There is no doubt that the Buy Now, Pay Later (BNPL) market will continue to grow each year in response to consumer demand for greater flexibility in payment options. However, consumers may be less in control of their finances than they realize and be unaware of the psychological impacts these schemes can have on our long-term financial goals and our relationship with money.

Buyers in the United States who have used these services are much more likely to spend more money compared to other forms of payment, with an average spend of $ 312 with BNPL. With electronics, clothing and fashion, and beauty and cosmetics listed as the top spending categories, there are also concerns that consumers are making non-essential purchases that they might not otherwise.

Not only is it incredibly easy to get and interact with multiple BNPL service providers with quick approval options, the ease of use makes the spending experience almost unreal. In fact, consumers borrow money – a fact often forgotten. Perhaps the best indicator of this is the late fees that some BNPL providers enjoy.

“Interest-free platforms generate most of their revenue by charging retailers a fee per transaction. They also generate income by charging late fees to the buyer. Afterpay added $ 99 million in revenue just from late fees for this 2021 fiscal year, so while no interest is charged, it’s not without financial stress, ”says author and financial advisor Helen Baker.

“About half of consumers aged 18 to 29 said they had to cut back on essentials to make their repayments, and half also said they had to take out additional borrowing to meet the repayments.” – Gérard Brody

According to Baker, “21% of active Afterpay users were charged non-payment fees, 55% of BNPL consumers reported spending more as a result, and 24% said they had suffered a negative financial impact as a result of these charges. expenses. “

She states that, “While it can be beneficial if it is managed well and you are disciplined in meeting refunds, the risk is that an over-buying event (or many events) could see you overworked and overworked. that you cannot honor payments when due. “

The lack of regulation in this industry also means that there are consumers using these services who may not have been approved for a credit card. However, BNPL providers are increasingly subject to new regulations.

“Because there is no credit check below $ 2,000, you could have consumers who have a lot of debt, or a lot of debt at the same time – credit card, payday loans – and instead than asking for help from a financial advisor, they’re going to say we ‘I’ll get another form of credit and BNPL becomes another,’ says Tom Abourizk, Policy Officer at Consumer Action Law Center.

Most at risk

Tracking multiple payments can be difficult for Millennials and Gen Z customers who typically use these programs, as they may not recognize BNPL as a line of credit which may result in monthly account maintenance and processing fees. late payments which constitute for the call at zero rate. The industry is also not particularly suited to helping people who are in financial difficulty.

“It allows people to make purchases that are beyond their means and they don’t think long term because instant gratification is a stronger feeling than long term savings.”

“About half of consumers aged 18 to 29 said they had to cut back on essentials to make their repayments, and half also said they had to take out an additional loan to meet the repayments,” says Gerard. Brody, CEO of Consumer. Law Center.

Late repayments can affect your credit report, which can affect your ability to borrow money in the future. In his podcast, “Ahh, Afterpay” by She’s on the moneyFinancial Advisor Victoria Devine notes the lack of awareness of how BNPL payment systems can affect consumer credit scores and future financial goals. “It allows people to make purchases that are beyond their means and they don’t think long term because instant gratification is a stronger feeling than long term savings.”

She goes on to say, “Afterpay is a line of credit and it will impact your ability to fund something bigger. I have people in the She’s on the money community who saw their mortgage turned down because they forgot to disclose that they had an Afterpay debt because they didn’t consider it a debt.

Key BNPL Considerations for Consumers

• To avoid impulse buying and unnecessary debt, consider whether you would be making the same purchase in six weeks.
• Compare the fees charged by different providers.
• Commit to using just one purchase, pay later on one platform at a time, and stay within a maximum spend amount.
• Consider if you would use a credit card to make the same purchase.

For ethical investors, the lack of consumer protection and currently inadequate levels of regulation represent a risk that companies may not be comfortable taking on. On the other hand, if governments intervene, what impact will this have on the sector and, in turn, on investors?

“Suppliers do not need to comply with responsible lending obligations set out in the national credit law, which means they can provide potentially unfair or adverse credit that would not be suitable for the consumer,” says Baker.

Read more : Eat Now, Pay Later, an app that brings big spenders back to restaurants