Granted, I’m not an economist. I’m a marketing guy. So, to a certain extent, when it comes to the economy and predicting what the future holds, I pretty much have to rely on those folks who at least seem to know what they’re doing. But, you needn’t have a PhD in Economics to see that, well, we’re headed for tough times. Whether the fed raises interest rates two times or three times, or even four times next year is up for debate. And, as for the size of those rate increases, that is, too. Where am I going with this? BNPL, or Buy Now, Pay Later.
I’ve been reading quite a bit about BNPL lately. It’s a hot topic. In fact, the Buy Now Pay Later (BNPL) industry is booming, having generated nearly $100 billion in 2020, and projected to reach $3.98 trillion by 2030. I’m wondering, though… is getting into BNPL a good thing for community banks? Especially at a time when the economy seems just a bit less than robust.
On the upside, I understand that BNPL is convenient and low-cost — at least compared to credit cards — and consumers, especially younger ones, seem to love it. And heck, it appears to be awfully profitable for providers. Lots of non-bank, BNPL service providers such as PayPal, Klarna, and Affirm seem to be making a lot of money. On the consumer side, there’s the benefit, or so I’ve read, that “when used responsibly,” that BNPL can actually help consumers manage their budgets. But I’ve read the same about “responsible use” when it comes to credit cards and alcohol. And so, it goes.
On the downside, I gather that lenders make more money with traditional installment loans than they do with BNPL transactions. In addition, with its fees and administrative costs, BNPL can be expensive for merchants. Yet another downside is “regulatory scrutiny.” The Financial Brand points out, in The Dark Side of Buy Now, Pay Later, “compared to the heavily regulated credit card industry, BNPL providers have operated with relatively limited oversight. This is a risk to BNPL firms, especially as regulatory scrutiny has been on the rise.” FinTech AfterPay, for example, paid a roughly $1 million settlement to California’s Department of Business Oversight, which found that the company structured products to evade otherwise applicable consumer protections and made loans to California residents without a valid license.
Then there’s the potential for fraud. According to the Payments Journal’s article BNPL and Fraud: Riskier than Credit Cards, “It is tough enough to fight fraud when you have sound credit underwriting. Regulatory standards to ensure you “know your customer” (KYC) and that they have the “ability to repay” (ATR) help vet out many criminals. But certainly not every crook gets caught.” With lighter credit standards, BNPL experiences higher risk, and BPNL fraud is on the rise. From CNBC’s Criminals love BNPL, “Buy now, pay later services aren’t just popular among consumers. They’re also proving to be a hit with criminals. Criminal gangs are exploiting weaknesses in the application process experts say, using clever tactics to slip through undetected and steal items ranging from pizza and booze to video game consoles. One of the vulnerabilities is BNPL firms’ reliance on data for approving new clients. Many companies in the industry don’t conduct formal credit checks, instead using internal algorithms to determine creditworthiness based on the information they have available to them.”
Then there’s the risk of default. While BNPL options are becoming increasingly popular, analysts warn of default risks given the lack of credit checks and “opaque” debt reporting. Not checking a consumers’ credit history could lead to underestimating a borrowers’ debt levels when assessing new loan applications. There’s also the risk, some analysts warn, of consumers chalking up more credit card debt in order to pay off their BNPL obligations. According to a study by Credit Karma, 40% of U.S. consumers who used BNPL missed more than one payment, and 72% of those saw their credit score decline. And The Financial Brand goes on to point out that “16% of users admit to having had regrets over BNPL purchases. Among the reasons: the purchase was ultimately too expensive; late fees were high; easy credit led to buying something not needed; and finding that some lenders’ policy of not putting BNPL deals through credit bureaus meant the debt did not build credit.”
Finally, as we are clearly headed toward more economic uncertainty, along with a rise in both the cost of goods and of credit, is making it easier for consumers to borrow money a good idea?
What do you think?
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As always, I would love to hear your thoughts on this subject.