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The U.S. Consumer Financial Protection Bureau plans to regulate Buy Now Pay Later (BNPL) transactions. The fact that there was no exuberant reaction in the market suggests that investors were expecting such a scenario. In the long run, however, this story will undoubtedly affect the profitability of companies like PayPal.
Speaking of the reasons for dissatisfaction with the BNPL payment system, we could highlight:
- Harm to consumers (the requirement to use auto-pay for all loan payments),
- Personal data collection (lenders use customer data for marketing campaigns to increase the likelihood of additional sales)
- Excessive burden on the borrower, expressed in separate short-term and long-term risks
It is estimated that Affirm Holdings, Block Afterpay, Klarna, PayPal, and Australia’s Zip, issued 180 million loans totaling $24.2 billion in 2021, up more than 200% from 2019. Eventually, the accumulation of debt could lead to yet another bubble. The regulator’s displeasure is also caused by the fact that listed companies don’t report credit transactions.
According to an April 2022 LendingTree study, just under half of Americans surveyed used BNPLs, up from 31 percent in 2021. The sector is expected to account for 9 percent of e-commerce share by 2025, reaching a market capitalization of $180 billion.
“Buy now, pay later” is essentially an interest-free loan. Providers make money on the commissions paid to them by their partner stores. Commissions are paid to them by customers who want to extend their payments. And also on the high penalties in case of delinquency.
All in all, the instrument is pretty useful. It’s estimated that the average check increases by about 68% and 44% of customers are willing to walk away from a purchase if there is no installment payment option at checkout. The problem is that the way the mechanism is designed encourages consumers to buy more and take out more credit. As a result, debts quietly grow and the ability to pay on time decreases.
