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Americans are relying on buy-now-pay-later to make holiday purchases this year. That could spell trouble later on, experts told MarketWatch.
MarketWatch photo illustration/iStockphoto
Americans are relying on buy-now-pay-later to make holiday purchases this year. That could spell trouble later on, experts told MarketWatch.
Shoppers checking out in stores have traditionally been offered an incentive to save on their purchase if they sign up for the store’s credit card. These days, consumers shopping online are being tempted with the option to buy merchandise now and pay for it later in a series of interest-free installment payments.
And during this holiday season so far, consumers are falling head over heels for these payment plans.
“We are doing more transactions today, in a single day, than during Klarnas first 4 years combined,” Sebastian Siemiatkowski, CEO of Klarna, a buy-now-pay-later platform, said on Twitter TWTR, +0.34% on Black Friday. He added that “regularly during the day over 100 transactions per second” were made.
On a competing platform, Afterpay, consumers generated 1.2 million clicks on Black Friday as they perused the directory of stores that have partnered with the company — amounting to 154% more clicks than on Black Friday last year.
Like a Google GOOG, +2.12% GOOGL, +2.33% or Facebook FB, +3.45% search referral, when consumers click through Afterpay’s directory they tend to make purchases on the sites they are led to, Amanda Pires, vice president of communication at Afterpay, told MarketWatch.
Installment payment options have been growing in popularity over the past few years, especially among millennials, but there’s been a surge in usage this year, with consumers using the payment plans at the highest rates ever. That’s due in no small part to the pandemic, experts said.
“It certainly has to do with the economic distress Americans are experiencing,” said Matt Schulz, chief credit analyst at LendingTree.
More than 30 million Americans became unemployed as a result of the pandemic, and nearly 12 million of these Americans will stop receiving unemployment benefits altogether the day after Christmas. Without a second stimulus check on the horizon and a looming cut-off from unemployment benefits, the appeal of buy-now-pay-later is obvious.
But the other side the equation is that “people don’t want to take on or have to have any exposure or any enticement towards more debt,” Schulz said. That’s become more prevalent during the pandemic.
Buy-now-pay-later was gaining traction before the pandemic
Buy-now-pay-later (BNPL), has become more popular across all generations in the U.S. since last year.
The trend is most significant among Gen Z Americans, whose spending through BNPL options increased by 201% since last year, according to Accenture ACN, +1.27% data compiled by Afterpay. Millennials and shoppers in Gen X and above increased their BNPL spending by 86% and 63% since last year, respectively.
“While adoption was already steadily increasing, it really accelerated throughout this year and particularly as we move into the holiday season when consumers want more spending flexibility for all their holiday shopping needs,” Siemiatkowski of Klarna, told MarketWatch in a statement. “As we’ve recently reached 11 million customers in the U.S., we expect this trend will only grow in the coming years,” he added.
“ ‘While adoption was already steadily increasing, it really accelerated throughout this year and particularly as we move into the holiday season when consumers want more spending flexibility for all their holiday shopping needs’ ”
Consumers are driven to what’s also referred to as “reverse layaway” for two main reasons: It’s become more available and it’s used as a way to avoid racking up debt.
Retailers are drawn to buy-now-pay-later partnerships because they let them avoid having to pay credit-card transaction fees, which run about 2% to 3% per transaction. BNPL companies also take a cut of each transaction with a retailer; Klarna gets about 6%, for example. But BNPL is attractive to retailers because they tend to get upfront payment from BNPL platforms faster than they would from credit-card transactions, said Ted Rossman, an industry analyst at Bankrate.
“Some of them even view it as a marketing expense — it’s like a customer acquisition tool,” Rossman said.
“A lot of people view credit as more of a travel and dining kind of thing which is part of why the credit-card industry has been struggling this year because people aren’t making as many of those purchases,” Rossman said. In contrast, Americans traditionally tend to purchase groceries and other necessities using a debit card.
“ ‘Some of them even view a marketing expense — it’s like a customer acquisition tool.’ ”
During the pandemic, Americans have begun to make more discretionary purchases with their debit cards, according to third-quarter data reported by Visa V, +0.40% and Mastercard MA, +0.70%.
“For whatever reason, more Americans are avoiding credit. It may not be that they don’t have access to it, it’s maybe more that they don’t trust it or they don’t trust themselves,” Rossman said.
That also helps explain why more Americans are drawn to BNPL and end up paying their installments using a debit card, Pires said.
The average age of an Afterpay user is 33 years old, she told MarketWatch. It makes sense that younger Americans are drawn to reverse layover payments because “they have enough student loans as it is” and want to avoid racking up even more debt, she said.
The downsides and dangers of BNPL
“There is an inherent danger to this [notion of] ‘Well, maybe I don’t have the money for it today but next week or next month I will,’” Rossman said. “If you get into too many of these installments arrangements it can conceal the true picture of your financial situation.”
“You might look at your bank account and say ‘Oh there’s a bunch of money in there,’ but maybe you don’t account for the fact that you have all these small or potentially not-so-small payments you’re going to have to make.”
Most of the BNPL platforms will start to charge a late fee if consumers do not make payments on time. Some 43% of BNPL users have been late to make a payment over the past two years, according to a nationally representative survey of more than 3,000 U.S. adults conducted by Cornerstone Advisors, a banking consultancy group.
“ Some 43% of BNPL users have been late to make a payment over the past two years ”
The grace period varies by platform for late payments. For example, Afterpay begins charging a late fee equal to no more “than 25% of your initial order value,” 10 days after a missed payment. Klarna will add a $7 late fee after a failed second attempt is made to collect payment. The late fee, in addition to the owed amount of money, are then rolled over to the next scheduled payment.
Unlike credit card companies that are typically required to report a late payment after 30 days to credit reporting agencies, BNPL platforms typically only report missed payments after more than 90 days, Rossman said.
That effectively means that a late payment, up until 90 days, won’t impact your credit score. That’s a good thing if you’re not somebody who has a great credit score, Rossman noted, but on the flip side, BNPL programs don’t help shoppers establish good credit if they pay on time.
During the pandemic, some of these platforms have allowed consumers to further delay payments. But ultimately if a consumer continues to not pay, they’ll get kicked off the platform until they pay the amount they owe.
That helps ensure that consumers won’t continue to “revolve into debt,” said Pires.
Rules of thumb to follow if you opt for BNPL
Before you sign on to a reverse layaway plan, “think about how likely you are to be able to pay it off on time,” Rossman said. Also, understand that you are “robbing from next week’s paycheck.”
AfterPay does not run credit checks on applicants, but uses a proprietary system to vet them. Klarna sometimes runs a “soft” credit check that will show up as a credit inquiry on your credit report, according to its website.
Even if you can make payments as scheduled, consider whether it will “put you behind the eight ball with respect to your rent or your car payments or some other bill,” Rossman said.
It’s important to be aware of the deadlines associated with the payment plan. Typically, the services ask for four payments over the course of six weeks. In some cases, the credit or debit card you enter will automatically be charged when payment is due. But in other cases, you will have to request that your card be automatically charged when payment is due.
“Knowing the cadence of how often you’re supposed to pay is a really important thing because so many of us are programmed now to expect monthly payments,” Schulz added. “But when you sign up for this, you really need to understand that a lot of these services require payments every two weeks.”
It’s best to set phone or calendar reminders so that you’re aware of these deadlines. If you set the payments on auto-pay, you should also regularly make sure that your checking account is not being overdrawn “because then there’s fees and consequences to that,” Schulz said.
“You really do need to know yourself,” Rossman told MarketWatch. “Not only should you think about will you have the money, but also think about will you have the time and attention and diligence to remember to stay on top of these things.”
