(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. ”In what seemed like a convenient deal.
Now, she admits she should have read the small version about the missed payments.
When the buyer now buys, pays later (BNPL), the supplier tried to withdraw a payment from Garrett’s bank account a few months later, she did not have enough funds to cover it. Soon after, the 42-year-old was charged $ 40 in penalties, and her credit score dropped 10 points to 650, a reading generally classified as “correct.”
“It’s important that consumers always read the small print, and we don’t always do it,” said Garrett, a community organizer in Charlotte.
The so-called buy now, pay later services – offered by vendors such as Affirm Holdings Inc, Klarna, Afterpay Ltd and PayPal Holding Inc “Pay In 4” – flourished on retail sites during the coronavirus pandemic as people -they focused more on online shopping.
However, the ease with which many shoppers can shop worries some regulators around the world, who fear that consumers could spend more than they can afford.
Nearly 40 percent of U.S. consumers who used “buy now, pay later” missed more than one payment, and 72 percent saw their credit score lower, according to a study by Credit Karma, which gives customers a score check. free credit.
The study, conducted for Reuters, surveyed 1,038 adult consumers in the United States to assess interest in “buy now, pay later” and found that 42% of respondents had used the service before.
“The percentage of consumers 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 do something so convenient, people may not really think, ‘Do I have a budget?’ Can I afford this payment? ‘You will get more out of that impulse buying behavior that leads to the realization that you may not be able to make the payment. ”
A lower credit score signals to creditors that a consumer may be at higher risk and makes it difficult for the consumer to borrow, whether they are securing a mortgage or a new credit card. It can even make it more difficult for a consumer to set up utility accounts or find housing, as landlords will generally check credit scores before renting apartments.
Management consultants Oliver Wyman estimates that BNPL companies facilitated between $ 20 billion and $ 25 billion in transactions in the United States last year, although analysts’ estimates of the size of the BNPL industry vary because it is relatively new and some of the companies are private. Individually, they described the explosive growth last year as their services became more widespread.
Australia-based Afterpay said it saw active U.S. customers more than double to 6.5 million in the fiscal year ended June 30, 2020, and its sales tripled in the July-September quarter compared to a year earlier.
More than half of Afterpay’s customers in the United States are millennials, ages 25 to 40, he said.
BNPL models vary, with some companies earning the most profits by collecting commissions from merchants at the point of sale, and others charging taxes and late fees to consumers. They say their services help merchants boost sales and consumers buy what they need and cause less financial damage than credit cards because of the restrictions they impose.
However, regulators in the UK and Australia are reviewing or tightening industry rules. BNPL service providers, classified as fintech companies, should be subject to stricter rules than banks, some regulators say.
It is not clear how you buy now, pay later falls within the US regulations, because the companies that offer these services do not have bank charters, some do not charge interest and the laws vary depending on the state. However, some experts expect the sector to be subject to deeper scrutiny during the Biden administration.
“One of the questions with the new administration is: what position will the Office of Consumer Financial Protection take in the future? – which we expect to be more aggressive, ”said Mark Palmer, financial analyst at BTIG Research.
San Francisco-based Affirm saw a 93% increase in revenue to $ 509.5 million in the June fiscal year. It allows buyers to split purchases between six weeks and four years, with interest rates ranging from 0 to 30%.
The statement shows customers how much a dollar loan will cost and does not charge late fees or compound interest. Although missed payments can affect credit scores, Affirm says it has worked with borrowers who fell in hard times during the pandemic.
“We approve loans only for what they can afford to repay comfortably,” said Silvija Martincevic, Affirm’s commercial director. “The reason our technology is significant is that we use machine learning to make underwriting decisions.”
At Afterpay in Australia, customers are prohibited from using its services after they lose a payment.
The company says 95% of its global transactions are repaid on time, and late fees contribute less than 14% of the company’s total revenue.
PayPal’s “Pay in 4” service, widely launched in the United States in November, allows customers to split their purchases from $ 30 to $ 600 in four interest-free payments. Late fees may be applied for missed payments, depending on the user’s state of residence, according to his website.
PayPal’s “Pay in 4” product in the United States does not report late transactions or fees to credit bureaus, said Greg Lisiewski, PayPal’s global vice president of Pay Later.
“We are working with industry and consumer credit bureaus to develop the right framework,” he said.
Sweden-based Klarna has grown rapidly in the last year, especially purchases between $ 100 and $ 200, said US Chief David Sykes.
Most Klarna loans are small, short-term and interest-free, which is safer for customers than credit cards, he said. Customers can delay a single payment without penalty. Delay fees vary by state, according to regulations, up to a maximum of $ 21, and the company launches a 25% cap.
“No one is buried in debt to Klarna,” Sykes said. “We don’t make multi-year loans for a car or a house.”
Smaller, shorter-term loans have benefits, but they are not without risks, experts said. Customers may take on more debt than they can bear, even if it comes in small portions.
Tamika Rivera, a 35-year-old insurance agent from Springfield, Massachusetts, uses multiple purchases now, pays for future services and missed payments. In one case, she did not have enough money to cover a $ 43 sweater purchase, which led to a $ 35 overdraft fee from her bank.
“These services are convenient, but there are some negative things that can happen,” Rivera said.
Alan McIntyre, head of global banking practice at Accenture, says it remains to be seen what the impact of the acquisition credit will be now, the subsequent payment trend.
“The optimistic idea is that millennials don’t want to go into debt and want to build a better budget – this is a deferred debt and you are not tempted to overturn it,” he said.
“The pessimistic view is that about 40% of people who use it do so because they have not been able to gain access to traditional credit – either because they have exceeded their credit limit or because of a weak or non-existent credit history – and some of these loans may not season well.
Reporting by Anna Irrera; Editing by Lauren Tara LaCapra and Susan Fenton