(Reuters) – When Leondra Garrett wanted to stock up on three new pairs of shoes early last year, the North Carolina resident split an online purchase of $ 161 into four installments through a “buy now, pay later” service, which in a comfortable way seemed like agreement.
Now she admits that she should have read the little letter about missed payments.
When the payment provider (BNPL) tried to withdraw a payment from Garrett’s bank account a few months later, she did not have enough funds to cover it. Shortly afterwards, the 42-year-old was fined $ 40 and her credit score dropped by 10 points to 650, which was usually classified as ‘fair’.
“It’s important for consumers to always read the fine print, and we do not always do that,” said Garrett, a community organizer from Charlotte.
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” – flourished on retail sites during the coronavirus pandemic as people turned more to online shopping . .
The ease with which many shoppers can make purchases is of concern to regulators around the world, who fear that consumers may spend more than they can afford.
Nearly 40% of U.S. consumers who used ‘buy, pay later’ missed more than one payment, and 72% of consumers saw their credit score drop, according to a study by Credit Karma, which offers customers free credit values .
The study, conducted for Reuters, surveyed 1,388 adult consumers in the United States to determine interest in ‘buy now, pay later’ and found that 42% of respondents had previously used the service.
“The percentage of consumers who are missing payments is remarkable and not as low as you would expect,” said Gannesh Bharadhwaj, general manager of credit cards at Credit Karma.
“When you make something so convenient, people may not really think, ‘Do I have the budget?’ Can I afford this payment? ‘You get more of the impulse shopping behavior that leads to the realization that they may not be able to make the payment. ”
A lower credit score indicates to credit providers that a consumer may have a higher risk, and this makes it harder for the consumer to borrow, whether to secure a mortgage or a new credit card. This can make it even harder for a consumer to set up utility bills or find housing, as landlords will usually do credit checks before renting out apartments.
Management consultant Oliver Wyman estimates that BNPL companies facilitated between $ 20 billion and $ 25 billion in transactions in the United States last year, although analysts’ analysis of the size of the BNPL industry differs because it is relatively new and some of the businesses are private. Individually, they described the explosive growth last year as their services became more widespread.
According to Australia’s Afterpay, active US customers more than doubled to 6.5 million in the financial year ended 30 June 2020, and their sales more than tripled in the July-September quarter of a year earlier.
More than half of Afterpay’s customers in the United States are 25- to 40-year-olds.
BNPL models vary, with some businesses earning the most profits by collecting fees from retailers at the point of sale, while other consumers charge interest and late fees. They say their services help retailers stimulate sales and consumers to buy goods they need, causing less financial damage than credit cards due to restrictions they hold.
Nevertheless, regulators in Britain and Australia are reviewing or tightening the rules around the industry. Some regulators say that BNPL service providers, which are classified as fintech enterprises, should be subject to stricter rules such as banks.
It is unclear how buying now, paying later fits into US regulations because the companies offering these services do not have bank charter, some do not charge interest and laws differ according to the state. However, some experts expect the sector to come under more scrutiny during the Biden administration.
‘One of the questions with the new administration is: what position will the Bureau for the Protection of Financial Consumers take in the future? – which we expect to be more aggressive, ”said Mark Palmer, financial analyst at BTIG Research.
The San Francisco-based company boosted its revenue by 93% to $ 509.5 million in the June financial year. This allows buyers to split purchases in terms of six weeks to four years, with interest rates ranging from 0 to 30%.
Confirmation shows customers how much a loan in dollar value will cost and not leave fees or compound interest. Although missed payments can affect credit scores, Affirm says it has worked with lenders that have fallen during difficult times during the pandemic.
“We only approve lenders for what they can comfortably afford to repay,” said Silvija Martincevic, Affirm’s chief trading officer. “The reason our technology is important is that we use machine learning to make endorsement decisions.”
At Afterpay in Australia, customers are not using their services after missing a payment.
The company says 95% of its transactions worldwide are repaid on time and late fees contribute less than 14% of the company’s total revenue.
PayPal’s ‘Pay in 4’ service, which launched widely in the United States in November, allows customers to split purchases from $ 30 to $ 600 into four interest-free payments. Late rates may apply for missed payments, depending on the user’s right of residence, according to the website.
The PayPal ‘Pay in 4’ product in the United States does not report 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 bureaus to develop the appropriate framework,” he said.
The US head, Klarna, has grown rapidly over the past year, especially purchases in the $ 100- $ 200 range, said its US head, David Sykes.
Most of Klarna’s loans are small, short and interest free, which are safer for customers than credit cards. Customers can delay one payment without penalty. Allow fees to vary by state according to regulations, up to a maximum of $ 21 and the company sets a ceiling of 25%.
“No one is buried in debt at Klarna,” Sykes said. “We do not give multi-year loans to a car or house.”
Smaller loans with shorter duration have advantages, but experts believe it is not risk-free. Customers can incur more debt than they can handle, even if it comes in a bite-sized portion.
Tamika Rivera, a 35-year-old insurance agent from Springfield, Massachusetts, now uses multiple purchases, later pays for services and has missed payments. In one case, she did not have enough money to cover a $ 43 jersey purchase, which resulted in a $ 35 fee in her bank.
“These services are convenient, 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 purchase, paid later, has yet to be seen.
“The optimistic point of departure is that millennials do not want to invest in debt and that they want to build a better budget. “This is a deferred debit and you are not tempted to transfer it,” he said.
‘The pessimistic view is that about 40% of people use it because they could not access traditional credit – either because they maximized their credit limit or because of a poor or non-existent credit history – and some of these loans will may not smell good. ”
Reported by Anna Irrera; Edited by Lauren Tara LaCapra and Susan Fenton