BNPL Has a Dark Side, But You Can Bring Light for Younger Customers

In just a few short years, Buy Now Pay Later or BNPL has become a standard payment option for many online or physical entities.  According to two recent studies by The Federal Reserve and Morning Consult both highlighted in a recent Financial Brand article, 1 in 5 U.S. adults used BNPL for a purchase in August 2023.  That is a staggering number!  Perhaps unsurprisingly, the users of BNPL skew younger and un/underbanked (see chart below).

The allure of BNPL was to make large value purchases easier by splitting up the purchase into three or four equal amounts due over a small period of time, usually measured in weeks. Retailers love BNP; for almost any purchase I make online for as little as $50, I get an offer to pay in BNPL installments. Many retailers touted this as a safer option than installment credit or credit cards (“no interest, no late fees!”). However, the reports show that 41% of all BNPL users are carrying balances past the initial period for completing the payments, and 1 in 4 BNPL users have had to pay late fees.  Worse, 27% have seen their credit bureau scores fall, and 22% have faced bill collectors. All of this bad news runs counter to what was expected at BNPL’s roll-out; namely that it would be a beneficial payment option for those that needed to stretch out a purchase over time, especially for those that may not qualify for a revolving line of credit.

So what does this mean for financial institutions who offer a comprehensive set of services but did not jump on the BNPL bandwagon?  The primary issue seems to be that just offering a way to split up payments on a purchase does not in itself mean that the individual purchasing the item has used sound financial judgment in doing so.  If BNPL enables someone to purchase something they cannot afford, splitting up the payments does not remediate that situation.  Which brings up an issue that all FIs should be doing anyway, which is providing financial education to its customers.  By educating customers on basic money management and further training them how to use the payments services that FI offers, it would reduce the mismanagement of purchases.  For example, say a customer is offered a credit card with a low credit line ($1500.00?) that would offer 0% interest for 8 weeks. This would enable customers to pay off a purchase in the similar timeframe that most BNPL services offer. Unlike BNPL, the card would not allow additional large purchases until the balance from the initial purchase had been significantly reduced or paid off.  For many borrowers, particularly younger ones, they are wary of a credit card due to perceived costs but are likely misusing BNPL and paying fees that would be in excess of proper use of a credit card.  Not insignificantly, many BNPL users are using credit cards to pay off BNPL balances; why not use the credit card in the first place?

Even for FIs that did offer BNPL, the proper education of customers is a critical service that each FI should address.  You have retail locations with unused space and can easily setup periodic classes that are available to all customers.  These sessions can be oriented to groups such as education targeting Baby Boomers versus young Millennials and Gen Zs.  The more you educate the customer on the proper use of financial services, the more likely they would see the payment options the FI offers are more likely to have long term benefits for individual financial wellness. As the Financial Brand article points out, some people are just not good money managers and would be in a mess whether they participated in BNPL or not.  Yet, to my thinking, this just further drives home the point that FIs should be out front with aggressive campaigns to educate on financial literacy.

Take a hard look at what options your institution has to enable safe and practical payments for a reasonably large purchase and see if there is an opportunity to do some education on how your existing payment options will serve customers well.  Or if you are offering BNPL or considering offering it, expand your educational offerings to provide the level of financial literacy that is appropriate for people to properly use financial service of all types.  In the end, a knowledgeable customer is a better customer with less errors, less likely to have fraud issues and happy to recommend the institution to family and friends.

 

Resources

https://thefinancialbrand.com/news/payments-trends/buy-now-pay-later/bnpl-sets-many-people-up-for-trouble-studies-show-170103/#:~:text=One%20out%20of%20four%20consumers,be%20a%20source%20of%20trouble.

 

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