“Buy Now Pay Later” apps give millions of users the chance to instantly purchase what they want, then pay off the item in installments. But as the services extend from small-ticket items to luxury goods, exercise equipment, and even rent and utilities, consumer protection advocates worry they may lead people into buying more than they can afford.
While online shopping soared last year during the pandemic, credit card companies kept credit limits low and reduced new offers as lockdowns and layoffs prompted fears of widespread defaults. Meanwhile, the low-cost, multiple-installment appeal of BNPL led to an astounding increase in such payments. Cornerstone Advisors estimates $100 billion in purchases this year will be made using BNPL apps, up from $24 billion last year.
Popular BNPL services include Affirm, Afterpay, Quadpay, and Klarna. The range of products that can be financed using BNPL has been growing: Amazon and Apple announced new partnerships with Affirm this year, while Target, Macy’s, Gamestop, Foot Locker, Gucci, and Peloton all announced BNPL financing options. Now, utilities, landlords, insurance companies, and car dealers are partnering with BNPL services for essentials.
That can cause problems. Several users of Flex, a BNPL app for rent payments, say the app began as a useful tool for managing cash flow but became a crutch that suddenly disappeared.
Flex pays landlords the full monthly rent directly at the start of the month. It then deducts half of the rent payment, plus a monthly convenience fee of $20, from the user’s bank account. The user then pays the other half in flexible installments, deducted from their bank account.
The Flex users WIRED spoke with found the app useful because they didn’t have to come up with their full rent payment at once. In January, though, Robert, a restaurant manager in Arizona who asked that his last name be withheld, says his landlord told him the property no longer worked with Flex. This meant Robert, who had already paid half of January’s rent, needed to pay both the back half of January to Flex and all of February’s rent to his landlord.
“They reported me as being delinquent to the credit bureaus and sent me collection demands weekly,” he says. Robert says his credit score has taken a hit even though he was able to work out a repayment plan with Flex for the half of January that the company did pay.
Another Flex user, Kanton, also got caught in the middle when Flex stopped working with her landlord. The app didn’t debit her account, nor did it notify her that it wouldn’t cover October rent. Her landlord charged her over $100 in late fees, which Flex initially refused to cover. She complained to customer service and ultimately threatened legal action. Flex then paid the late fee. The company did not respond to requests for comment.
Investors love the companies behind the apps. In August, Square agreed to buy Australia-based Afterpay for $29 billion. Affirm went public in February and is valued at $45 billion. Europe-based Klarna was valued at $45.6 billion in a July funding round.
But consumer advocates are skeptical. Marisabel Torres, the director of California policy at the Center for Responsible Lending, says “Buy Now Pay Later” is a misnomer. These are short-term loans paid back in installments, with terms that can vary dramatically. Some include late fees but not interest; others charge interest. Some report to credit bureaus and some don’t. Consumer advocates say the variety of offerings can be especially confusing for younger users with little credit history or financial literacy.
Afterpay, for example, doesn’t charge interest on BNPL services, but it collected A$87 million ($64 million) in late fees from users in the 12 months ended June 30. Affirm doesn’t charge late fees but collected $200 million in interest payments from consumers in the same 12-month period.
“Regulators need to be looking under the hood to see exactly how much of the profits these companies are making is coming from the fact that they might be charging a lot of late fees,” Torres says. High default rates and user debt could speak to a business model designed to profit from inability to pay. “We've seen credit flood the market before when no one was paying attention,” she says. “That ended up not being good for consumers or the economy.”
Lawmakers and regulators are taking notice. Earlier this month, the House Financial Services Committee heard from consumer advocates on the potential risks to consumers of the services. Torres and other witnesses called for tighter regulation and more data on how often users default, the potential long-term impact on credit scores, and tighter rules around credit approval.
The Consumer Financial Protection Bureau in July issued a blog post to guide consumers. Among other things, the post warned, “Don’t overextend your finances.”
“We have experience working with regulators to build in a lot of the protections that we already have from the very beginning,” says Harris Qureshi, Afterpay’s head of public policy. He notes that the service freezes a user’s account if they miss payments and offers a “hardship line” for users unable to make payments following unforeseen issues.
In a statement to WIRED, an Affirm spokesperson says that the company doesn't charge late fees, tells consumers their total costs upfront, and screens users before approving them for BNPL financing.
“We understand and support reasonable regulation and are compliant with regulations” enforced by state and federal agencies, a Klarna spokesperson said in an emailed comment. ”We do not, however, believe no-interest products should be regulated in the same way as high-interest products.”
Merchants, too, pay fees to the services, typically either a flat charge of, say, 30 cents on each purchase, a commission of around 4 to 6 percent of the purchase, or sometimes both. This, too, is variable. Merchant fees and transactions make up roughly half of Affirm’s revenue but over 90 percent of Afterpay’s. But some merchants love the services.
“As soon as I started using it, I sold more products,” says Brittany Aaron, who sells bath and body products in her online shop, Angel Kisses. Since offering Shop Pay and Afterpay early last year, Aaron says sales increased roughly 30 percent, with nearly 70 percent of users buying goods with BNPL services.
Aaron says the fees she pays to the services are a small price for the sizable increases in shoppers’ baskets. Since offering the service, BNPL shoppers have spent more on each trip. A recent survey from Lending Tree found that a quarter of BNPL users admitted they bought more using the service than they would have if they had to pay out of pocket.
“I think the idea of getting away from credit cards is what’s super appealing to the younger generation,” says Leslie Tayne, a debt resettlement lawyer based in New York. “But you can easily get sucked into the ease of the process.”
A September report from Credit Karma found that a third of all BNPL users reported being behind on their BNPL payments, impacting their credit scores. (Some, but not all, apps report missed payments to credit bureaus.) Those numbers are higher for Gen Z and millennial respondents; over half reported missing at least one BNPL payment, twice as often as any other age bracket.
Tayne warns that the convenience can itself be a trap. Most BNPL apps run only a “soft” credit check. These have easier standards for approval and don’t appear in any report, which means one shopper can have multiple BNPL lines. While apps like Klarna and Afterpay lock users’ accounts when they fall behind on payments, Tayne notes they can always just try another service. She describes a recurring scenario where a person with steady income may have four or five recurring BNPL payments, and then a sudden misfortune—a layoff, a sick family member, a car repair—throws them off track, leading to multiple instant late fees and overdraft charges.
“If you're not able to keep up with those payments, that's going to have an impact on your ability to afford the things that you actually need,” says Torres, of the Center for Responsible Lending.