Social Navigation

BNPL customers are more vulnerable financially


Customers who pay with buy-now-pay-later products also often “buy-now-pay-later” with payday loans, credit cards, mortgage loans, and other high-interest financial products, signaling financial distress .

That’s according to a report by the Consumer Financial Protection Bureau (CFPB) this week, which found that users of buy-now-pay-later (BNPL) services have lower credit scores and less savings. The report also found that they are more likely to default on other types of loans and are more likely to overdraft their bank accounts and use alternative credit products – all signs of living with low financial margins.

Services such as Affirm, Klarna and Afterpay allow consumers to make retail purchases and spread the cost, typically over four interest-free monthly payments, potentially offering an alternative to credit cards and other types of loans. The government’s consumer watchdog agency is studying the BNPL industry with a view to creating rules for it similar to traditional products. Regulators raised concerns that BNPL was encouraging consumers to accumulate too much debt.

“A common misconception among Buy Now Pay Later borrowers is that they do not have access to other forms of credit. Our analysis shows that these borrowers are more likely to use other credit products,” CFPB Director Rohit Chopra said in a news release. “Because Buy Now Pay Later is like other forms of lending, we work to ensure borrowers have similar protections and that companies play by similar rules.”

The CFPB could not say whether people used BNPL more because they were under financial pressure, or whether excessive use of BNPL put them in bad financial shape, or a combination of the two.

BNPL’s industry itself is under financial pressure, with majors deteriorating last year after surging during the pandemic. The market valuation of Swedish BNPL supplier Klarna fell 85% last summer when it raised a new round of funding, falling to $6.7 billion, down from $45.6 billion in 2021. Similarly, Affirm shares are down 92% from their 2021 peak.

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.