BNPL: The phantom debt

Summary

Is “buy now, pay later” a lifeline to those who need non-traditional financing most? Or an unregulated danger zone that could lull consumers into a false security in which many small payments add up to one big problem? Our sense after surveying what limited dataare available is that BNPL is not a major problem for consumer spending yet. But until there is a definitive measure for it, there is no way to know when this phantom debt could create substantial problems for the consumer and the broader economy. This report looks at the upsides and downsides of one of the fastest growing categories in consumer finance.

Manageable risk for now, but fast growth warrants better monitoring

“Buy now, pay later” (BNPL) is a type of short-term financing that allows consumers to split their purchases into multiple, often interest-free, installments. This payment method has gained popularity in recent years, particularly among younger consumers and those who are averse to credit cards or who may not have ready access to traditional forms of credit. The category has expanded as some merchants may contract with BNPL firms to provide financing that the merchant can offer at the point of sale. But BNPL differs from credit cards in three main ways; it’s not a revolving line of credit, each loan is tied to a specific purchase and lending terms are generally easier.1

While some individuals may be in over their heads, even by the most robust estimates, the total pile of BNPL loans is not large enough yet to be problematic enough to derail consumer spending on its own. The category is still small relative to more traditional forms of consumer financing.

Still, everything starts out small, and until there is a definitive measure for it, there is no way to know when this phantom debt could create problems for the consumer and the broader economy. In the meantime, it could make life difficult for those who embrace it most enthusiastically. More worryingly, BNPL does this in de-facto stealth mode because it largely flies beneath the radar of both regulators and policymakers.

Overall, BNPL is a relatively new financial product, and there is still much to learn about its long-term impact on consumers and the economy. It is important for consumers to weigh the risks and benefits of BNPL before using it.

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