Focus on BNPL’s Effects on Financially Vulnerable People

The use of Buy Now Pay Later (BNPL) services has exploded over the past few years, and only now are we beginning to understand the impact of this boom.

In March, the Financial Health Network published Buy Now, Pay Later: Implications for Financial Health. The report, comprised of survey data from 5,033 US households, reveals some interesting trends about the service’s users.

The majority of BNPL clients, 70%, use interest-free short-term financing, while 21% have seen interest-free repayment periods of six months or more. Only 11% were in plans of six months or more where interest was charged.

Unlike the results of other BNPL surveys, which suggest that up to half of Americans have used BNPL, this survey found that only 10% have used it.

The differences may be explained by methodology, the authors said. The Financial Health Network’s survey was administered to the University of Southern California’s (USC) Understanding America Study (UAS) panel, a nationally representative, probability-based internet panel constructed via sampling based on on addresses.

The survey included questions on household use of various financial products and services. Responses were weighted to achieve a nationally representative sample regarding gender, race/ethnicity, education, age, and census region.

BNPL users are younger and less financially healthy

While 10% of the total population have used BNPL, 20% of 18-25 year olds have tried it. This rate drops to 16% for those aged 26 to 35 and to 13% for respondents aged 36 to 49.

Rob Levy, vice president of research at the Financial Health Network, said younger, less financially healthy people tend to use BNPL. There are several reasons, including younger groups’ stronger preference for online shopping.

Rob Levy, vice president of research at the Financial Health Network.

Not having a credit card may be a factor, but it is not a dominant factor. Only 23% of BNPL users do not have a credit card, which is similar to the 26% of non-BNPL users who do not.

“BNPL users are more likely to have subprime credit scores,” Levy said (43% of BNPL users are subprime versus 24% of non-users). “For some, it’s a more affordable credit product, especially for the 70% who make four interest-free payments. This makes certain purchases more accessible than they otherwise would be.

“The absence of a credit card is part of the story, but the ease of use when they make a purchase is powerful.”

BNPL use is higher in minority households. One in six Latinx households (16%) and one in eight Black households (12%) report using BNPL. Only 9% of white homes have them. Black families more frequently reported difficulty making payments or missing them altogether at 13%.

BNPL warning signs on the horizon?

Like other credit products, Levy said BNPL incentivizes people to spend more than they otherwise would. The big question is what would they do if no credit was available? This is a difficult question to answer.

There are clear concerns about people using BNPL multiple times over a short period of time. Almost half, 46%, have used it three or more times in the past 12 months. With the survey conducted before the end of the 2021 holiday shopping season, Levy wouldn’t be surprised if that rate had increased.

What happens when it becomes three or more BNPL uses? Six or more? Levy fears this will only extend life’s challenges from one paycheck to the next. If the user engages in BNPL through separate providers who do not communicate with each other, there is no clear picture of risk. There are discussions about the relationship between BNPL and other credit products and how to include BNPL in credit scoring and underwriting.

“I hope the industry will move on and include BNPL in the rating,” Levy said.

Future influences

Financially vulnerable households are much more likely to use BNPL, with 18% having tried it (compared to 5% of financially sound households). The average family using BNPL owed $330.

What will be the role, if any, of higher interest rates? Levy said with so many people using zero-rate plans, that might not be meaningful. If credit card interest rates rise and the BNPL remains unchanged, this becomes a more attractive option.

“If the rate of inflation increases and the price of goods increases, then consumers may reduce their purchases,” Levy said.

Levy said the concern over the risk of BNPL products is real, adding that he has never seen a product grow in popularity as quickly as this.

Clear benefits are driving this popularity, and users understand what they’re getting into, contrary to what some industry watchers suggest. Almost all (99%) said they understood the terms and conditions.

A small minority struggles to make payments, but that amounts to millions of people and dollars. Levy said 8% of people report having difficulty making their BNPL payments.

Remember, BNPL is still new. If this encourages people to spend more and go into debt, even if no interest is paid, it will impact the financial health of the family.

Many are already in difficulty, is BNPL making the situation worse?

He brings the conversation back to how many families are struggling financially – one in three check live.

Financially vulnerable households struggle to save, borrow and plan. These households are almost twice as likely to use BNPL, and 77% of users have incurred credit card debt in the past year, compared to 49% of non-users.

Even though only one in nine users report having to pay interest, Levy estimates that Americans have paid $1 billion in fees and interest.

One in three said if the option wasn’t available they wouldn’t have made a purchase, roughly equal to the 33% who said the same about credit cards (the debit card rate was 25%).

The numbers are more striking when comparing financially vulnerable households with healthier households. While only 7% of cost-effective companies bought just because BNPL was available, 61% said they made one because of BNPL.

“Forty-seven percent of users said the availability of BNPL led them to either make a purchase they otherwise wouldn’t have made or spend more than they would have without (it)”, indicates the report.

“This suggests that while BNPL may act as a substitute for credit or debit card purchases in some instances, BNPL may have triggered additional purchases or spending outside of normal consumer spending patterns.”

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