BNPL is a $100billion global industry that is growing fast and largely unregulated. To give a sense of scale, in the UK, the BNPL market is larger than the payday lending market was at its peak.
Benedict Guttman-Kenney is an economist researcher at the University of Chicago Booth School of Business, previously having spent 6+ years conducting economic research informing financial regulation at the UK Financial Conduct Authority (FCA), Bank of England and Federal Reserve Bank of New York.
Here, he discusses his new research on Buy Now Pay Later, which reveals many consumers are shifting BNPL debt onto credit cards, raising doubts about their ability to pay it back.
What is the cost of borrowing on Buy Now, Pay Later (BNPL)? At first glance it may appear to be zero as BNPL has a 0% interest rate. However, my research reveals a minority of BNPL consumers are charging their BNPL debt to their credit cards – which typically carry hefty interest rates of 20%.
Today we’re seeing regulators react to this market’s growth, subjecting the payment method to extreme scrutiny on both sides of the Atlantic. In February, the Financial Conduct Authority (FCA) secured changes to potentially unclear terms in the contracts of several major BNPL lenders and the UK is awaiting the outcome of a government’s consultation on how to regulate BNPL. At the same time, the US Consumer Financial Protection Bureau (CFPB) has announced the start of its own inquiry into BNPL and has ordered the largest BNPL lenders to provide data and has issued an open call for comments.
Putting payments on credit cards
Unfortunately, there is no prior quantitative academic research on BNPL to inform such regulatory debates. My research paper `Buy Now, Pay Later (BNPL)…On Your Credit Card’ with Warwick Business School’s Chris Firth and the University of Nottingham’s John Gathergood starts the economics and finance literature on this topic.
In our study, we looked at an anonymous dataset of UK credit card transactions and found it is common for UK credit cardholders to charge BNPL transactions to their credit card. From our data just under one in five active credit cards (19.5%) had at least one transaction by a BNPL firm on them during 2021. This shows that some consumers are taking out interest-free BNPL loans which are structured to be paid off quickly and transforming them into a credit card debt, where interest rates are 20% and repayment schedules can be decades-long if they only pay the minimum (a practice common in UK and US data).
Repaying one debt with another casts doubt on some consumers’ ability to pay for BNPL at all. BNPL is unregulated, but if it were regulated the practice may come unstuck when challenged with the usual ‘creditworthiness’ regulations that other UK lenders have to consider, foremost the ability of a consumer to repay a debt out of their income or assets “without the customer having to borrow to meet the repayments”.
So, how many consumers are doing this? What fraction of BNPL is put on credit cards? One UK BNPL lender reports it’s under one in ten. But given the size of this market that is still quite a lot – especially as this may vary over time across lenders and countries.
Our research also shed light on the types of consumers most likely to put BNPL transactions on their credit card. The high-risk groups are consumers in their 20s and those in the poorest areas of the UK.
A force for good?
This use of BNPL as `gateway debt products’ by younger consumers is important to investigate in the broader context of discussion over financial inclusion as it could represent two quite different realities. BNPL may potentially be harmfully leading some young consumers into a debt spiral of taking on increasingly expensive forms of debt. Or conversely, BNPL may be beneficially enabling young consumers to learn to prudently use low-cost credit, improve their credit access and avoid relying on higher-cost products.
As someone who has spent a great deal of time researching established credit products such as credit cards and payday loans, BNPL appears to be a good fintech innovation for credit markets. The payment method doesn’t include `junk’ fees common in other credit products such as overdrafts and some BNPL firms don’t charge late fees and, where they do, they are usually small and capped. At the same time, BNPL doesn’t carry the high-interest rates of payday loans, it’s interest-free and it doesn’t come with the long repayment schedules of credit cards. Instead, BNPL must be repaid in one or a few instalments over a few weeks or months. If financially constrained consumers are using BNPL instead of more expensive forms of credit such as overdrafts or credit cards then it is likely beneficial for them.
However, as with all credit products, BNPL creates the potential for some consumers to make mistakes when using these products. One we should be especially concerned about is consumers impulsively spending. It’s very possible consumers can take on more debt than they can afford to repay and will suffer the cost as credit card debts accrue or overdraft fees kick in, potentially resulting in other financial distress such as mental health problems.
Only through data-driven research can we evaluate which of these theories is true and test whether proposed regulations would be effective. Indeed my prior research on credit cards has shown well-intentioned, proposed regulatory disclosures and nudges were ineffective. I hope our paper helps to inform discussions and generate more research to ensure regulation of BNPL (and other credit markets) is done proportionately to improve real outcomes for consumers.
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