‘Buy Now, Pay Later’
You’ve probably heard about it, or seen the offers from companies like Klarna, Affirm, and Afterpay when you’re holiday shopping online.
But what is it? Is it a creative new way to stretch your budget? Or a dangerous invitation to dig yourself into holiday debt?
Earlier this year, I researched Buy Now, Pay Later (BNPL) as part of a graduate class in financial therapy and behavioral finance. I wanted to see how programs like BNPL impact consumer spending, especially for women and more vulnerable young shoppers.
What is Buy Now, Pay Later?
Buy Now, Pay Later is an innovative payment option that more consumers are using to finance purchases. Think of it as a modern version of the old-fashioned layaway program.
BNPL allows consumers to break their purchases into smaller payments with a down payment (usually 25% of the purchase price) and 3 additional interest-free payments every two weeks. BNPL offers easier, streamlined credit terms, no reporting to credit bureaus, and no additional interest charges assuming on-time payments.
It’s simple to use online, in-store, or by downloading a BNPL app to your smartphone.
Growing worldwide popularity
Not surprisingly, BNPL has caught on like wildfire, especially with women and young consumers. U.S. shoppers will buy over $18 billion of goods and services ranging from tennis shoes to travel getaways this holiday season using Buy Now, Pay Later.
Over 61% of young U.S. consumers ages 18 to 24 say they have used BNPL, with the majority of Gen Z and Millennial consumers considering BNPL a “smarter way to shop.” Used by a staggering 360 million people worldwide, spending on BNPL purchases has reportedly increased from $33 billion in 2019 to $300 billion in 2023.
Benefits and drawbacks of BNPL
Why use Buy Now, Pay Later? It’s simple. BNPL lets consumers buy top-line goods and services today even if they don’t have the money to pay for the purchase, all without impacting their credit score.
On the flip side, fees and interest can pile up quickly if you don’t make payments on the schedule agreed to. Consumers can quickly dig themselves into a hole by overspending, or by losing track of how much has already passed through their shopping cart.
Blame it on your brain
It’s not all the fault of BNPL. Research shows that your brain has a hard time keeping up with spending when using non-cash payment systems.
Here’s the theory. When handing over cash, the purchaser feels the “pain of payment” most acutely and therefore does a better job controlling his or her spending. There’s an incentive to spend only the amount necessary. Cash is considered the most tangible or “real” means of payment and therefore the least likely to be wasted. The less tangible the means of payment, the easier it is to spend, and the more likely the consumer is to spend more. Did you ever notice how you spend more freely when using a credit card than when using actual cash? Electronic payments, like Venmo, BNPL, digital wallets, or ‘tap to spend’ cards amp that up an extra degree. They make buying fast and seamless, leading to overspending.
Incentives to overspend
If consumers were rational, the way they pay would have no effect on the amount spent. In the real world, consumers are biased to spend more when non-cash payments are introduced. The so-called “cashless effect” is a form of cognitive bias describing how consumers are both more willing to pay, and willing to pay more, when the transaction is executed with something other than physical cash.
No surprise, then, that vendors design payment systems exploiting these biases. Amazon’s 1-click purchase, for example, removes “money” from the visible equation, making it easier to spend more. Credit cards do the same thing. BNPL takes it one step further. The strategy of breaking the total purchase price into smaller pieces helps convince consumers they are spending less than they really are, with one study suggesting that customers spend as much as 20 percent more when using BNPL.
Targeting financially fragile consumers
Whether intentional or not, my research revealed that cashless payment platforms like BNPL appeal to younger and less sophisticated consumers, as well as those categorized as ‘financially fragile’ with weaker credit scores and existing debt. This raises concerns that cashless payments can lead to overspending, indebtedness, and greater consumer financial stress, and prove especially damaging to already challenged younger consumers who are incessantly bombarded with spending appeals from social media.
Those concerns are now echoed in popular media, like a recent article in Inc. Magazine which found that BNPL “can be particularly appealing to consumers who have low credit scores or no credit history, such as younger shoppers, because most of the companies providing the service run only soft credit checks and don’t report the loans and payment histories to the credit bureaus, unlike credit card companies.”
Research shows that digital overspending was most associated with less financially literate consumers. Young female consumers appear significantly more vulnerable given their lower levels of financial literacy, and attractiveness to retailers given that women drive an estimated 70-80 percent of all family purchasing decisions.
The deck is stacked against consumers
Like many financial innovations, BNPL can be a beneficial tool in the hands of credit-healthy and responsible consumers, but a dangerous invitation to overspend for fragile and already overextended shoppers.
Significantly, consumers now face a new challenge: how to control spending in a mobile, cashless society where overspending is already a serious problem. Americans now carry over $1.1 trillion of credit card debt at average interest rates of over 24%, and less than half pay off their credit card balances each month.
But there are still ways to push back
There are several tried-and-true steps consumers can take to avoid overspending, both during the holidays and throughout the year.
- Innovative offerings like BNPL may seem attractive, but consumer credit always ends up costing you money. In most cases, credit only makes sense when you can pay it off before interest charges kick in. If you’re not sure you can do that, steer clear.
- Track your spending and know where your money goes. Don’t spend money you don’t have, and pay off credit card and other balances each month. An app like Quicken or You Need A Budget can help.
- Make it easier to track your spending by paying bills using online banking (it’s actually safer than writing checks) or use one primary credit card that you reconcile every month. Cap your spending in each area to a pre-determined amount and don’t exceed that unless it’s a dire emergency.
- Focus on the Big Money Goals you want to work toward over the next 12 months and enjoy the feel-good vibes you get by making progress toward what really matters to you.
- If you tend to overspend, understand what triggers your behavior. A financial therapist can help.
- Learning about personal finance can help you make better and more informed decisions that will keep you on track. Look for classes in your community, online, or through your financial providers to enhance your financial savvy. Many women prefer women-only classes that respond to the special needs of women investors.