Is ‘Buy Now, Pay Later’ the Future of Consumer Lending?

Major specialists like Klarna, Afterpay and Affirm, as well as payments giant PayPal, are raking in big bucks financing consumer purchases. They are playing a different game than many banks and credit unions. But amid this tectonic shift there may be opportunity for traditional institutions — in part by picking up the pieces.

That buy now, pay later purchasing is booming is indisputable. It’s a story that’s been building up over the course of the last several years. Predictions that it would surge to new heights during the 2021 holiday shopping season were supported when PayPal CEO Dan Schulman, appearing on CNBC, crowed that on Black Friday, “our volume on buy now, pay later was up almost 400% year over year.”

Schulman added that his company’s “Pay in Four” installment plans proved to be “one of the stars, actually, of the holiday season for us.”

Contrast that euphoria with comments by Scott Galloway, NYU Stern marketing professor. In a blog post written a few days after the national shopping binge, ironically titled “Red Friday, “he points out something that often seems forgotten by consumers who tap this service: “Buy Now Pay Later" is (wait for it) credit.”

An outspoken BNPL skeptic, Galloway adds: “The stale product formerly known as a loan has been rebranded as ‘Buy Now Pay Later’ … The premise is simple: Buy a product for a fraction of its cost at checkout and pay the rest of it off over a few weeks or months. The good news: Debt is not as bad as cancer. Though it can trigger depression or even revolution. But that’s another post.”

BNPL is often promoted as a friendlier way to spend without racking up credit card debt, with a key feature of most plans offered by fintechs being no interest rate, with merchants paying the lenders a fee instead. BNPL websites take a page from credit card promotions, showing photos of happy consumers happily, well, consuming.

Not everyone buys the BNPL message, especially when missteps can be costly in terms of fees. In congressional testimony, Marisable Torres, Director of California Policy at the Center for Responsible Lending, stated that: “We are wearied by the now-familiar claim, particularly among many occupying the ‘fintech’ space, that extending credit, without any accompanying requirement that it be affordable, promotes financial inclusion. Unaffordable credit may provide a quick inflow of cash, but it exacerbates financial exclusion over the longer term which, in the case of BNPL, can be just a few weeks or months down the road.” Continue Reading