‘Buy Now, Pay Later’ Phantom Debt Mounting, Wall Street Warns

Afterpay Mobile App. | Image by Tada Images/Shutterstock
Afterpay Mobile App. | Image by Tada Images/Shutterstock

New purchasing options available to consumers are leading to short-term debt accumulation that Wall Street is struggling to track.

Retailers are increasingly offering “buy now, pay later” (BNPL) options. This short-term financing solution allows consumers to make a purchase immediately and pay for it in installments over time.

While the programs can vary, they are typically short-term in nature, with fixed payments and no interest. Commonly, the payment plan is divided over four periods, hence the nickname for the product: “pay in four.” The first payment is often due right away, with the three subsequent payments due every other week.

The actual magnitude of the short-term financing program is unclear but is likely substantial, according to one expert.

Tim Quinlan, a senior economist at Wells Fargo & Co., said the program is driving a growing “phantom debt” in the U.S. economy. This is largely because the major players in the space, Affirm Holdings Inc., Klarna Bank AB, and Block Inc.’s Afterpay, are not required to report BNPL loans to credit agencies.

Even without official figures, surveys of consumer usage point to a rising and largely untracked bucket of U.S. personal debt.

Last year, The Dallas Express reported that one in five Americans planned to use a BNPL payment plan to make purchases over the holiday season, according to a report by Adobe Analytics. In another survey, Bankrate found that 8% of respondents intended to use BNPL to finance holiday travel.

While the loans do not charge interest, consumers are still at risk of being hit with late fees for missed payments. Adobe Analytics estimates that in the first quarter of 2024, $19.2 billion was spent using BNPL, representing a more than 12% rise from the same quarter the previous year.

One estimate predicts that the opaque “buy now, pay later” market will reach nearly $700 billion globally by 2028. This could spell trouble, as a recent Harris Poll survey conducted for Bloomberg News found more than four out of 10 respondents who owe money to BNPL services were past due on payments.

The survey, conducted in April, found that dividing payments encourages consumers to overspend, with over half saying BNPL enabled them to buy more than they could afford.

For nearly a quarter of respondents, BNPL spending was deemed “out of control.”

Simon Khalaf, Chief Executive Officer of Marqeta Inc., a firm focused on assisting payment processing for BNPL providers, says the hidden debt may be so large that it could have broader economic implications.

“They’ve reached a certain scale that they could impact economists’ assumptions about their economic outlooks,” said Khalaf, per Bloomberg.

The major players in BNPL blame credit agencies for the lack of transparency, saying they cannot handle their information. They also claim disclosure could harm customer credit scores.

For their part, the big three credit bureaus say they are prepared to manage the financing details, and VantageScore Solutions and Fair Isaac Corp. (FICO) similarly say they are prepared to assess how BNPL products affect their credit scores.

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