Roderick Mann,Jadetimes Staff
Roderick Mann is a Jadetimes news reporter covering fashion
Holiday shopping was in full bloom in 2024 and BNPL recorded almost a billion dollars of consumer volume purchases out of a total of $13.3 billion spending.
What is BNPL?
Buy Now, Pay Later (BNPL) is short-term financing that allowing consumers to make purchases and pay for them over time in interest-free installments. BNPL services are offered by retailers and through various third-party apps. Afterpay and Klarna are the most popular online retail BNPL apps today. While certainly convenient, we need to consider the potential risks.
At checkout, you can opt for a BNPL plan, which divides your total purchase into equal payments. You put down a minimal payment, maybe 25% of the purchase price, and the balance is paid off in weeks or months with fixed, interest-free installments. Payments are deducted automatically from your debit card, credit card or bank account.
What accounts for BNPL’s growing popularity?
Retailers are increasingly adopting BNPL because they can convert window shoppers into purchasers, pushing customers to fill up their shopping carts. BNPL payment plans especially influence shoppers who usually spend less and are more reliant on credit cards, those we could characterize as financially constrained, the credit card users and the small-basket shoppers tend to account for the largest increase in spending.
BNPL users are generally younger, according to Bankrate, mostly Gen Z and Millennials report using a BNPL service. BNPL appeals to young people either reluctant to rely on credit cards or can’t even get the approval to get the credit card. Primary factors accounting for BNPL popularity include:
The popularity of Buy Now, Pay Later (BNPL) services can be attributed to several key factors:
BNPL Risks:
BNPL use can lead to financial hardship, according to a survey from the Federal Reserve Bank of Philadelphia. BNPL shoppers oftentimes find they are unable to pay some or any of the bills, having stretched their total debt beyond their ability to service it and pay it down or pay it off entirely. Many BNPL users may have lost their government benefits, relocated because of higher housing costs or eviction, or perhaps suffered a natural disaster.
Consumers may perceive BNPL to be safer than credit cards, but it oftentimes doesn’t work out that way. The temptation to overspend is very real, and missed payments can result in late fees. “I worry that consumers will become quickly overextended financially and not be able to make payments, have trouble with debt collectors and destroy their credit,” according to Consumer Reports investigator Lisa L. Gill.
Late fees of around $30 are not uncommon, and interest rates that then kick in can be as high as 37%. This trigger can occur if you fail to make even one single payment. In addition, the application process for the longer-term BNPL loans could ding you 5 points against your credit score.
In August 2022 Consumer Reports conducted a national survey of over 2,000 U.S. adults who used BNPLs. One third of the people who missed a payment reported it was because they simply lost track of the deadline. This is how the high interest rates combined with late fees make BNPL so lucrative for the companies that offer it.
BNPL Regulations:
BNPL services had been loosely regulated before the Consumer Financial Protection Bureau issued a rule in May 2024 that classifies BNPL lenders as credit card providers, which provides consumers with additional rights and legal protections, such as the right to dispute charges and demand a refund after making a return.
Young people are not only more likely to use BNPL services, but are more likely to encounter issues when they do. Only 24% of Gen Z and 35% of Millennial BNPL users reported never experiencing an issue with BNPL services, compared with 68% of Baby Boomer users, according to a Bankrate survey.
BNPL products are not regulated under the Credit Act. BNPL regulations are evolving as government and financial authorities have acknowledged the need to protect consumers and ensure fair practices:
1. Regulations require BNPL providers to offer clear disclosures about their terms and conditions, including fees, interest rates, and repayment terms.
2. New requirements for BNPL providers to also conduct affordability checks so the consumer isn’t pitched into a debt cycle that he or she cannot resolve or extract themselves from.
3. Provisions that protect consumers from unfair practices, e.g. excessive fees or aggressive collection tactics.
4. Financial authorities, such as the Office of the Comptroller of the Currency (OCC) issue guidance to ensure banks offering BNPL services do so in a fair manner.
Summary:
· As of today, Buy Now, Pay Later (BNPL) services are experiencing significant growth and popularity. The global BNPL market has topped $500 billion and is expected to keep growing, reaching perhaps well over $3 trillion by 2030.
· There are over 360 million BNPL users, from a global perspective, expected to grow to more than 900 million by 2027. BNPL is particularly popular among younger generations, Gen Z, with the highest adoption rate. Clothing is the dominant BNPL category, but electronics and home goods are also significant.
· Governments are focused on regulating BNPL providers to ensure strong consumer protection, transparency, and consumer affordability.
· The main concern for each of us is that the BNPL model can lead to overspending, even as the perception is that it is less likely to do so than the use of credit cards. Given the combination of so many people triggering exorbitantly high interest rates and late fees for missing only a single payment, the risks for most of us may outweigh the benefits.
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