BNPL is reaching an inflection point. Continued strong growth is spurring action by larger providers, such as Amex, Capital One and Citizens – firms with incentives to think holistically and long-term about their customers’ financial well-being, and their corporate reputations. Federal and state regulators are also focusing more on BNPL. It’s time to consider what “responsible BNPL” might look like, and what outcomes it can help deliver for low and moderate-income (LMI), underserved customers.
Among consumer advocates and some regulators, the rapid growth of Buy Now Pay Later (BNPL) has been met with deep suspicion and concern. This is unsurprising: BNPL is marketed to merchants as a way to increase spending, yet is serving more at-risk populations and with little regulatory oversight. BNPL has also taken root rapidly, growing 85% in 15 months during 2020 and 2021 and attracting a record $4B of venture funding in 2021,
BNPL deserves special focus, as it is serving younger, more racially diverse households with lower and more volatile incomes (compared to credit cards). Amidst historical and current systemic discrimination, these same households are less likely to have a credit card, yet more likely to face financial challenges that make access to credit critical. For many, BNPL may be the only practical credit option.
It’s also clear consumers have embraced BNPL; over 55% of Americans have tried it. And BNPL has some desirable attributes: loans are clear, time limited, convenient, don’t create long-term debt balances by themselves, and can be no-cost. BNPL is also extending credit to those with few or no other credit options.
These facts suggest an opportunity for BNPL to contribute to financial inclusion and security. Here are four key questions to consider for financial service providers looking to chart a long-term, responsible BNPL strategy built on a commitment to LMI customers’ financial well-being.
How do your LMI customers experience BNPL?
While we speak of BNPL as if it is a single product, in fact offerings vary considerably from provider to provider in terms of costs, fees, underwriting practices and other issues. The practical result is caveat emptor (“buyer beware”), and a greater chance that customers will end up using products they don’t fully understand as they make quick decisions at point of sale. Because BNPL is rarely underwritten using traditional credit bureaus, few providers understand a consumer’s full debt picture; this places users at greater risk of biting off more debt than they can chew.
Responsible BNPL providers have an opportunity to make terms and conditions completely clear and easily understood, not only at the point of sale, but by communicating with customers before and after purchases. Firms should engage their customers to understand how they use BNPL and what types of support they would welcome; for instance, might they value a simple tool to help take stock of how many installment loans one has outstanding – with what amounts, due dates, and outstanding balances – before adding another?
Do you have a sustainable, transparent BNPL business model?
BNPL’s growth is powered in part by consumers seizing a good deal – in some cases, a chance to pay over time at zero cost. But there is reason to doubt that free-to-consumer BNPL is sustainable, as losses mount and profitability is elusive. Worse still, if “free” means a business model that depends on some users paying costly late fees, then it is likely that the most vulnerable consumers will actually foot the BNPL bill – with echoes of “free checking” products that were sustained, in part, by overdraft fees often paid by LMI bank customers.
Evidence abounds that consumers – especially LMI customers – value clear, transparent pricing, and in many cases, will choose a predictable cost over a variable, uncertain cost (a fact that has helped power the prepaid card industry). Forward-looking BNPL providers should base pricing on what they need to charge consumers over the long haul, make costs crystal clear to users, keep penalties to a minimum, and avoid any surprises.
Can you place BNPL in context for LMI customers?
Because BNPL growth has been driven by “point solution” start-ups, there has been little focus on when or for whom it is the best payment option. Consumers can and must be the deciders, but evidence is emerging of possible “BNPL regret.” One-third of users report incurring late fees, there is very strong correlation between BNPL use and incurring bank overdraft fees, and some BNPL users say it encourages “unnecessary” purchases. Therefore, it is fair to ask if the current checkout experience is helping people find the best payment tool. As more banks and others enter the market, including firms that also offer debit and credit payment options, there is an opportunity to focus on consumer outcomes: Which payment option will most help my customer achieve her financial goals, and how can I help her find and use that solution?
Credit card statements forecast the time and total cost of different payment amounts for cardholders. As consumers, we have grown accustomed to retailers presenting “recommended” products. We may be open to guidance on payment options too, especially if tailored to our specific financial circumstances. If “a third of people like you incurred a late payment fee when using BNPL,” providers may earn substantial customer goodwill by using what they know to help customers make fully informed choices.
What customer financial outcomes do you want to enable?
BNPL offers an irresistible formula: reward today, cost in the future. But short-term benefits are just that, and firms seeking to build lifetime customer relationships need to meet immediate and long-term customer needs. For BNPL, this means careful consideration of if and how the product’s use helps customers build a strong credit history and raise credit scores (especially for those without credit alternatives). It means attention to the full cost customers incur to acquire goods and services, including interest and fees. It means focusing on customers’ overall levels of debt, and especially risk of defaults. Ideally all of this occurs in the context of some understanding of customers’ long-term financial goals, and working in partnership with them to achieve those goals.
Realistically, we simply don’t know yet all we would like to know about how BNPL contributes to or undermines these long-term financial security outcomes. Responsible actors can acknowledge this, and commit to using their data and experience to fill in these gaps in our understanding – potentially in partnership with regulators and consumer advocates. For vulnerable consumers especially, the stakes are simply too high to do otherwise.
BNPL is growing rapidly in part because it serves an underserved market of younger, lower-income and more racially diverse consumers who either cannot access or do not want traditional credit cards. But growth and consumer demand are not by themselves evidence a product is good or useful. Seasoned financial service providers understand this, and understand they must consider how consumer finance innovations impact financial inclusion and financial security – or wait for regulators and advocates to do it for them.