fast and without a formal credit check.

There are no extra costs for borrowers unless they miss a payment. A few companies don't even charge late fees. The lenders make most of their money through fees they charge retailers, which are higher than traditional credit card processing surcharges, anywhere between 2% to 8%.

Some companies like Klarna offer a "pay-in-30 plan" without fees where full payment is due within 30 days. Klarna and PayPal also offer financing plans for up to 36 months for larger purchases. Some systems only work online within a network of merchants. Others can be used nearly anywhere through mobile apps.

Buyers beware of overextension

The biggest complaint about BNPL is that the entire system encourages people to buy more. When the price of something is divided by four it seems much cheaper. And users can take out multiple loans at the same time from different sources. Called "loan stacking," borrowers can quickly lose an overview of what they owe.

Rohit Chopra from the Consumer Financial Protection Bureau also scrutinized the BNPL mobile apps because they bring together lots of detailed information about users in ways that traditional banks or retailers don't.

"Many of these firms have created their own gateways and digital, app-driven marketplaces, powered by personalized behavioral data, to lure their users into buying more products financed through a buy now, pay later loan," he said.

An online shop with a Buy Now, Pay Later option from Klarna
A growing number of people around the world are gravitating toward buy now, pay later appsImage: Rüdiger Wölk/IMAGO

survey released in June by the Federal Reserve Bank of Philadelphia looked at the demographics of buy now, pay later users in the United States. It found an even split between men and women. But an overwhelming majority of users are white, while just over 23% are nonwhite. Overall, it found that all age groups are adopting it and 61% of users were currently employed.

One thing particularly surprised experts at the bank: "Contrary to the assumptions of most observers, buy now, pay later users did not cite lack of credit access as a primary reason for choosing buy now, pay later as a payment option."

Watch your credit score

With BNPL's fast growth and wide reach, consumer advocates like the Consumer Financial Protection Bureau are calling for more regulation. They think these companies should be treated like credit card operators.

Currently they don't need to report to credit agencies since they are not banks or technically considered lenders. This works two ways: They don't know their customers as intimately as banks do and the borrowers don't get to use these loans to build up their credit history. To help fill in the gaps some BNPL operators do soft credit checks and start customers with smaller purchases and later extend additional credit based on repayment histories.

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Penny Lee, CEO of the Financial Technology Association, an industry group that represents several pay-later providers, sees the positives. "Consumers and merchants alike benefit from buy now, pay later. Consumers turn to it as a flexible, zero-to-low-interest alternative to legacy credit products, and merchants of all sizes use buy now, pay later to reach new customers," wrote Lee in a statement to DW. "Buy now, pay later is regulated, with key US federal and state consumer protection laws safeguarding consumers who use the service."

Yet the US is not at the forefront of this e-commerce trend. In 2021, Northwestern Europe was the champion of pay-later transactions. In Sweden they accounted for 25% of domestic online sales, in Germany 20%, Norway 18%, Finland 13% followed by Denmark, the Netherlands, Australia, New Zealand, Belgium, the UK, France and Singapore.

Overall, buy now, pay later accounted for only 3% of e-commerce payments in 2021, which leaves room for growth. But any increased popularity will bring rules. The United States may not be at the forefront of BNPL, but its regulatory decisions will have a big impact on how these companies work around the world.

Edited by: Uwe Hessler

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