After a ‘Buy Now Pay Later’ summer, fintech enthusiasts are waking up to more than rising autumn Covid cases.
According to a survey, of the 40 percent of Americans that have used BNPL, 34 percent have missed one or more payments. In addition, respondents said their credit scores dropped and they were contacted by debt collectors.
Credit Karma surveyed 1,038 BNPL users back in December of 2020 and found one in three missing payments, and many reporting their credit score lowered accordingly. BNPL products typically market themselves as credit score-free consumer lending.
It doesn’t end there. As the sparkling firecracker news of acquisitions, plans, and partnerships in the BNPL space fizzle, oversight reporting has sprung up.
An updated survey from late August found that of 3,353 adults, one in five has used BNPL. Survey Monkey found that one-in-six regretted the decision. The survey also found what many have: the product is most popular with Millennials.
The Credit Karma survey found that of those who used BNPL, more than half of the younger crowd missed at least one payment.
Credit Karma also found that the product looked more attractive to lower-income respondents: Of those that said they would use BNPL in the future, more than half (53 percent) made less than $50,000 compared with 38 percent of those making more than $50K saying the same.
“Interest-free payments is the leading reason for using buy now pay later among those making $50,000 to less than $100,000 (45 percent) and $100,000 or more (46 percent), while affordability is less of a driver.”
Consequences for Credit Free
BNPL is not a cure to credit card debt or overdraft fees but a simple credit-averse alternative to credit cards. In a dark timeline, BNPL may even be a new, flaring symptom of systematic financial inequality. Users may have their credit score injured for not paying on time, anyway.
Affirm, for example, doesn’t charge late fees, but late and partial payments will hurt your credit score. Klarna and Afterpay both shut off the platform until payments are made, and both companies charge late fees.
Afterpay charges the lessor of $8, or 25 percent, mirroring Klarna’s 25 percent or $7. Klarna said it would contact users to collect payment before charging a late fee.
Why do merchants go out for this sort of thing anyway?
Where sellers pay two percent transaction fees to Mastercard and Visa, they dish up to four percent or even five percent for BNPL options. This makes up the cost for most BNPL customers, who have to pay no interest as long as they pay on time. Merchants shell out more because offering BNPL not only brings in more customers, but those shoppers spend more than they usually would.
Based on data from Adobe Analytics, BNPL loans saw a 215 percent jump in January and February this year. But, the customers using BNPL for e-commerce purchases tended to make 18 percent larger purchases.
“Retailers are offering the buy now/pay later option more often, while consumers deal with financial uncertainty,” Adobe found.
According to a 1,066 person Deal Aid survey, 14 percent of respondents planned on using BNPL this holiday season. However, almost half of the respondents said they regretted a BNPL purchase last holiday season.
According to Fitch Ratings, The volume of U.S. e-commerce payments made using BNPL rose to $19 billion last year — more than double the $9.5 billion spent in 2019, Fitch said, citing estimates from payments company Worldpay.
Fitch also wrote that “short-term, small-ticket BNPL offers may lead consumers to take up credit in situations where they’d have simply refrained from making the purchase.”
Full Circle: Credit cards taking notice
Regardless of these recent issues with a credit-free online credit card, banks and fintechs are still targeting the BNPL scene.
Capital One Financial announced it would launch a BNPL product, and U.S. Bancorp said that it is also testing buy now/later. Goldman Sachs already signaled support of the product through the purchase of GreenSky. Even JP Morgan Chase said to “stay tuned” for more info on their game plan for BNPL, American Banker reported.
But thinking back to the 2008 financial crisis, the biggest problem may not be the defaulting borrowers, the disguised late fees, or the debt collectors. Instead, the debt itself, repackaged and sold in big buckets as securities, may prove to be a significant issue. As the BNPL market absorbs more of the credit market, fintechs will begin to sell off the debt to investors: there is no way they are managing stacks like that on their own.
It is hard to find data on security sales outside of a Bloomberg terminal, but last month Crowdfund Insider reported a $500 million sale of Affirm Loans. The offering, Affirm’s sixth, included classes of notes with the rating AA, A, BB, etc. With 7.9 million loans at the time of the S-1 filing, Affirm and the BNPL firms like it will be doing just as much selling of loan debt as they will selling loans.
Defaults to come? A Klarna story
The one major BNPL not to feature in the news last month was Klarna. Though at a self-reported 90 million users, Klarna’s default rate doubled over the summer, according to the Q2 results and analysis by Financial Times.
Klarna had some more operating loss this year as defaults in the platform rose, from $10M a year to $111M. However, chief executive Sebastian Siemiatkowski told the Financial Times that he was “happy with the loss development.”
“If you’re a small bank, you’ll have small losses, if you’re a big bank you can have bigger losses,” Siemiatkowski told FT.
“At the same point of time that we’re growing this bank at a fast pace, then you’re going to have more losses as you’re going to have more revenues and volume.”
As regulators have been slow to take notice of the potential problem, the BBC began reporting the personal experiences of one Klarna user who is paying late fees on a winter jacket he ‘bought later’ while he still had a job last year. Jordan, 23, said he was facing constant calls from debt collectors.
Alex Marsh, head of Klarna UK, told the BBC that “At Klarna we only ever use debt collection agencies to help us contact customers we are unable to reach and we do this on fewer than one percent of orders. We encourage any of our customers whose circumstances have changed to please get in touch so we can help you with a plan to get back on track.”