The rapid growth of buy now, pay later services has transformed the consumer financing landscape, offering shoppers a convenient alternative to traditional credit cards at the point of sale. As BNPL providers continue to attract users, particularly among underbanked consumers, regulators are taking a closer look at the risks associated with installment payments, consumer debt, and credit access. While these services promise greater financial flexibility, concerns have emerged around late fees, borrowing behavior, and the potential impact on financial wellness. Increasingly, lenders are exploring how artificial intelligence and alternative underwriting models can create more responsible forms of consumer financing that balance access to credit with long-term financial stability.
“Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too.”
So said Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB), as part of CFPB’s December 16 announcement it had opened an inquiry into five Buy Now, Pay Later (BNPL) providers: Affirm, Afterpay, Klarna, PayPal, and Zip. Klarna, for its part, responded immediately; it hired a Washington lobbying firm the very next day, according to Politico.
By now, most of us are aware of or have used a BNPL service. How prevalent are these apps? According to the Consumer Financial Protection Bureau, over 40% of Americans have used a buy now, pay later app. During the 2021 Black Friday shopping season, there was a 400% increase in the use of BNPL apps to finance purchases
Buy now, pay later (BNPL) explained
BNPL is a form of credit with a deferred payment option. BNPL allows the consumer to split a purchase into typically four or fewer installment payments, often with a requirement of a 25% down payment at checkout. BNPL apps support a fast application process that requires very little information from the user. The industry has promoted these services as a safer alternative to credit card debt and a boon to those with subprime credit histories.
The financing provided by BNPL providers is interest-free: until the user misses a payment. And that’s where the BNPL story gets problematic. Many of these providers impose late fees or apply interest rates as high as 30% if you miss a payment. When users miss payments, some
BNPL providers turn to debt collectors or report the matter to the credit bureaus, resulting in
bad credit ratings.
It doesn’t have to be this way. The opportunity exists to provide credit access to those least able to afford it without paving the way for them to assume debt. By using AI and Machine Learning tools, financing providers can avoid the traditional credit score approach and, instead, collect and analyze a holistic set of financial behavioral data about a would-be customer. This can improve providers’ ability to determine how much financing these customers can reasonably handle and set limitations on point-of-sale financing: something most BNPL providers don’t do. At Kafene, we use this approach and couple it with the flexibility to accept product returns or the occasional loss when borrowers can’t make their payments. We are proof that this approach can succeed.
Are we BNPL? Yes. And no.
We extend financing to select customers – primarily the underbanked – to buy specific items in a pre-determined cost range. We don’t use debt as part of our offering, and transparency and flexibility are core to our mission. When our users can’t make payments, we accept their product returns and take a loss when necessary. Our lease-to-own infrastructure provides consumers with the ability to build credit while also offering a lower total cost of ownership compared to credit cards. Also, we don’t “negatively report” our customers when they need to terminate the agreement; we only report their successes in meeting our terms. We help them build their credit scores, not burn them down.
The CFPB’s inquiry extends beyond the debt implications for buy now, pay later users to include regulatory arbitrage and data harvesting. These are other problematic areas for the current crop of BNPL providers and deserve a closer look.
But make no mistake, debt is the ugly four-letter word at the center of the BNPL problem. Specifically, the delivery and promotion of financial products that have the propensity to ensnare the underbanked into debts they will ultimately not be able to settle. This can only worsen the lives of the 100 million Americans that qualify as underbanked.
There’s a better way to help the underbanked. Our success proves it.
