(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 using a “buy now” service , pay later, ”in what seemed like a convenient deal.
Now, he admits he should have read the fine print on lost payments.
When the purchase provider now, pay later (BNPL) tried to withdraw a payment from Garrett’s bank account a few months later, he didn’t have enough funds to cover it. Shortly afterwards, the 42-year-old charged $ 40 in fines and her credit score dropped from 10 points to 650, a reading generally classified as “fair.”
“It’s important that consumers always read the fine print and we don’t always do it,” said Garrett, a Charlotte community organizer.
Services called buy now and pay later (offered by vendors like Affirm Holdings Inc., Klarna, Afterpay Ltd, and PayPal Holding Inc., “Pay In 4”) have flourished through retail websites during the coronavirus pandemic. since people have been more dedicated to shopping online.
Still, the ease with which many shoppers can shop worries some regulators around the world, who fear consumers will spend more than they can afford.
Nearly 40% of U.S. consumers who used “buy now and pay later” have lost more than one payment and 72% of those who saw their credit score decline, according to a study by Credit Karma, which offers to customers a free credit score check.
The study, conducted by 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 expected,” said Gannesh Bharadhwaj, CEO of Credit Karma Credit Cards.
“When you do something so convenient, people may not be really thinking,‘ Do I have the budget? Can I pay this payment? Get more out of this impulsive buying behavior that will make you realize that they may not be able to make the payment. ”
A lower credit score tells lenders that a consumer may have a higher risk and that it makes it difficult for the consumer to borrow, either to secure a mortgage or a new credit card. It can even make it difficult to set up a utility bill or find housing for a consumer, as landlords will usually perform credit score checks before renting apartments.
Management consultant 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 explosive growth last year as their services became more prevalent.
Australia-based Afterpay said it saw U.S. active customers more than double to 6.5 million in the June 30, 2020 fiscal year, and its sales tripled in the quarter. July-September with respect to the previous year.
More than half of Afterpay’s customers in the United States are millennials, ages 25 to 40, he said.
BNPL models vary, some companies get most of the profits by charging fees to merchants at the point of sale, and others charge interest and late fees to consumers. They say their services help merchants increase sales and consumers buy the things they need and cause less financial damage than credit cards because of the restrictions they impose.
Still, regulators in Britain and Australia are reviewing or tightening industry standards. Some regulators say BNPL service providers, classified as fintech technology companies, should be subject to stricter rules such as banks.
It is unclear how the purchase is now, the payment later adapts to U.S. regulations because companies offering these services do not have bank cards, some do not charge interest, and laws vary by state. However, some experts expect the sector to be subject to more thorough control during the Biden administration.
“One of the questions of the new administration is: what position will adopt the Office of financial protection of the consumer? – which we hope will be more aggressive, “said Mark Palmer, financial analyst at BTIG Research.
San Francisco-based Affirm saw its revenue rise 93 percent to $ 509.5 million during the year ended June. It allows buyers to divide purchases into terms ranging from six weeks to 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. While missed payments can affect credit scores, Affirm says he has been working with borrowers who fell through hard times during the pandemic.
“We approve borrowers only for what they can comfortably pay,” said Silvija Martincevic, commercial director of Affirm. “The reason our technology is significant is that we use machine learning to make subscription decisions.”
At Afterpay Australia, customers are prohibited from using their services after losing payment.
The company claims that 95% of its worldwide transactions are paid on time and late fees contribute less than 14% of the company’s total revenue.
The PayPal ‘Pay in 4’ service, widely launched in the United States in November, allows customers to split purchases between $ 30 and $ 600 into four interest-free payments. Late payment fees may apply, depending on the user’s state of residence, depending on their website.
The PayPal “Pay in 4” product in the U.S. doesn’t report delinquent transactions or commissions to credit bureaus, said Greg Lisiewski, global vice president of PayPal Global Pay Later.
“We are working with industry and consumer credit bureaus to develop the right framework,” he said.
Sweden-based Klarna has experienced rapid growth over the past year, especially in purchases between $ 100 and $ 200, said its U.S. 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 payment without penalty. Delay fees vary by state in accordance with the regulation, up to a maximum of $ 21 and the company deploys a 25% limit.
“No one is buried in debt to Klarna,” Sykes said. “We’re not making multi-year loans for a car or a house.”
Smaller loans with shorter maturities have advantages, but they are not risk-free, experts said. Customers can take on more debt than they can bear, even if it’s small-sized portions.
Tamika Rivera, a 35-year-old insurance agent from Springfield, Massachusetts, now uses the multiple purchase, pays for back services and has lost payments. In one case, he did not have enough money to cover a $ 43 sweater purchase, which resulted in a $ 35 overdraft commission from his bank.
“These services are convenient, but there are some negative things that can happen,” Rivera said.
Alan McIntyre, head of Accenture’s global banking practice, says the credit impact of buying the back payment trend remains to be seen.
“The upbeat view 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 reverse it,” he said.
“The pessimistic view is that around 40% of people who use it do so because they can’t get access to traditional credit, either because they’ve exceeded the credit limit or because they have a poor or no credit history. some of these loans may not be well-funded. ”
Report by Anna Irrera; Edited by Lauren Tara LaCapra and Susan Fenton