It’s beginning to look a lot like [a BNPL] Christmas.

We’ve talked about BNPL before. Granted, it has been a while, but what we were saying back in April is just as true today as it was back then. The upshot? That BNPL is risky business. Check out this recent article on financebuzz: “Target and 30+ stores offering “Buy Now, Pay Later” for holiday shopping”. The headline pretty much says it all; stores are pushing BNPL hard for the holidays and they’re not waiting until Halloween to do it. Surprised? Probably not, since Walmart (among others) is already merchandising Christmas in their stores. And with the merchandising, lots of messaging around how wonderful your holiday will be if you overextend yourself financially over the holidays. It’s easy; simply buy now and pay later! The financebuzz article explains that “buy now, pay later (BNPL) services have become increasingly popular, especially during the holidays. They give you a way to include potentially expensive purchases in your holiday gift plans, especially if you’ve been trying to crush your debt and want to avoid making any money mistakes.”

Hmmm. Somehow the logic of that statement escapes me. How does buying expensive stuff help you “crush your debt”? Seems to me that this might fall in the category of “money mistake.” As I said back in April and I’ll say it again: I’m no economist, but I do understand the basic principles of sound money management and that hardly sounds like sound financial management to me. The financebuzz article goes onto list what they view as preferred BNPL providers that are participating:

Sezzle: A BNPL service that splits your order into four interest-free payments over the course of six weeks. There are no fees and no impact on your credit… as long as you pay on time.

Affirm:  No hidden fees, however, it’s possible to be charged interest depending on the payment plan you choose. Interest rates can range from 0% to 30% and potential monthly payment plans could include lengths of three months, six months, or 12 months.

AfterPay: You can split a purchase into four different interest-free payments, payable every two weeks. Your total payment period would be six weeks, with the first 25% of the total price happening immediately. If you don’t make your payments on time, you could be hit with late fees that are capped at 25% of the order value.

Why are retailers pushing BNPL so hard for the holidays. It’s obvious. For them, it’s good business. But is it good for consumers? On the upside, I understand that BNPL is convenient and low-cost (as long as you follow the rules) — at least compared to many credit cards — and consumers, especially younger ones, seem to love it. And according to proponents of BNPL, “when used responsibly,” BNPL can actually help consumers manage their budgets.” Although, I think I’ve also heard similar claims about “responsible use” with other products… among them, credit cards and alcohol. And so, it goes.

But despite their growing acclaim and popularity, are these services really safe?  The bottom line, according to financebuzz, is this: “BNPL options offer appealing ways to afford different types of shopping purchases. But be wary of the terms and conditions, especially if there are interest charges or late fees. Not complying with these terms is risky and could put you into debt if you’re not careful.” I would say so: Interest rates that can reach 30%? Late fees up to 25% of your total order’s value? This is certainly the kind of stuff that you want to be “wary of”! Especially when, as cited in a recent Personal Finance article, that “nearly 70% of buy now, pay later users admit to spending more than they would if they had to pay for everything upfront” and that “42% of consumers who’ve taken out a buy now, pay later loan have made a late payment on one of those loans.”

In addition to potentially high interest rates and late fees, consumers seem to be defaulting on these BNPL lending agreements at alarming rates. According to a study by Credit Karma, right now, consumers are “relying on Buy Now, Pay Later amid record inflation, and using their credit cards to pay off their debt. Among respondents who have used BNPL products to pay for an item, 40% currently have an outstanding balance. Those carrying a balance owe an average of $665. When asked about the largest amount ever owed across all buy now, pay later services, one-in-five reported owing more than $1,000. This may be fueling a cycle of debt for some consumers. In fact, nearly a quarter of BNPL users say their debt load increased after using Buy Now, Pay Later products to make a purchase.”

As for those who make their payments regularly — perhaps those younger users hoping that by doing so, they’re building credit — well, there’s some not-so-great news here, as well. That’s because, unbeknownst to many BNPL borrowers, these point-of-sale loans do not routinely appear on most credit reports. That means, of course, that a good payment record on your BNPL account won't help you build credit.

As if high interest rates and late fees, as well as the likelihood of default due to mounting debt weren’t enough, there’s also the potential for fraud. 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. One of the vulnerabilities is BNPL firms’ reliance on data for approving new clients, instead of conducting formal credit checks.”

These facts haven’t escaped the Consumer Financial Protection Bureau (CFPB). This past January,  the CFPB provided an update on a continuing investigation into five BNPL providers. The update included an invitation to “any interested parties, including consumers, small businesses, consumer advocates, financial institutions, trade associations, investors, state and Federal regulators and Attorneys General, and experts in consumer lending, payments, and marketing to submit comments to inform the agency's inquiry.” That information, says the bureau, will aid them in furthering their investigation. 

And just the other day — in their September 15 article, “CFPB vows to rein in buy now/pay later lenders,” American Banker provided this update:  “After spending months examining the business practices of buy now/pay later fintechs, the Consumer Financial Protection Bureau has produced an 82-page report that will help develop "interpretive guidance or rules" to cover gaps and consumer risks in the booming BNPL niche. The CFPB's market-monitoring exercise began early this year when it surveyed five top BNPL providers — PayPal, Affirm, Afterpay, Klarna, and Zip — and focused specifically on the "Pay in 4" style of loans that are spread over four equal segments, bypassing traditional lending regulations.”

What does this mean for community banks? Why not take this opportunity to let your customers know that you offer money/credit management guidance, along with the kind of financing that truly makes sense and meets their needs? A low-interest, no-fee credit card, for instance or better still, a HELOC? At the very least, it might be a good idea to remind your customers that using BNPL for their holiday purchases may not make for the most joyous post-holiday season… especially when they get to that “pay later” part of the loan.

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