The entrance of “buy now, pay later” into the financial system has led to a furious debate that has consumed regulators, politicians, and TikTok users about whether the new financial product is good or bad. But the messy truth might be that it embodies two seeming contradictions at once. The “buy now, pay later” system may very well be an improvement on the credit card system and its cycles of compounding debt while still encouraging overspending among the financially marginalized and vulnerable—two groups who can least afford it and are also more likely to use the industry’s services.“It's easy to get sucked in,” one “buy now, pay later” user said.
By comparison, “buy now, pay later” companies say they don’t win when customers fail to pay—they make a much smaller percentage from fees—and as such they’ve built systems that help people succeed financially, avoid long-term debt, and remain reliable customers. While the companies have their differences, the services by and large charge little to no interest (and especially no compounding interest), small late fees (if any at all), and often restrict spending after a failure to make a payment. Spending limits are more closely limited and monitored, sometimes even on a purchase-by-purchase basis, and balances are much lower than on credit cards as a result. According to Klarna and Afterpay, for example, their typical balances are $70 and $200, respectively—much less than the typical outstanding credit card, which was $5,500 last year, according to credit reporting company Experian.“Shoppers who use Afterpay spend +40% more than those who do not,” Afterpay says on its website.
One survey put out by the lending marketplace LendingTree found that almost 70 percent of “buy now, pay later” customers bought more than they would if they had to pay for everything at once. Another survey by the Financial Health Network found almost half of those polled “said they would not have made a purchase or spent more than they otherwise would have spent had BNPL not been available.” Companies like American Eagle and Southwest Airlines have explicitly said “buy now, pay later” boosted their sales.“It is not accurate to say that Affirm makes users less financially responsible or helps convince people to spend more than they should,” an Affirm spokesperson said.
Outside surveys put the likelihood of missed payment higher, including one from the personal finance company CreditKarma that found 34 percent of “buy now, pay later” users had fallen behind on a payment. But even if “buy now, pay later” customers don’t technically fall behind, the debt can still financially stretch them beyond comfortable limits. “People can be struggling even before the ‘buy now, pay later’ company stops getting payments,” said Saunders. “By the time somebody is defaulting on their ‘buy now, pay later’ payment, they're in deep, deep trouble.” Data show that the argument that “buy now, pay later” customers use the services as a cash-management tool and are largely spending within their bounds is not the entire story. Surveys have found that “buy now, pay later” customers’ total debt increases once they use the services. One in three “buy now, pay later” customers in the U.S. overdrafted in January, a significantly higher percentage than adults overall; and a quarter of financially vulnerable people who use “buy now, pay later” struggle to make the payments; and more than two in five end up borrowing money elsewhere to cover their payment installments in the U.K.“By the time somebody is defaulting on their ‘buy now, pay later’ payment, they're in deep, deep trouble.”
But the growing popularity of “buy now, pay later” could also be related to the fact that the services are relatively accessible in the U.S. In fact, the process has been described by researchers as “nearly instantaneous.” Afterpay has said it does “no external credit checks or reporting to credit bureaus.” The CEO of Sezzle, another “buy, now pay later” service, went so far on a podcast published in May as to say that the company approves 90 percent of people who apply—even if the company can’t find anything about the person’s history—and for the most part only turns down suspected fraudsters and people who have already missed a payment.“There’s a high certainty that you’re going to get the limit you need,” Sezzle CEO Charlie Youakim has said.
Unsurprisingly, at least some of the companies don’t see that as the case, believing their processes to be modern but comprehensive while also noting that it is the company that takes on the risk. Affirm, for example, says it performs a fast but in-depth analysis using some credit report data as well as “proprietary,” “Affirm-specific” data each time a user wants to buy something using the service to deduce whether they can afford it. The CEO has said this process protects customers from “overextending themselves,” and a spokesperson said the “soft” credit check allows customers to avoid temporarily hurting their credit.Affirm: “other buy now pay later players … do not underwrite at all.”