The Ethics of “Buy Now, Pay Later” (BNPL)

May 06, 2022 - 5 min read
Also Available in : Français
Bettina Vaccaro Carbone, Head of Research for SFP at Sopra Banking Software

Buy Now, Pay Later (BNPL) is among the latest in a line of financial trends to hit the market, allowing consumers to easily purchase products they might have otherwise not been able to. And while this type of financing is intended to empower buyers and widen purchasing options, how can we ensure that BNPL isn’t forcing the financially vulnerable further into debt?

There’s no doubt that BNPL is an attractive option for those looking to make big purchases without having the sufficient resources at hand, as well as those with otherwise limited incomes, but the question is: do these borrowers know what they are agreeing to when signing up for BNPL services?

Despite offering greater payment control, this financing method has a dark side, which can result in more debt and financial struggles for some. With this, governments, regulators and providers must work together to offer safe BNPL solutions that meet the needs of both providers and customers.

The rise of BNPL

According to McKinsey’s Consumer Lending Pool, credit that begins at the time of purchase is set to grow from 7% of US unsecured lending balances in 2019 to between 13 and 15% of balances by 2023.

2021 was a major year for advancements surrounding BNPL as a payment option. In the second half of the year, Amazon partnered with Affirm to expand its BNPL capabilities, Square announced their intention to acquire Afterpay, and Target released plans to partner with delayed payment providers Affirm and Sezzle. Research by PYMNTS suggests that BNPL usage virtually doubled during the holiday season from 2020 to 2021.

In fact, 15% of adults worldwide have already made use of BNPL services, with 17% admitting to likely using these in the future. With all of this in mind, It looks like BNPL financing isn’t going anywhere.

There is a good reason banks and providers are interested in getting involved in BNPL. Next to making money off these short-term lines of credit, they stand to gain much more. For example, BNPL grants banks and other providers access to younger audiences, that they normally wouldn’t have. And even though Gen Z frequently shops online (and even makes use of BNPL), most don’t have credit cards. Once these younger buyers become familiar with the institutions financing their payments, they’re more likely to become customers in the future. BNPL thus represents a new way of attracting customers, especially younger audiences, for a very low customer acquisition cost (CAC).

A question of ethics for BNPL

While BNPL can open up financing options for those with limited funds to make important purchases, it also encourages people to make unnecessary and larger purchases than what they can actually afford. Because BNPL providers initially granted cash facilities to virtually everyone who wanted them, some borrowers quickly acquired a lot of debt, while being required to pay penalties and possibly experience damage to their credit ratings, eventually having to default.

What’s more, BNPL services are often not advertised as a loan or credit, but a payment option, when they still have many of the same repercussions as loans when it comes to a lack of payment.

In this way, BNPL can be compared to the greatly criticized payday advance and check-cashing loan industry. These short-term credits often result in the borrowers paying more on the interest rates than the amounts borrowed.

With BNPL usage on the rise, it’s important to understand the real cost to borrowers and society as a whole. For example, in the UK, one in 10 buy now, pay later shoppers have debt collectors on their backs. For the youth, it’s even worse: one in eight is in the same position. This is largely due to the lack of knowledge regarding how this new financing option works. Next to this, there is considerable misunderstanding surrounding how BNPL companies actually make money. Nearly half (43%) of consumers believe these companies make money on interest collected from shoppers. 26% of consumers believe that products are marked up with BNPL fees, while 21% say BNPL providers earned money from unadvertised fees included in the product cost, and paid by the consumer. Perhaps most shocking, 31% said they don’t know how BNPL providers earn money.

The future of BNPL

Given the current issues surrounding BNPL coupled with its growing popularity, governments and BNPL providers, whether banks, fintech or merchants, need to work on offering these financing services in a more ethical manner.

As BNPL is largely unregulated, it’s in the hands of the providers themselves to operate in an ethical manner. BNPL has a long way to go in terms of offering sufficient consumer protection; for this reason, it’s vital that BNPL providers educate their consumers, so that they’re fully aware of what they are signing up for and have all of the information necessary to make an informed decision. This is especially true for the youth, who naturally have less financial knowledge and experience.

What could BNPL regulation look like? To start with, contractual terms should be clearer, especially in regards to late payments and cancellations. BNPL providers should also be required to report to the credit bureaus. Next to this, several checkpoints would be included throughout the financing journey, from credit checks to KYC verification. In fact,the UK stands to become ​​the first countryto to set forth regulations for BNPL practices in 2022. This would bring more legal certainty to merchants and greater protection for buyers.

Regulation would undoubtedly make entry into this market more difficult, as is often the case. And while it could initially hinder the expansion of BNPL, it would also protect and help consumers to make more educated decisions.

BNPL has the opportunity to generate new opportunities for everyone involved: merchants experience an increase in sales, banks and providers earn revenue on what they lend, and customers gain access to short-term credit.

With this, the future of BNPL rests on growing in a way that’s beneficial and safe for both providers and consumers. Allowing buyers to purchase necessary high-cost items, while not encouraging excessive spending on items that only lead to the accumulation of debt. It’s all about making the BNPL process as transparent as possible, so everyone experiences the benefits rather than the pitfalls.