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The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives

Use of buy now, pay later (BNPL) payment products has been growing in the United States. We explore the benefits and risks of BNPL products for consumers and merchants.

Payments System Research Briefing
Banking and Finance

In the last decade, buy now, pay later (BNPL) has become an increasingly popular payment option in the United States. This Payments System Research Briefing explores how BNPL compares with other “purchase/pay-over-time” options, and the benefits and risks BNPL presents to the consumers and merchants who adopt them. A forthcoming Briefing will consider BNPL from the perspective of financial institutions, payment networks, and regulators.

What Is BNPL?

BNPL is a type of short-term loan that allows consumers to make purchases and pay for them at a future date over a series of installments. BNPL divides a consumer’s purchase into multiple equal payments, with the first due at checkout. Shorter-term BNPL products are usually interest free, while longer-term BNPL products may charge interest. Although BNPL was initially used mainly for online purchases, it has expanded to purchases in stores and has become an increasingly popular payment option to purchase electronics, clothing and fashion items, furniture, and appliances. Today, BNPL is beginning to be available for services such as travel and even health care.

BNPL products can be grouped into two main types, depending on how they are offered to consumers. One type of BNPL product is offered directly to consumers by fintechs before a purchase is made; the other is offered during a purchase through a merchant who partners with a fintech or financial institution. _ Although five BNPL fintech providers—Affirm, AfterPay, Klarna, Sezzle, and Zip (formerly known as QuadPay)—are the most prominent, there are approximately two dozen domestic providers.

The first type of BNPL products generally targets millennials, Generation Z (Gen Z) consumers, and financially underserved consumers such as those with no credit or bad credit. The credit limits associated with these services tend to be lower, ranging from hundreds of dollars up to thousands, with only a soft credit check that verifies credit history, age, and salary but does not rely on a consumer’s credit score. However, credit limits may increase as a consumer demonstrates creditworthiness. BNPL services include a virtual or physical payment card to make purchases, which typically can only be used at participating merchants. Repayment of a purchase with these services usually involves four equal, interest-free installments, with 25 percent paid at the time of purchase and the remaining balance paid in three two-week cycles. _ These services allow multiple BNPL purchases up to the predetermined credit limit.

Compared with the first type of BNPL products, the type offered through merchants targets broader consumer segments and offers longer-term installments. In addition to millennials and Gen Z consumers, baby boomers and affluent customers may also be targeted. BNPL products offered through merchants tend to have higher credit limits that may reach up to tens of thousands of dollars and repayment terms that range from six weeks to 60 months (depending on the type of merchant). Unlike shorter-term loans, longer-term loans (3 months or more) typically require no upfront payment at the time of purchase. Interest rates vary according to the length and value of the loan and can range from 0 percent to nearly 30 percent.

Revenue for the fintechs or financial institutions that provide both types of these loans is primarily derived from fees charged to the merchants that accept the loans as a customer payment option. However, revenue may also be generated from late fees or penalties charged to consumers who fail to comply with the terms of repayment. _

BNPL Compared with Other Installment Options

BNPL products may look and feel new, but they share similarities with existing installment payments, such as layaway and credit cards. Layaway is a pay-over-time service offered by a merchant that allows a consumer to reserve an item by making interest-free, predetermined installment payments until the item is paid for in full. Consumers who use layaway may have bad or no credit or limited income. Like BNPL, layaway enables consumers to acquire a good they may not otherwise be able to afford, but without taking on debt. Layaway is relatively low risk for both the consumer and merchant. Consumers may be charged a nonrefundable service fee and may incur a cancellation fee if they do not complete the purchase. For merchants, layaway enables sales that might not occur otherwise; however, if the consumer fails to pay in full, the value of the good may decrease over the loan term. _ Although still available—especially during the holiday season—layaway programs began declining during the 1980s as the ubiquity of credit cards decreased their utility. Now, with BNPL products increasing, even more merchants are eliminating layaway services (Kenton 2020; Bruce 2021).

BNPL products also share similarities with credit cards, which enable consumers to take immediate possession of goods and delay payment. Consumers use credit cards for their rewards, cash-free convenience, and as a cushion for emergencies, among other reasons. Some consumers carry a balance from month to month, while others may pay each month’s balance in full. However, a consumer’s ability to obtain a credit card hinges on their creditworthiness (Weliver 2021). Even among those deemed creditworthy, younger generations are less likely to use credit cards than previous generations; only about one-third of Gen Z and about one-half of millennials has a credit card (Rossman 2021).

Although credit cards are a viable form of installment payment for many, products like layaway and BNPL offer a means for a broader range of consumers—especially those with bad or no credit—to access goods and services. Generally, interest-free BNPL loans and layaway are comparable in their terms and costs, but BNPL enables consumers to take immediate possession of a product at the point-of-purchase while layaway requires consumers to wait until the product has been paid for in full. When using layaway requires a service fee, BNPL can be the least expensive method of payment. Interest-bearing BNPL loans may be less expensive than credit cards, as the average interest charge of BNPL is typically lower. (See the appendix to compare a purchase made with BNPL, credit card, and layaway installment options.)

Consumer Adoption, Benefits, and Risks

Many U.S. consumers have already adopted BNPL, and the number of adopters is growing rapidly. According to a September 2021 report by Accenture, the number of BNPL users in the United States has grown by more than 300 percent per year since 2018, reaching 45 million active users in 2021 (Accenture 2021). Spending with BNPL has also increased and now represents about 2 percent of U.S. online retail sales (Tighe 2021). Information provided by the Financial Technology Association indicates that BNPL users are predominantly female and younger, with the vast majority being millennials and Gen Z consumers (Financial Technology Association 2021). The user base also includes lower-income consumers who may lack access to traditional forms of credit or banking services.

For consumers, BNPL offers various benefits. Credit may be the most important BNPL benefit, especially for consumers with limited means. In a poll by Ascent in March 2021, 45 percent of U.S. adults who were BNPL users said they used these services to make purchases that otherwise would not fit their budget (Backman 2021). Predetermined repayment schedules may be another important benefit. Unlike credit card debt, for which consumers need to make their own repayment plan, consumers simply follow the repayment schedule set by the BNPL product. The broad availability of BNPL may be another benefit relative to the limited availability of layaways; moreover, unlike layaway, BNPL enables consumers to immediately take possession of a product as they are still paying for it. Among other reasons for adopting BNPL, consumers cite convenience, transparency of terms, interest avoidance, cash conservation, and less impact to their credit score. For users with little or no credit, or bad credit history, some BNPL providers have begun offering programs for users to submit their repayment behavior to a credit bureau to help build their credit file and improve their credit score (Sezzle 2021).

However, BNPL products also carry risks. Unlike credit card issuers, BNPL lenders are not required to consider a consumer’s ability to repay loans. _ Most BNPL providers only run a soft credit check for interest-free installment loans. As a result, consumers may use multiple BNPL products—in addition to other credit products—and risk financial overextension. New research from consumer research firm Piplsay found that though 74 percent of BNPL users were able to make their BNPL payments on time, 14 percent missed a payment once, and 12 percent missed a payment more than once (Piplsay 2021). _ As some BNPL providers do report to credit bureaus, late payments may affect an individual’s credit scores (Paul 2021; Lapera 2021).

Another potential risk for consumers is that the availability of BNPL credit during the checkout process could encourage impulse buying. The March 2021 Ascent survey found that 16 percent of BNPL users reported making five or more purchases with BNPL in an average month. BNPL purchases can be difficult for consumers to track in aggregate when multiple purchases are made from multiple providers. This could result in late and missed payment fees and interest may accrue with some providers if a BNPL balance is not paid in accordance with the terms and conditions.

BNPL products also have longer-term risks. Users of BNPL products tend to skew younger, so any financial trouble could hinder their ability to access credit in the future or even obtain certain types of employment. Identity fraud is also possible. In instances where BNPL loans are not reported to credit bureaus, an individual may be unaware that BNPL credit has been fraudulently established and used in their name, and alert and monitoring services would have no insight. Because some merchants have eliminated layaway services in favor of BNPL options, some consumers may feel nudged into using a credit product they cannot effectively manage.

Merchant Adoption, Benefits, and Risks

Merchants receive several benefits by adopting BNPL products as payment options for their customers. A study by BNPL firms shows that merchants experience a decrease in cart abandonment and an increase in repeat business (Todorov 2021). The predefined, fixed-dollar installments—with or without interest—can make goods more attainable for new customers, increase existing customers’ propensity to purchase, and increase transaction value. BNPL products also provide merchants the ability to settle sales quickly and may eliminate a merchant’s chargeback and fraud risks because BNPL firms assume those risks (Eckler 2020). Furthermore, BNPL products decrease a risk associated with layaway—that the value of a good may decrease. Additionally, at least for now, BNPL may provide merchants an opportunity to gain or maintain a competitive advantage because consumers may choose merchants that offer BNPL over those that do not.

BNPL firms can also assist the merchant by directly marketing the merchant’s offers to consumers. In addition, BNPL products with direct API integration capabilities (which allow different apps to exchange data) enable merchants to offer consumers a seamless checkout experience: the consumer can apply for a loan, receive the loan approval, and pay for the first installment easily and quickly during checkout (CB Insights 2021). As a result, an increasing number of merchants—including big-box merchants such as Amazon, Target, and Walmart—are offering BNPL options for e-commerce as well as for in-store purchases. According to a Zip.co survey of more than 1,000 U.S. merchants, 25 percent accept BNPL; of those that do not, 46 percent say they are either likely or extremely likely to accept BNPL within the next year (Willson 2021).

Although BNPL provides benefits to many merchants, not all merchants may find it optimal. Offering BNPL as a payment option comes at a premium. The cost of a BNPL transaction for merchants ranges from 1.5 to 7 percent of the purchase value (including tax), while the cost of a typical debit or credit-card transaction ranges from 1 to 3 percent. As a result, merchants should consider whether BNPL products fit what they sell and whether a minimum transaction value is needed to justify offering BNPL as a payment option. Although BNPL products may earn a merchant a new customer, BNPL providers may cap the number of concurrent loans a consumer can have, which can limit a merchant’s ability to maintain a recurring relationship. _

Offering BNPL also comes with the risk that the interest-free BNPL payments will attract existing customers away from payment options that cost merchants less to accept, such as debit and prepaid cards (Southall 2021). Long-term effects could include lasting shifts in payments that result in the cost of accepting BNPL outweighing the value. Once consumers have widely adopted BNPL, merchants may not be able to discontinue accepting it even if the cost has become greater than the benefit—and the cost may not decline without regulatory intervention.

Additionally, the use of BNPL can complicate a merchant’s returns process and damage customer satisfaction. Although merchants experience lower return rates with BNPL purchases, returns that do occur can be cumbersome due to the extra steps involved. Some BNPL firms may even hold a consumer responsible for the total cost of a purchase after an item has been returned (Akeredolu and others 2021).

The number of BNPL providers is increasing and consumers and merchants appear to be readily adopting the products they offer. Although BNPL has benefits for both consumers and merchants, the offerings are new enough that potential risks may not yet be well understood. The risks to consumers have resulted in calls for regulatory attention domestically and internationally. As a result, the Consumer Financial Protection Bureau has encouraged BNPL providers in the United States to take steps to ensure users are adequately informed of the risks BNPL presents. For merchants, BNPL cost of acceptance may warrant careful consideration as regulatory intervention is uncommon in the United States. In our forthcoming Payments System Research Briefing , we will examine the regulatory considerations of offering BNPL products in addition to the perspectives of financial institutions and payment networks.

Appendix: Comparison of Consumer Payments across BNPL, Credit Card, and Layaway

Table 1 below compares a consumer’s payment for the purchase of a $500 TV (including tax) using BNPL, a credit card, or layaway for three different durations of loans: six weeks with three biweekly payments (in addition to the upfront payment at the time of purchase for BNPL and layaway); three months with three monthly payments (in addition to the upfront payment for layaway); and 12 months with 12 monthly payments. For BNPL and credit cards, all three durations are possible, while for layaway only the first two durations (six weeks and three months) are possible.

In the table, we assume “typical” fees or interest charges. For BNPL, we assume interest-free or 0 percent annual percentage rate (APR) for the six-week and three-month durations and 15 percent APR for the 12-month duration. _ For credit cards, we assume 17 percent APR for all three durations. _ For layaway, we assume a service fee of $5 for the six-week duration and $10 for the three-month duration. We make additional assumptions for a credit card. We assume that the consumer has an unpaid balance at the time of the TV purchase, and therefore no grace period applies for the purchase. We also assume that the consumer pays almost equal amounts for each biweekly or monthly payment.

Table 1 shows that BNPL is generally the least expensive among the three products, because BNPL typically assesses no service fee and no interest charge for short-term loans. However, if BNPL has an interest charge for longer-term loans that is the same as the credit card interest charge, the total payment the consumer makes is similar between the two products.

Table 1: BNPL Is Generally the Least Expensive among the Three Loan/Installment Products

Recently, a third type of BNPL product has emerged, which credit card issuers can offer to their cardholders after purchases have been made. We discuss this type more thoroughly in the next BNPL Briefing .

Some providers offer longer-term loans up to 60 months, which may carry an interest rate as high as 30 percent.

Financial institutions may also derive revenue from interest charges on longer-term BNPL loans.

Merchants may offset this depreciation with service or cancellation fees.

BNPL providers also may not offer the same disclosures or the same billing error resolution procedures.

The research is based on the online survey conducted September 28–30, 2021, which gathered 30,880 responses. It found that 43 percent of Gen Z users missed a BNPL payment at least once this year, compared with 31 percent of millennials and 26 percent of Gen X users.

However, BNPL firms could nudge the consumer back to the merchant when they are done paying off a loan.

Typically, interest-free BNPL is available for the six-week and three-month durations (Affirm 2021). For the 12-month duration, the average interest charge is not available. We assume the midpoint of the typical range of APR between 0 percent and 30 percent.

As of August 2021, the average APR of credit cards is 17.01 percent, according to the Federal Reserve Bank of St. Louis, FRED, External Link Commercial Bank Interest Rate on Credit Card Plans, Accounts Assessed Interest .

Accenture. 2021. “ External Link The Economic Impact of Buy Now, Pay Later In the US .” September.

Affirm. 2021. “ External Link Welcome to the Affirm Investor Forum .” September 28.

Akeredolu, Nelson, Andrew Braden, Joshua Friedman, and Laura Udis. 2021. “ External Link Should You Buy Now and Pay Later? ” Consumer Financial Protection Bureau, July 6.

Backman, Maurie. 2021. “ External Link Study: Buy Now, Pay Later Services Continue Explosive Growth .” The Ascent, March 22.

Bruce, Beverly. 2021. “ External Link Major Retailers Are Starting to Ged Rid of This Popular Perk .” BestLife, September 27.

CB Insights. 2021. “ External Link Disrupting the $8T Payment Card Business: The Outlook On ‘Buy Now, Pay Later’ .” Research Report, March 2.

Eckler, Mike. 2020. “ External Link What Merchants Should Know about ‘Buy Now, Pay Later’ .” Practical Ecommerce, August 24.

Financial Technology Association. 2021. “ External Link Just the Facts: Buy Now Pay Later (BNPL) .” July 8.

Kenton, Will. 2020. “ External Link What Is Layaway? ” Investopedia, December 30.

Lapera, Gaby. 2021. “ External Link 72% of Americans Saw Their Credit Scores Drop After Missing a ‘Buy Now, Pay Later’ Payment, Survey Finds .” Credit Karma, February 8.

Paul, Trina. 2021. “ External Link ‘Buy Now, Pay Later’ Loans Can Decrease Your Credit Score Even If You Pay on Time—Here’s What You Need to Know .” CNBC.com, September 3.

Piplsay. 2021. “ External Link ‘Buy Now, Pay Later’ Programs: How Interested Are U.S. Shoppers? ” October 4.

Rossman, Ted. 2021. “ External Link Do Young Adults Want Credit Cards? ” Bankrate, February 1.

Tighe, D. 2021. “ External Link Most Popular Online Payment Methods in the U.S. 2020 .” Statista, July 19.

Sezzle. 2021. “ External Link Sezzle Expands Partnership with TransUnion .” October 14.

Southall, Martha. 2021. “ External Link Buy Now, Pay Later—Three Key Lessons from Australia .” The Paypers, October 1.

Todorov, Svetlio. 2021. “ External Link Entering the Mainstream: The Growth of BNPL .” Payments Journal, October 21.

Weliver, David. 2021. “ External Link What Credit Score Do You Need to Get Approved For a Credit Card? ” Money Under 30, November 1.

Willson, Amelia. 2021. “ External Link Is 2021 the Year of BNPL? 6 Facts You Need to Know about This Payment Method .” Zip, July 10.

Julian Alcazar is a payments specialist and Terri Bradford is a senior payments specialist at the Federal Reserve Bank of Kansas City. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Kansas City or the Federal Reserve System.

Julian alcazar, senior payments specialist.

Julian Alcazar is a Senior Payments Specialist for the Office of the Chief Payments Executive for Federal Reserve Financial Services. Julian received a B.A. in Sociology from Cal…

Terri Bradford

Terri R. Bradford is a Specialist in the Payments System function of the Economic Research Department at the Federal Reserve Bank of Kansas City. Among her responsibilities are m…

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How and Why Do Consumers Use “Buy Now, Pay Later”?

Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw

Decorative illustration: two shopping bags (small and large). Text on Image Credit access and What's the role of BNPL?

In a previous post , we highlighted that financially fragile households are disproportionately likely to use “buy now, pay later” (BNPL) payment plans. In this post, we shed further light on BNPL’s place in its users’ household finances, with a particular focus on how use varies by a household’s level of financial fragility. Our results reveal substantially different use patterns, as more-fragile households tend to use the service to make frequent, relatively small, purchases that they might have trouble affording otherwise. In contrast, financially stable households tend to not use BNPL as frequently and are more likely to emphasize that BNPL allows them to avoid paying interest on credit-finance purchases. We explore below what drives these differences and consider the implications for future BNPL use.

While the exact terms of BNPL plans can vary, they have been defined by the Office of the Comptroller of the Currency as “loans that are payable in four or fewer installments and carry no finance charges.” They are generally offered to online shoppers at checkout. BNPL plans have grown increasingly prominent in recent years, and today can be used for a wide variety of online purchases, ranging from standard retail orders to fast food deliveries. Still, because of the general lack of regulation surrounding BNPL loans, little is known about how and why households use them. To examine how BNPL use varies with a consumer’s financial situation, we draw on special questions added to the October 2023 Survey of Consumer Expectations (SCE) Credit Access Survey . The survey is fielded every four months as a rotating module of the “core” SCE, which is itself a monthly, nationally representative, internet-based survey of a rotating panel of household heads that has been conducted by the Federal Reserve Bank of New York since June 2013. Our sample consists of about 1,000 households, with about 200 reporting BNPL use.

We differentiate between two types of respondents: 1) the financially fragile, whom we define as having a credit score below 620, having been declined for a credit application in the past year, or having fallen thirty or more days delinquent on a loan in the past year, and 2) all other respondents, whom we refer to as financially stable. Our results reveal different use patterns between the two groups, with the financially fragile being more likely to use BNPL for frequent small purchases. As we discuss below, this finding contrasts with past survey evidence suggesting that BNPL use is mostly experimental, and it provides further evidence that the option is particularly attractive to those who have trouble obtaining credit otherwise. We also show that across levels of financial stability, it is rare for people to use BNPL just once. Indeed, about 72 percent of financially stable users and 89 percent of financially fragile users have made multiple BNPL purchases over the past twelve months. While we cannot determine if this relationship is causal, it is suggestive that a first use often results in repeat use, and it will be a factor to watch as more consumers try BNPL for the first time.

How Often Do Households Use BNPL?

A growing number of surveys, including our own, have shown that BNPL use is particularly likely among financially fragile individuals. Still, relatively little is known about how often households use BNPL. One exception is survey evidence presented by our colleagues at the Federal Reserve Bank of Philadelphia’s Consumer Finance Institute (CFI) suggesting that BNPL use is largely experimental, with most users not using the service as a regular payment option. That said, given that the CFI’s survey was conducted in November 2021 and that the landscape surrounding BNPL is fast changing, it is possible that many first-time users in the CFI survey have continued to use BNPL since.

Conditional on using BNPL at least once, we asked respondents about their use frequency and average purchase sizes. Similar to our findings on which households use BNPL at all , we find that the financially fragile are disproportionately likely to use BNPL at higher frequencies and appear to have embraced BNPL as a regular payment option, as shown in the chart below. Indeed, among financially fragile BNPL users, about 60 percent have used the product five or more times in the past year, which translates to about 18 percent of all survey respondents deemed financially fragile (which includes those who have not used BNPL in the last year). This implies that financially fragile users are almost three times as likely as financially stable users to use BNPL five or more times and suggests that high-frequency use may grow if the product continues to be adopted by financially fragile households. Given that BNPL use in the U.S. has not been observed over a full business cycle, this factor will be particularly important to track, as households may turn to BNPL if their financial conditions worsen.

BNPL Use Frequency by Financial Fragility

Three-panel Liberty Street Economics chart showing the percentage share of “buy now, pay later” users at each level of financial fragility—financially fragile or financially stable—who have used BNPL two or more times, five or more times, or ten or more times in the past year.

Source: SCE Credit Access Survey.

Our results also indicate interesting aspects of financially stable households’ use patterns. While about 68 percent of financially stable BNPL users have taken advantage of the product at least twice in the past year, just 23 percent and 14 percent have used it five or more times and ten or more times, respectively. This reveals that use by the financially stable tends to drop off substantially after a few instances, but that there is a small group of financially stable individuals who use BNPL frequently.

Purchase Sizes

Another distinguishing factor between the two groups is the size of the purchases they make. While both groups are skewed toward relatively smaller purchases, 62 percent of financially fragile users have a mean purchase price under $250, compared to about 44 percent of the financially stable (see chart below). Looking at the rest of the distribution, this gap is largely made up in the right tail, as financially stable households are significantly more likely to have a mean purchase price between $1,750 and $2,000.

Share of BNPL Purchases by Price

The authors shed further light on the place of “buy now, pay later” (BNPL) in its users’ household finances, with a particular focus on how use varies by a household’s level of financial fragility.

Importantly, we do not find household income to be a primary driver of these disparities. Even after we control for income, financially fragile households make BNPL purchases that are on average about $220 smaller than financially stable households, and they make more purchases, averaging about four more BNPL purchases than stable household respondents in the past year.

The Anatomy of BNPL Use

To assess what’s driving these differences in use, we asked respondents an open-ended question on why they used BNPL. The word clouds below offer a visual representation of the responses of the two groups, with the size of each word indicating its frequency and prominence in answers overall.

Reasons for BNPL Use Vary by Level of Financial Stability

Side-by-side word clouds showing terms used frequently by financially stable BNPL users (on the left) and financially fragile BNPL users (on the right) when asked why they use BNPL. “Payments” dominates both, with “interest” and “credit” also prominent for stable users and “easy” and “money” also prominent for fragile users.

While both groups emphasize the appeal of spreading out payments, they also display key differences. The financially stable, for example, frequently mention the advantages associated with zero interest, while the financially fragile are more likely to describe ease of access and convenience. Both groups are likely to mention credit, but for different reasons. For example, the financially fragile are generally more likely to mention having poor credit, whereas the financially stable often mention that they’d like to avoid using their credit card or that they see BNPL as a good method of building credit. (Because BNPL lenders generally do not furnish data to credit bureaus, the latter statements may indicate some degree of misunderstanding among the product’s users, unless they are referring to building credit with BNPL lenders specifically.) Lastly, the financially fragile are more likely to state that they are making a purchase that they do not have money for up front or that they could otherwise not afford, while the financially stable tend not to emphasize this point.

Relating our qualitative responses to results on frequency and spending amounts, we can begin to paint a picture of differential BNPL use by financial fragility. For the financially stable, BNPL use appears to be more centered on a few purchases and seems to be largely driven by a desire to avoid paying interest on high-priced items. Meanwhile, use among the financially fragile appears to be more akin to a credit card, as shoppers use the service to make medium-size, out-of-budget purchases frequently. One primary driver of this difference could be access to short-term debt through credit cards. For individuals near their credit limit, BNPL may be particularly attractive as a way to smooth consumption over the short term. Meanwhile, those with ample credit available may choose to use BNPL for medium-size purchases as a way to avoid carrying a balance and accruing interest. That said, our results also reveal some misunderstanding of the product, even among its users, including the financially stable, given that some users seem to assume that BNPL will help them build credit, as mentioned above. Those with this view may be better off using a credit card.

Our results also have implications for future BNPL use. They suggest that the largest barrier to consumer take-up is their first use, and that after this initial use consumers tend use BNPL again. With about 80 percent of households not using BNPL in the past year, there may still be a great deal of room for increased adoption of the product. This will be particularly important to watch in the coming months, as many shoppers used BNPL for the first time this past holiday season .

Felix Aidala is a research analyst in the Federal Reserve Bank of New York’s Research and Statistics Group.

Daniel Mangrum is a research economist in Equitable Growth Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Photo: portrait of Wilbert Van der Klaauw

Wilbert van der Klaauw is the economic research advisor for Household and Public Policy Research in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post: Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw, “How and Why Do Consumers Use “Buy Now, Pay Later”?,” Federal Reserve Bank of New York Liberty Street Economics , February 14, 2024, https://libertystreeteconomics.newyorkfed.org/2024/02/how-and-why-do-consumers-use-buy-now-pay-later/.

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What Is BNPL?
How BNPL Works
BNPL Trends
How BNPL Affects Credit
Risks of BNPL Apps
Pros and Cons
Teaching Teens

The Bottom Line

Credit & Debt
Buy Now Pay Later

Buy Now, Pay Later (BNPL): What It Is, How It Works, Pros and Cons

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is Buy Now, Pay Later (BNPL)?

Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over time. BNPL is also commonly known as a point-of-sale (POS) installment loan that doesn't charge interest. Using BNPL financing can be convenient, but there are also some potential traps to consider. Consumers can make purchases using BNPL services offered by traditional and online retailers or through apps provided by third-parties.

Key Takeaways

Buy now, pay later is a type of short-term financing.
Consumers can make purchases and pay for them over time after an up-front payment.
Buy now, pay later plans typically charge no interest.
Compared to traditional credit cards and personal loans, BNPL loans are fairly easy for consumers to get approved for.
BNPL generally won’t affect your credit score unless you make late payments or fail to pay.

Investopedia / Joules Garcia

How Buy Now, Pay Later (BNPL) Works

Buy now, pay later programs have different terms and conditions. They generally offer short-term loans with fixed payments, no interest , and no additional charges. This means you know your payment amounts up front, and each payment will be the same. You can use a BNPL app to make the purchase, or you may have BNPL options through your credit card.

With BNPL, you can make a purchase at a participating retailer and opt for buy now, pay later at checkout. If approved, you make a small down payment , such as 25% of the overall purchase amount. You then pay off the remaining amount in a series of interest-free installments, usually over a few weeks or months.

Payments can be deducted automatically from your debit card , bank account , or credit card . You may also be able to pay via check or bank transfer in some cases, although the Consumer Financial Protection Bureau (CFPB) says that most BNPL lenders give consumers no choice other than autopay .

The main difference between using BNPL and a credit card is that the credit card generally charges interest on any balance carried over to the next billing cycle. Although some credit cards offer 0% annual percentage rates (APRs) , it may only be for a limited time. With a credit card, you can carry a balance or use your credit line indefinitely.

Some purchases may not be eligible for buy-now-pay-later financing. Also, there are limits on the amount that you can finance this way.

Buy Now, Pay Later (BNPL) Trends

BNPL is a payment option you may see more now than you did in the earlier 2000s. During economic times when inflation is high and interest rates rise, BNPL may be a helpful option for people making purchases.

A September 2022 report from the CFPB found that from 2019 to 2021, the number of BNPL loans originated in the U.S. by the five lenders it surveyed grew from 16.8 million to 180 million. This kind of financing was once most popular for beauty and apparel purchases, but it has branched out into other areas like travel, pet care, groceries, and gas. Most BNPL loans range from $50 to $1,000. The CFPB's research showed that the average loan was $135 over six weeks.

Companies, such as Affirm and Klarna , offer buy-now-pay-later financing on purchases at participating retailers. Some credit card issuers, such as Chase and American Express, have also set up similar financing arrangements.

Another CFPB report from March 2023 found that:

Users of buy-now-pay-later services were far more likely to have bank overdrafts , payday loans , pawn loans, and other high-interest financial products, indicating that they are more financially vulnerable than non-users of BNPL financing
Black, Hispanic, and female consumers were more likely than average to use it, as were consumers with household incomes between $20,000 and $50,000

While BNPL can help you make purchases you wouldn't otherwise be able to make at that time, if you're not careful, you could put yourself into a situation where you have more debt than you can afford. And that can impact your credit.

Walmart-backed One Finance announced plans to offer BNPL financing to the retailer's customers in 2023. The service hasn't started yet as the company continues to use Affirm.

How Buy Now, Pay Later (BNPL) Affects Your Credit

Most buy-now-pay-later companies only require a soft credit check for approval, which doesn’t affect your credit score . However, others may conduct a hard pull of your credit file, which could knock a few points off your score temporarily.

BNPL loans are only reported to one or more of the three major credit bureaus for late payments or nonpayments and could show up on your credit reports and have an impact on your credit score .

It's important to ensure that you can pay the monthly installments after you agree to the BNPL loan. If you do not pay your monthly payment for the BNPL loan, you could become delinquent on it and your credit history, report, and score could all be negatively impacted.

The CFPB found that those who used BNPL loans often had delinquencies on their other credit lines. These users also tended to have lower credit scores.

Since a BNPL loan is not reported to a credit bureau, it won’t help you build a good credit history like a credit card would.

Risks of Using Buy Now, Pay Later (BNPL) Apps

There are some risks to consider before entering into a BNPL arrangement.

First, you’ll want to understand the repayment terms to which you’re agreeing because BNPL financing is not as closely regulated as credit cards are. Terms can vary significantly. For example, some companies may require you to pay the remaining balance with biweekly payments over a month-long period. Others may give you three months, six months, or even longer to pay off your purchases.

Understanding how your payments will work can help you plan for them in your budget. This ensures that you can afford your payments and make them on time. Missing a payment for a buy-now-pay-later agreement could result in late fees. Your late payment history could also be reported to the credit bureaus, which could hurt your credit score.

Finally, consider store return policies and how BNPL loans might affect your ability to return something that you’ve purchased. For example, a merchant may allow you to return the item, but you might not be able to cancel the buy now, pay later arrangement until you can provide proof that the return has been accepted and processed.

Advantages and Disadvantages of Buy Now, Pay Later (BNPL)

As mentioned, buy-now-pay-later financing agreements allow consumers to pay for things over time without interest charges. And it’s possible to get approved for this type of financing even if you’ve been shut out of other loan options due to a low credit score or the lack of credit history.

BNPL loans don’t add to your credit card debt , but they do add to your personal loan debt. They don’t usually affect your credit score unless you fail to pay.

Disadvantages

BNPL does come with certain downsides. For instance, paying off a BNPL loan generally won’t help you establish and build good credit, either. You also miss out on any perks that credit cards offer, such as cash-back or rewards points.

Also, if you want to return an item you bought via BNPL, it can get complicated. You should get your money back, but there can be a delay until the merchant informs the BNPL lender of the refund. You may have to keep making payments in the meantime. If you don’t, then the payment might be marked tardy or missing, resulting in added fees and a possible ding to your credit score.

Convenient way to pay for purchases over time

Frequently no interest or lower interest rates than credit cards

Good credit/high credit score not necessary to qualify

Fast approval

Payments can be hard to track

Missing or late payments result in late fees and may damage credit score

No rewards or cash back earned on purchases

Payments may continue even if item is returned

Teaching Teens About Buy Now, Pay Later (BNPL)

If you have a teenager in your life, there's a good chance they've seen buy now, pay later as an option when online shopping. It's important to explain to them how it works so they know the risks associated with installment loans.

Most BNPL loans require the borrower to be at least 18 years old. And even if they are that age, they could be denied and need someone who has a strong credit history and good credit score to apply for the BNPL financing. So if your teen is under 18, they likely won't be able to use a BNPL loan to purchase something on their own.

BNPL may be easy and fast to use for purchase, but it may not be the best way to go about buying that item. For example, if a teen wants to buy a $100 jacket, BNPL may break down the cost of the jacket into four installments of $25, but the teen could also work to save up the $100 and then buy the jacket outright. The latter approach would help teach the teen about saving and budgeting their money. By the time they save up $100, the teen may not even want to spend it on the jacket anymore.

On the flip side, BNPL could help teach a teen about paying monthly bills. If you agree to purchase the jacket with BNPL financing, you could require the teen to pay you $25 every month until it's paid off. There's still the chance that the teen doesn't pay you back, but it could be a good learning opportunity for them.

If your teen is old enough to use BNPL financing, make sure they know how it could impact their credit history, report, and score. Take the time to explain debt and the best ways to manage it, as well as how credit impacts teens and why it's important for their financial future.

What Credit Score Do You Need for a Buy Now, Pay Later (BNPL) Plan?

There is no set credit score required for signing up for a BNPL plan. In fact, some providers of the service won’t even check your credit score or credit reports when you apply. Some run a soft credit check to understand your creditworthiness.

What Are the Dollar Limits on BNPL Loans?

That also varies from provider to provider, and from retailer to retailer. In general, it may range from hundreds to thousands of dollars. Along with an overall limit, some plans set a per-purchase limit. That is worth checking out before you head to the store to buy a big-ticket item.

What Is the Interest Rate on a BNPL Loan?

Most plans charge 0% interest as long as you make your payments on time. However, if you fail to do so, interest rates can range up to 36%. The plans may also charge late fees, typically $7 or $8, according to the Consumer Financial Protection Bureau.

Buy now, pay later loans can let you make purchases immediately but pay them off over time with no interest. If you’re considering using a BNPL plan, be sure that you understand the terms and conditions, and that you’ll be able to make all the payments on time. Consider whether the payments are affordable and what penalties you may face if you’re unable to pay. Before you decide, it’s worth weighing the pros and cons of BNPL against other options, such as credit cards and personal loans .

Consumer Financial Protection Bureau. “ Buy Now, Pay Later: Market Trends and Consumer Impacts .” Page 74.

Consumer Financial Protection Bureau. “ Buy Now, Pay Later: Market Trends and Consumer Impacts ." Page 3.

Consumer Financial Protection Bureau. “ CFPB Study Details the Rapid Growth of ‘Buy Now, Pay Later’ Lending .”

Consumer Financial Protection Bureau. " Consumer Use of Buy Now, Pay Later ," Page 2.

Chase. " My Chase Plan ."

American Express. " Buy Now, Pay Later with Plan It by American Express ."

Consumer Financial Protection Bureau. " Consumer Use of Buy Now, Pay Later ." Pages 6-7.

Consumer Financial Protection Bureau. " What is a Buy Now, Pay Later (BNPL) Loan? "

Consumer Financial Protection Bureau. “ What’s a Credit Inquiry? ”

Consumer Financial Protection Bureau. " Will a Buy Now, Pay Later (BNPL) Loan Impact My Credit Scores? "

Consumer Financial Protection Bureau. " Consumer Use of Buy Now, Pay Later ." Pages 11-12.

Federal Reserve Bank of Kansas City. " The Rise of Buy Now, Pay Later: Bank and Payment Network Perspectives and Regulatory Considerations ."

Consumer Financial Protection Bureau. " Should You Buy Now Pay Later? "

Federal Trade Commission, Consumer Advice. " Cosigning a Loan FAQs ."

Consumer Financial Protection Bureau. " Do Buy Now, Pay Later (BNPL) Loans Have Fees? "

Affirm. " Here's What Customers Will Pay ."

Consumer Financial Protection Bureau. “ Buy Now, Pay Later: Market Trends and Consumer Impacts ." Page 23.

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The Hidden Risks of Buy-Now, Pay-Later Plans

Spreading out payments is convenient, but you don't get the same protections as credit cards

More online shoppers are encountering a new payment method at the checkout page: put down 25 percent of purchase price, then pay off the rest in three equal installments over six weeks—no fees or interest charges.

Known as Buy Now, Pay Later, or BNPL, this type of instant, no-cost financing has become increasingly popular during the COVID-19 pandemic. Some hard-pressed Americans use it to stretch out payments for necessities, while others are buying big-ticket items without having to put down the full amount.

These short-term loans are also popular with consumers who can't qualify for a credit card or other financing but would still like to enjoy the advantage of spreading out payments.

Leisa Meredith, a Tampa resident, for example, keeps a tight rein on spending as she rebuilds financially after a bankruptcy. So she opts for this payment method to buy shoes for her grandchildren.

“For folks looking to manage their cash flow, buy-now, pay-later is absolutely wonderful,” says Meredith, 51.

There are risks, however. Depending on the type of plan you use, you may be subject to fees and interest charges if you don't make the payments on time. You also may have trouble getting a refund for something you’ve purchased, even if it's defective or otherwise unsatisfactory. And there's the danger of getting carried away and buying much more than you can afford.

“Consumers don’t always understand how these loan programs work, or what help they can expect if something goes wrong,” says Chuck Bell, a program director with the advocacy division of Consumer Reports.

More big-name merchants are offering buy-now, pay-later options, often by partnering with financial tech companies. (The merchants pay a fee to these lenders, betting that consumers will buy more if they can stretch out payments.) Even banks and credit card issuers are offering their own versions of these deals.

More than 40 percent of American shoppers have used a buy-now-pay-later plan, according to a recent Credit Karma/Qualtrics survey , with the highest usage among Gen Z and younger millennials. Of those who participated in a BNPL program last year, 27 percent were aged 19 to 25, while 48 percent were 26 to 34, according to Cardify.ai, a firm that tracks consumer spending data.

Participation grew during the pandemic, which hit the incomes of many American families and drove more shoppers online. Afterpay, one of the leading lenders, saw its U.S. monthly sales more than double in November from a year earlier, to $2.1 billion.

How the System Works

Buy-now, pay-later programs, also called point-of-sale loans, work like a layaway plan in reverse. Instead of making payments over time in order to qualify for a purchase, you receive your item up front, then make your payments on schedule.

For online shoppers, you’ll see a pay later button when you reach the check-out page on a participating retailer’s website. For those shopping in brick-and-mortar stores, participating retailers typically let you set up a payment option through an app on your smartphone.

Getting approved for a BNPL account, if you haven’t done it ahead of time, usually takes only a few seconds. Most programs generally do only a soft credit check to confirm your information, with no impact to your credit score . You can choose to link your payments to your debit card, bank account, or even a credit card, depending on the lender.

The typical arrangement is to put down 25 percent of the bill and pay the rest every two weeks in three equal, interest-free installments. But BNPL plans may have varied payment arrangements (more on that below).

You may also be offered a pay-later plan from more established financial services firms. Last fall PayPal introduced Pay in 4—like the other BNPL offerings, this plan allows shoppers to split payments into four equal, interest free installments. PayPal customers must apply separately for this plan.

American Express, Citigroup, and JP Morgan Chase have launched installment plans for their cardholders, giving them the option of spreading large purchases into a series of payments when they get their statements. These programs generally carry a fee or interest charges that may be lower than regular credit card rates.

Be aware, when you click that BNPL button, not every purchase may be approved. The financial tech companies place limits on the amounts you can defer, which are geared to your payment history, as well as the retailer’s policies.

Afterpay, which can be used at thousands of retailers, including Dillard’s, Bed Bath & Beyond, and Lululemon, caps spending between $1,000 to $2,000, says Melissa Davis, head of North America, although customers with strong repayment records can qualify for higher amounts.

Most shoppers actually make relatively modest purchases. At Quadpay, another BNPL lender, transactions average $200, says Shira Schwartz, vice president of marketing, with customers often using the plan for fashion and beauty products, gaming items, as well as food delivery.

Some luxury retailers are starting to offer point-of-sale loans as well. Peloton, the high-end exercise bike (cost: nearly $2,000 or more), has partnered with Affirm to give customers the option of no-interest, no-fee installment plans for as long as 39 months. Peloton purchases recently accounted for 28 percent of Affirm’s revenue, according to its IPO filing.

What Can Go Wrong

One obvious risk with BNPL programs is that those seemingly affordable payments may tempt you to splurge.

In a survey last year by Cardify.ai, nearly half of BNPL shoppers said they increased their spending between 10 percent to over 40 percent when they use these plans compared with using a credit card. Two-thirds of BNPL customers said they are buying jewelry and other “want” items that they might not otherwise purchase, the survey found.

Consumers may also find that installment payments are harder to track. A study last year by Cornerstone Advisors, a banking consulting firm in Scottsdale, Ariz., found that over the past two years, 43 percent of those who used BNPL services were late with a payment. Of those, two-thirds said the reason for falling behind was that they simply lost track of the payments, not because they did not have the money.

“For most people having the money was not the problem—it was the management piece of it,” says Ron Shevlin, director of research at Cornerstone Advisors.

You may also face challenges if you have a problem with your purchase, such as obtaining a refund for a product that didn’t arrive or turned out to be defective. That’s because you will have to meet the requirements of both the BNPL lender and the retailer.

Unlike credit card issuers, which are subject to strong federal regulation , these short-term lending programs are relatively new and receive minimal, inconsistent oversight from federal and state bank regulators.

“Buy now pay later programs fall into a regulatory gray area and do not have the same consumer protections as credit cards,” says Chuck Bell, the Consumer Reports advocate.

Unlike credit card issuers, who typically stop payments when a transaction is disputed, BNPL lenders generally require consumers to first contact the merchant to get credit for a return or refund. Until the lender is notified by the retailer that the transaction has been voided or a refund issued, you may have to continue to make payments on your loan.

That often leaves consumers on their own to ensure that the merchant follows through and the payment is credited by the BNPL lender. These tasks can be challenging, especially during a pandemic.

For LT Horhn, 48, a Los Angeles resident, obtaining a refund from Sezzle for a $200 handbag turned out to be a long ordeal.

“I was shopping online last September and clicked—then I had second thoughts, since I didn’t know the retailer,” says Horhn.

She tried to cancel the purchase, but she could not reach the retailer by phone, and Sezzle’s customer representative told her that all requests must go through the merchant directly.

Horhn sent back the bag, which was poor quality, she says. But the address given to her by the retailer turned out to be false, and the package was returned as undeliverable. Unable to get a refund from Sezzle, she canceled payments through her bank, but the first one for $51 had already gone through.

Upon being contacted by Consumer Reports, Sezzle CEO Charlie Youakim reviewed Horhn's account, and she received a refund. Youakim also says Horhn should have initiated a dispute.

Horhn responded that she did not understand where to do this on the website.

How to Avoid Problems

1. Be realistic about spending. Your BNPL lender may allow you to spend as much as $1,000 in one shot, but that doesn’t mean you should.

So take a hard look at your budget and your income to understand how much free cash you will have coming in.

Once you understand your spending limits, make sure you stay on track, perhaps by keeping a strict list of planned purchases. And earmark an account for those future payments.

“You want to make sure you really have the money set aside for those bills, when they come due,” says Marguerita Cheng, a certified financial planner in Gaithersburg, Md.

2. Check for pitfalls in the FAQs. “These pay-later services are still the Wild West—they come in all types, some with fees and interest charges and some without,” says Matt Schulz, chief industry analyst at Lending Tree. “It’s easy to get confused, especially if you sign up with more than one lender.”

So check the terms of the loans on the lender’s website, which are typically laid out on a support or FAQ page, or call and ask. Is the late fee imposed automatically, or can you get it waived if you pay a day late? If you miss a payment, are you barred from future purchases? Will late or missed payments be reported to a credit bureau, possibly hurting your credit score ?

Be sure you are getting the rules for the specific type of loan you are using, since some lenders provide more than one type of financing program. Affirm, for example, offers loans of varying lengths, and the terms and interest rates can vary by retailer and your credit profile.

3. Set up automatic payments. As the Cornerstone Research showed, consumers can easily lose track of their BNPL payments. One likely reason these bills are short-term and come due biweekly rather than monthly, says Shevlin. Juggling multiple loans can add to the confusion.

Some consumers may also view the late fee as a minor cost, but they can defeat the purpose of using these programs, says Ted Rossman, industry analyst at CreditCards.com.

Say you end up paying $30 in late fees on a $100 item—that effectively raises the price of the item by 30 percent. If you don’t have enough money in the bank to pay that bill, you may get hit by a $35 overdraft fee on top of that.

The most foolproof way to avoid these costs is to automate the entire process. Schedule regular payments through your bank account or card.

You can also set up text or email reminders that payments are due. Some lenders do this automatically.

4. Don’t use for obscure retailers or travel. Unless you’re spending a small amount that you won’t miss, an installment loan program isn’t the best way to try out a new product or service.

“If you’re using a buy now pay later plan, you probably want to stick with well-known retailers with track records for delivering on time and responding quickly if there’s an issue with your purchase,” says Rossman.

You may also want to think twice about using these plans for travel arrangements, such as buying airline tickets, says Chuck Bell, the Consumer Reports advocate. When dealing with online travel booking sites, especially, you may come up against inflexible refund policies if your travel plans change or are canceled.

5. Consider using a credit card instead. While point of sale loans can be convenient, you may be better off in the long run if you use a credit card, as long you can pay off the full balance on time.

“By using a credit card, you can build a good credit score, which is important for your overall finances,” says Schulz. (Learn smart strategies for improving your credit score .) Your purchases may also qualify for rewards, such as cash back or discounts, which can boost your budget.

You also have stronger consumer protection when you use a credit card. In addition to investigation of disputed charges, some issuers may offer purchase protection that will cover your costs if items are damaged or stolen.

In these uncertain times, it can be a major benefit to have additional help if something goes wrong.

Penelope Wang

I cover everything from retirement planning to taxes to college saving. My goal is to help people improve their finances, so they have less stress and more freedom. What I enjoy: walks through the city, time with family, and reading mysteries, though I rarely guess who did it.

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For Retailers, a Direct Link from ‘Buy Now, Pay Later’ to the Bottom Line

Sponsor content from PAYPAL.

Most corporate growth strategies are grounded in plans to enter new markets, launch new products, acquire another company, or enhance the customer experience. At the same time, companies have to negotiate an increasingly complex global digital economy where tech-savvy consumers have limitless shopping choices and higher expectations than ever before. As retailers jockey for customers, they should consider one growth tactic that can help meet consumers’ need for flexibility and increase conversion: updating checkout to offer more-flexible payment options.

Today’s online shoppers expect a range of payment choices. A 2021 TRC Market Research survey of ecommerce customers in the United States, the United Kingdom, Germany, France, and Australia found that the majority of shoppers decide how they’re going to pay for a purchase before they check out — and “buy now, pay later” (BNPL) payment options offered earlier in the shopping journey can help influence their decision to buy. 1

Unsurprisingly, the fintech industry has taken notice. In 2020, spurred by the financial shock of the pandemic, demand for BNPL increased substantially, 2 and a host of new providers quickly emerged to meet it. While the pandemic is subsiding, enthusiasm for paying by installment remains high across customer segments. 2

It looks like BNPL is here to stay. And to remain competitive, retailers need to know who uses it and why — and how offering it can help them increase sales.

Not Just for Millennials

BNPL is often associated with Millennials, 1 but today’s BNPL has broad appeal across demographics, from Gen Zs to Boomers. Despite some country-by-country variations, the TRC survey revealed significant uptake across all age segments:

Millennials (ages 25-40) are the biggest users of BNPL, with usage ranging from 37% in France to 49% in the United States. 3
Many Gen Xs (ages 41-56) also choose BNPL — from 25% in the United Kingdom to 33% in the United States.
Younger and older generations are catching up, with more than 18% of Gen Zs (ages 18-25) and 11% of Boomers (ages 57-70+) using BNPL.

From young people settling into adulthood to retirees entering the next phases of their lives, interest-free credit options seem to be playing an increasing role in people’s purchases. 2

The Broad Appeal of BNPL

Consumers see many advantages to using BNPL. The most common are:

Flexibility and convenience. The popularity of BNPL parallels a rise in the “subscription lifestyle” trend. Consumers like the convenience of automated monthly payments for streaming services, meal delivery plans, and curated fashion shopping. Even some airlines, recognizing that consumers enjoy a “set it and forget it” payment schedule, are exploring subscription travel plans. 4 BNPL offers similar consistency and transparency — automated repayments on a set schedule — as well as convenience.
Appeal to a wide range of consumers. At least half of the TRC survey respondents in all five national markets said that spreading the cost of a purchase allows them to make better purchasing decisions. 1 This means BNPL may help retailers reach a wide range of shoppers who will purchase higher-quality and valued goods because they can pay over time. This can help increase revenue and average order values for retailers.
Budgeting and cash flow support. While it may at first seem counterintuitive, many consumers use BNPL to help manage their finances and improve their financial health. In the TRC survey, 76% of respondents reported using BNPL to budget and manage cash flow 1 — a practice especially appealing to digital natives who may use investment and budgeting apps such as Ellevest and Acorns. 5 Knowing the payment schedule and costs associated with BNPL when a consumer uses it to make their purchase makes it easier for them to manage their cash flow.
Streamlined application and approval. Shoppers can quickly access BNPL as part of the checkout process, without a lengthy approval process. They can get the flexibility to spread payments over time and the satisfaction of receiving purchases quickly.

Helping Retailers Grow Sales

Retailers, meanwhile, find that BNPL helps drive both sales and customer loyalty. The TRC survey revealed three major advantages:

Conversion boost. Consumers paying with BNPL were up to three times more likely to complete a purchase after browsing. 1
Bigger average cart size. BNPL users may be more likely to pull the trigger on big-ticket items. The most common purchases are clothing and shoes, while purchases of electronics, appliances, and other durable goods also raised the average basket size. Samsonite added a BNPL option in fall 2020 and saw a 25% increase in the average value of orders made through its leading payment provider in 2021. 6
Fewer abandoned transactions. BNPL has become so much more commonplace that the absence of a BNPL option may turn off buyers. At least half of BNPL users in each country surveyed (66% in the United States 7 ) said they would abandon a purchase if BNPL wasn’t an option.

Fortunately, retailers have the ability to build the trust that shoppers require to maintain the customer-company relationship. The TRC survey found that at least 64% of consumers in France are more likely to trust a retailer that offers their preferred payment option. 1 Retailers also play a critical role in raising awareness of BNPL and expanding the use of it; 74% of BNPL users in the United States have been prompted to use BNPL by a message delivered on a retailer’s site while they were shopping. 8

Finding the Right BNPL Partner

Retailers can choose from a long list of BNPL providers. Look for one that can deliver the seamless transparency consumers expect, with a track record of efficient, accurate, high-capacity transaction processing. Demonstrated investment in enhanced data security is also crucial. For instance, in Australia, 60% of BNPL users would abandon a purchase due to security concerns. 9

A provider that meets all these criteria delivers a win-win for retailers and customers alike: Consumers acquire what they want on preferred terms, while retailers increase their ability to energize growth, convert browsers to buyers, and garner greater customer loyalty from BNPL believers.

Find out how PayPal can help you integrate Pay Later options for your customers.

[1] TRC study, commissioned by PayPal, April 2021. TRC surveyed 1,000 consumers 18+ in each of five countries: the United States, the United Kingdom, Germany, France, and Australia.

[2] Ron Shevlin, “ Buy Now Pay Later: The ‘New’ Payments Trend Generating $100 Billion in Sales ,” Forbes, Sept. 7, 2021, accessed April 29, 2022.

[3] TRC, commissioned by PayPal, April 2021. TRC conducted 20-minute online surveys among 1,000 consumers ages 18+ in Australia (among BNPL users, n=447). TRC conducted 20-minute online surveys among 1,000 consumers ages 18+ in Germany (n=342). TRC conducted 20-minute online surveys among 1,000 consumers ages 18+, including ~300 PayPal BNPL users, in France (n=255). TRC conducted 20-minute online surveys among 1,000 consumers ages 18+ in the United Kingdom (n=303). TRC conducted 20-minute online surveys among 1,000 consumers ages 18+ in the United States (n=282).

[4] Josh Rivera, “ The newest subscription service: Flights. Would you do up to 24 roundtrips a year for a monthly rate? ,” USA TODAY, Feb. 17, 2022, accessed April 29, 2022.

[5] Maryalene LaPonsie, “ How 7 Financial Tools and Services Simplify Life for Millennials ,” U.S. News & World Report, July 27, 2018, accessed April 29, 2022.

[6] David Oksman, Samsonite, VP of Marketing and eCommerce, et al., “ BNPL: The Millennial Payment Method Comes of Age ,” The MoneyPot podcast, Jan. 25, 2022.

[7] TRC online survey commissioned by PayPal in April 2021 involving 5,000 consumers ages 18+ in the United States, the United Kingdom, Germany, France, and Australia (among BNPL users, U.S. (n=282), U.K. (n=303), Germany (n=342), France (n=255), and Australia (n=447)).

[8] TRC online survey commissioned by PayPal in April 2021 involving 1,000 U.S. consumers ages 18+ (among BNPL users, n=282).

[9] ACA Research, PayPal Australia eCommerce Trends Report 2021 (commissioned by PayPal Australia).

Money Management

Should You Buy Now, Pay Later?

Link Copied!

Buy Now, Pay Later (BNPL) is a payment option has been around for some time and has been quickly gaining traction among consumers in recent years.

The onset of the COVID-19 pandemic caused a consumer paradigm shift towards online shopping, a change that did wonders for BNPL’s popularity as people began relying more on the internet for purchases.

As its name suggests, BNPL allows customers to make a purchase and receive the product immediately but pay for it at a later time, usually over a series of installments.

But wait a second. Isn’t that just a credit card installment plan? Yes, both payment methods are incredibly similar. However, there are a few key differences between the two.

BNPL vs credit cards

While both credit cards and BNPL involve delayed payments, the use of a credit card to pay for purchases only requires you to make the minimum payment due on the card each month. Interest accrues on the remaining amount until you pay it off in full. On top of that, the outstanding balance can be carried indefinitely (while paying a very high interest rate!).

On the other hand, BNPL purchases often do not charge interest. However, they do have a fixed schedule for repayment. At the moment, providers in Malaysia allow tenures of up to six months at a time. There are hefty late payment fees that will be added if you do not follow the repayment schedule. If you still fail to pay up despite the late fees imposed, your balance may be sold to a debt collection agency and your credit score could take a hit.

For the most part, BNPL is not as widely accepted as credit card installment plans. Despite this, BNPL can still be a rather attractive option when it comes to smaller purchases whilst browsing the web.

4 things to check before you BNPL

Before committing to a BNPL arrangement, make sure you are clear on all the terms and conditions. Every company does things differently. Some of the most important terms you need to keep an eye out for include:

Application process
The time required for repayment
The interest rates (if any)
Late payment conditions
Return policies

1. Application process Most BNPL companies generally only require a soft credit check for approval with this payment method. This means that your credit score will not be affected. However, there are exceptions to this, where some companies may conduct a hard pull of your credit. This means that a creditor has requested to look at your credit file to determine how much risk you pose as a borrower This can end up affecting your score temporarily.

2. Allocated repayment time It would also do you good to learn how your BNPL payments work. This will help you to budget the required amount by the allocated time, so you will not miss the deadline on payments, potentially incurring additional late charges. As mentioned previously, BNPL arrangements often come with 0% interest, but that is not always the case. If you are not careful, you may end up with a BNPL purchase that charges equal, if not more interest than credit card installments.

3. Interest rates and late payments Another thing to keep in mind is the terms of repayment that you are agreeing to. For example, missing a payment or not having sufficient funds in your account when payment is due could trigger fees and penalties with BNPL, and customers may also have to pay interest for the rest of the payment period. Some BNPL penalties – like that from Shopee – can add up to exorbitant amounts.

4. Return policies One final thing to consider is the return policy of items bought via BPNL. Returning an item may be possible. However, due to this method’s nature, the merchant might only be willing to cancel your installments or offer a refund on your purchase after they can verify that the return has been accepted and processed.

Pros and cons of using BNPL

Here’s a quick summary.

Convenient, structured, and disciplined way to pay for purchases over time at fixed intervals.
Commonly has little to no interest rates compared to credit card installment plans.
A good credit score is not a necessity to apply for BNPL in most cases.
Approval is usually very fast.
Payments can be difficult to keep track of (particularly if multiple purchases are made from multiple providers.
Generally does not earn you any rewards or cashback benefits.
Ease of payments could lead to overspending.

Who is BNPL for?

BNPL is aimed at those who would like more options for installment payments, but are unable to qualify for credit cards. These could be lower income individuals who need the option to afford certain household appliances or items, or for those who are on a tight budget and need to spread out some payments to stick to it.

However, it should be noted that the short term nature of BNPL means that the installments will still be higher than credit card or store in-house repayment plans. If only because credit card providers tend to allow for longer repayment periods. So while the overall amount might be lower with BNPL, you are still on the hook for more each month.

The dangers of BNPL are similar to that of a credit card. You will require self control in order to ensure that you do not end up buying more than you can afford. Buying now and paying later can still send you into debt, even if the late payment charges are lower than that of credit cards and bank loans.

Overall, BNPL is yet another tool in your financial toolkit. It can help you stick to a budget and smooth over rough patches, or it can do substantial damage if you’re not careful. So like any other financial product, it is up to you to use it wisely and live within your means.

Trying to figure out which BNPL provider to use? Check out our comparison article .

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Consumers and Companies Are Buying In on Paying Later

Installment payment services are everywhere thanks to fresh deals with Amazon and Square. It’s a simple idea that can quickly get complicated for users.

By Tara Siegel Bernard

That $128 pair of jeans can now be had for just four payments of $32. Dropping $100 on cosmetics seems less indulgent when the transaction is broken up into $25 payments. Even a pricey Dyson vacuum can be rationalized when purchased in $125 installments.

And retailers from Amazon to Walmart to your neighborhood boutique are buying in, too.

The option to buy now and pay later has soared in popularity, accelerating last year as consumers bought almost everything online at the start of the pandemic. But the little buttons under those Lululemon leggings or that new TV that suggest spreading your purchase over six weeks or more — often at no cost — are expected to change spending habits in lasting ways.

“I think of it as a credit card, without interest,” said Jenna Kellett, 27, a personal assistant in Dublin, Ohio, who was enough of a fan of one of the leading services, Afterpay, that she became a moderator on a Facebook group where members track new features and follow participating retailers.

If you haven’t encountered a pay-later option before, you will soon. One major provider, Affirm, announced a deal last week to offer its service on Amazon , the nation’s largest retailer. And Square, the payments firm run by the Twitter chief executive Jack Dorsey, agreed to acquire Afterpay for $29 billion in early August, a deal that will open installment payments to millions of small businesses that process sales through Square’s app.

Younger adults — who have now lived through two major economic upheavals — have embraced the services, similarly to the way they’ve favored debit cards over credit and all that it represents. “Their preferences are starting to become the trend,” said Nick Molnar, co-founder and co-chief executive of Afterpay, who said 90 percent of the company’s users pay later using a debit card.

Afterpay and Affirm — along with competitors like Sezzle, Klarna and Zip — are only beginning to push into territory long dominated by credit cards, which accounted for 30.4 percent of online sales in the United States last year. That’s far more than the 1.7 percent from pay-later services. But their share is expected to nearly triple to 4.8 percent of sales — or $79.7 billion — by 2024, according to Worldpay, a payment processing firm. They’re already more established overseas: Pay-later accounts for 23 percent of online transactions in Sweden, almost 20 percent in Germany and is also popular in Norway, Finland, Australia and New Zealand.

“There was already growth before the pandemic,” said Ginger Schmeltzer , a senior analyst for the research and advisory firm Aite-Novarica, which estimated there are about 125 million pay-later users at the top six providers worldwide, though that includes people using multiple platforms. “Now, it is like a hockey stick. What we are seeing is that it is not slowing down.”

The idea is straightforward: The purchase price is usually split into four interest-free installments, with the first payment generally due at checkout. It’s smoothly embedded in the shopping experience, offering almost immediate approval — sometimes not even requiring a so-called soft credit inquiry , which doesn’t affect your credit score in any case. There are generally no finance charges, or additional fees if you pay on time. But some services, including Affirm, may charge interest to some consumers using certain payment products.

Many providers will also let consumers create a virtual card in just a few minutes, with hundreds of dollars made available to spend at participating retailers. Some of the apps double as online marketplaces , listing participating merchants and linking directly to their online stores.

That’s how Ms. Kellett stumbled on a recent obsession: Surf’s Up Candle, based in Belmar, N.J., was listed on Afterpay’s app. “I would have never known their brand existed,” she said.

That’s part of the lure for merchants — even though pay-later services can be three times as expensive to offer as credit cards, costing those businesses between 2 percent and 8 percent of the transaction amount, according to Jefferies, a financial services firm.

“It definitely makes them spend more,” said Michelle Fontanez, who started Surf’s Up Candle with a crockpot in her kitchen in 2014 and now has 60 employees and a retail location. She added Afterpay last year, and Shop Pay earlier this year. “People love to pay it off and not have to pay in full,” she said.

But consumer advocates worry about the potential implications of these growing services. Pay-later usage generally isn’t reported to credit bureaus like Equifax and TransUnion, so there’s nothing stopping people from juggling multiple services. And their varying policies can lead to unpleasant surprises.

“They work differently and you have to dig deep in the weeds to figure out the cost to you,” said Rachel Gittleman, financial services and membership outreach manager at the Consumer Federation of America.

Pay-later services usually charge late fees for missed payments, starting around $7 each and sometimes capped at 25 percent of the total spent. They will cut off users until they catch up, and can reduce their spending power once they have.

And though several providers say they don’t report payment behavior or outstanding debts to the credit bureaus, serious delinquencies may show up eventually. Some companies, including Affirm, Afterpay, Klarna and Zip, reserve the right to send the account to a debt collector, which can lead to repeated phone calls or other efforts to recover outstanding balances.

But Sezzle’s chief executive, Charlie Youakim, said his company allows users to opt in to having their payment record — good and bad — reported to help build their credit history. Fifteen percent of Sezzle’s 3 million active users don’t have one, he said. “If we don’t report we aren’t helping them get to the next stage,” Mr. Youakim said.

Chuck Bell, programs director of advocacy at Consumer Reports, said users need to ask questions when they sign up. “When you are trying to interpret a lending agreement on your smartphone, you can miss critical details if you click through too quickly,” he said. “Are there late fees? Will they refer you to collections?”

So far, pay-later companies say they have few problems with bad debts. But that might not be the case for some of their users. If struggling consumers make their payments automatically from a tapped-out bank account, they can fall further behind. Some have filed lawsuits claiming pay-later services’ policies caused them to incur significant overdraft charges. Other suits claim that the services continued to attempt collections even after consumers filed for bankruptcy.

“Users may find themselves unable to afford the periodic repayments and may turn to credit cards or other forms of high-interest debt,” said Joyce Fargas, a senior director at Fitch Ratings who co-wrote a report in July on the industry.

In Australia, where pay-later accounts for about 10 percent of online transactions, a regulator found in November 2020 that 15 percent of users had taken out an additional loan in the preceding year to meet their obligations on time, the report said.

Pay-later services can fall into something of a gray area because of the length and terms of their products. They don’t carry the same dispute protections that consumers have come to expect from credit card providers, the Consumer Financial Protection Bureau has said, and getting refunds can be more complicated.

And last year, the California Department of Financial Protection and Innovation temporarily halted the top players ’ main businesses and required them to refund nearly $2 million in fees after concluding that they had structured their products to evade regulation. To do business in the state, they must now be licensed lenders, which means considering consumers’ ability to repay loans, rate and fee caps, and responding to consumer complaints .

The services also require some self-regulation, users said.

Kimberly Williams, an avid user of several services, said she would only recommend them to people who are financially fastidious.

“You cannot use these types of plans and not be fully in sync with your finances, how the plans work and what you can afford,” said Ms. Williams, 42, a health care research site manager.

Ms. Williams previously worked as a wardrobe stylist and has a side business designing clothes that are manufactured in Lagos, Nigeria. She dedicates a portion of her monthly budget to clothing purchases that she often resells, which makes pay-later an attractive option.

As she’s used the services more, they’ve increased her spending power — $10,000 at Affirm, up from $2,000 — and she’s earned perks, like free shipping and the option of two additional weeks to make her first payment.

“The rewards, the benefits, the increase of availability to spend — it comes at you quick,” she said. “It becomes more and more tempting.”

Tara Siegel Bernard covers personal finance. Before joining The Times in 2008, she was deputy managing editor at FiLife, a personal finance website, and an editor at CNBC. She also worked at Dow Jones and contributed regularly to The Wall Street Journal. More about Tara Siegel Bernard

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FINANCE & BANKING

Are buy now pay later payments a convenience or a trap.

On the surface, “Buy Now Pay Later” (BNPL) services are an attractive offer. You make a purchase, and instead of paying it all at once, you pay over several installments. This makes it easier to handle big expenses, especially when you don’t have enough cash to pay in full.

Some schemes can give you up to 30 days to pay, while others can allow you up to 12 months. However, unlike credit cards, BNPL plans don’t charge interest on the items you pay off over time, provided you make payments when you are supposed to.

But is there a catch to this convenience? Read on if you’d like to find out.

How does Buy Now Pay Later work?

Buy Now Pay Later programs aren’t all the same. Every company has its own terms and conditions. However, the services generally operate along the following lines:

You buy something at a participating retailer and opt to ‘buy now, pay later’.
If you are approved (which only takes seconds), you’re told to make a small down payment. For example, 25% of the total.
You then pay off the remaining amount over a period of time in regular installments until the whole amount is paid.
You can pay the installments yourself or the amounts can be deducted from your debit card, bank account, or credit card.

There usually aren’t any interests or fees with BNPL. However, they have a fixed repayment schedule which usually lasts several weeks or months. You’re told upfront what you’ll need to pay every time. The thing is, you cannot miss a single payment.

For approval, most of these services don’t really consider your credit score. So just about anyone can access it. But, not all purchases are eligible. There may also be limits on how much you can pay this way.

With Buy Now Pay Later services seeming so attractive, it’s only natural to wonder whether it’s convenient or just a risk. Is it worth it?

What are the advantages of Buy Now Pay Later payments?

In recent years, Buy Now Pay Later services have become quite popular. So, why are so many people opting for this payment method? What are its advantages?

More flexibility – With the payments spread out over several weeks or months, Buy Now Pay Later services give you more flexibility when you have your heart set on buying something.
No interest rates – If you make your payments on time, you won’t get slugged with extra costs. You just pay for the product itself, nothing more, nothing less.
Easy approval – The best thing about BNPL services is that it’s quite easy to get approval. However, not all stores offer this. Some that do, make it simple for customers to access the service.
It’s convenient and easy to use – Most people find the service more convenient than using credit cards or paying the full price for a product upfront. It’s also easy to make the payments.
Good credit or a high credit score isn’t necessary – To qualify, you don’t need a high credit score.

All in all, these are some of the reasons most people prefer BNPL payments. But like with most things, there are risks involved.

Risks of Buy Now Pay Later payments

Some of the dangers include the ones listed below.

1. Unaffordable debt

It’s easy to spend more money than you can really afford. Prices can seem cheaper when you split them into smaller repayments, but the truth is that you may end up losing track of how much you owe.

This is especially true if you make multiple purchases on different days. You could quickly find yourself spending far more than you intended or more than you can afford to pay. This could cause financial problems for you.

2. It’s difficult to track spending

BNPL purchases can sneak up on you. You can easily go from paying $25 weekly over 8 weeks for a nice shirt, to buying even more items the next week. You may end up finding that you’ve committed the equivalent of your food budget for the week on BNPL payments.

3. You can get hit with expensive fees and penalties

What makes this service attractive is that you’re not charged interest right off the bat. But watch out if you fall behind on your payment plan! You could get hit with expensive penalties and fees that would make your purchases cost a lot more than you thought. This can turn out to be quite the headache!

4. Vulnerable groups

The easy approval process means vulnerable groups like low-income customers (students, teenagers, etc.) will jump on this service. These groups are more prone to buying on impulse. Unfortunately, this means they are most likely to fall down a debt rabbit hole.

Don’t miss a payment

BNPL can quickly become expensive if you don’t make payments on time. While BNPL is a convenient way to shop, it could be problematic later down the track if you’re not able to meet your repayment obligations.

Late or missed payments may be reported to the credit bureau which can impact your credit score. If your various repayments are piling up and you’re feeling overwhelmed, Credit24 could help.

Simply consolidate all your BNPL repayments into one manageable Credit24 account.

We provide you with the flexibility to spread your repayments over 36 months. This could reduce your fortnightly instalments into a more manageable and affordable amount. You can also repay the loan early with no penalty. The earlier you pay it back, the more you’ll save on interest.

BNPL has really revolutionized the way we shop. It’s such an ingenious idea but you need to have your wits about you to stay on top of your repayments.

But don’t stress, Credit24 is here to help if things go awry. If you’re looking to consolidate BNPL payments that are getting out of hand, visit our website today at www.credit24.com.au

Disclaimer: IPF Digital Australia Pty Ltd, trading as Credit24, ABN 59 130 894 405. Australian Credit Licence 422839. Lending criteria, fees and charges apply.

Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.

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Privacy Overview

Buy Now Pay Later Fraud (BNPL): Risks & Prevention

by Jimmy Fong

Since Buy Now, Pay Later (BNPL) solutions ballooned during the pandemic, there’s been no signs of slowing down. According to research reported by The Ascent, about 27% more people were using BNPL services in 2021 than in 2020.

Everyone, from consumers to retailers down to traditional lenders, wants a taste.

But these groups aren’t the only ones seeking to benefit from the BNPL model. Fraudsters are too. And this is more of a concern in BNPL than in some more traditional sectors.

Because unlike fraud specialists in other industries, BNPLs must implement fraud prevention without sacrificing frictionless customer experience – a key strength in the industry. Otherwise, they risk a high churn rate, reputation damage, and revenue loss.

Let’s see how to detect and prevent BNPL fraud while retaining the seamless customer experience.

What Is BNPL Fraud?

Any fraudulent activity related to buy now, pay later systems is, technically speaking, BNPL fraud. Both payment processors and merchants are diversifying the ways in which consumers can make their online purchases, but these new payment products come with their own fraud hazards. The increasingly popular buy now, pay later system is no different, and indeed offers its own unique risk challenges that require targeted solutions.

In general, the structure of the BNPL payment ecosystem sees fraud in two main silos: fraudsters that attack the payment system themselves using tactics common across all forms of digital payments, and fraudsters that exploit the onboarding processes of BNPL providers and merchants.

How Does BNPL Fraud Work?

Like any system that accepts payments, part of the body of BNPL fraud includes digital payment fraudsters that use stolen user data, automated bots, and other account takeover (ATO) methods to make unauthorized transactions. To learn more about that large risk vector, read our dedicated article about payment fraud in BNPL , which discusses the relevant dangers, detection strategies, as well as mitigation of that problem.

Buy Now Pay Later Fraud - Types of Fraud

Aspects of BNPL fraud that don’t directly exploit payment infrastructures typically target BNPL-specific onboarding processes, which tend to fall on the more relaxed end of the customer due diligence spectrum, and can snowball into much larger problems. Otherwise, BNPL fraud can take the form of first-person, or friendly fraud which requires the use of human resources to address.

BNPL fraud takes many guises, which we’ll see in more detail below. Very often, however, it works by having someone pretend they are someone else, and double down by making a false claim.

This could be linked to their intention to do something in the future, or they could claim something has happened.

For example:

A fraudster can sign up for a new account with a BNPL provider with stolen credentials.
A bad actor can try to take over existing BNPL accounts belonging to legitimate customers.
They can order various goods to be shipped to a drop address , which they don’t intend to pay for.
They can use BNPL payment methods to launder money in order to hide its original source.
Fake or fraudulent merchants could also involve themselves in false chargeback requests, which the BNPL companies absorb.

And so on. There are some highly intelligent people conducting scams and fraud out there, and they are always looking for new avenues to make money. A sector as young as BNPL, with less of a clear legal landscape as others, is very attractive to such individuals.

Book a demo and learn how we have lowered fraud rates by 50% and saved costs on automated checks by 6% for a leading BNPL provider

Ask an Expert

Why Are Fraudsters Targeting BNPL?

The success of buy now, pay later systems are the same reason why they are being increasingly targeted by fraudsters. The BNPL microloan system offers users convenient low-friction onboarding, and increases the timeframe of the purchase process. While this system brings new and increased spending power to populations that find it easier on their lifestyles to stretch payments over months, these same conveniences also represent obvious toeholds for fraudsters to climb over security walls.

Over the course of 2023, BNPL payments are estimated to reach nearly $530 million, according to research conducted by ResearchAndMarkets. As the BNPL industry enjoys this explosive growth, so does the population of fraudsters trying to attack it.

Not only does the massive amount of transactional activity mean that it’s easier to be a needle in a haystack, the success also gives the BNPL microloan providers less financial impetus to tighten security if it makes good customers less likely reach the checkout stage of their purchase.

Consider that the BNPL microloan system wants to get customers to the checkout stage with the minimal amount of security friction, and thus less time to consider if they really can afford it. This frequently means that securing a BNPL microloan has much fewer points where the user journey is stopped for security checkpoints, and thus less security overall. This can make signing up for accounts, compromising logins, and ultimately taking over accounts much easier for fraudsters. From there, a number of fraud techniques can then be carried out, discussed later. The extended time frame inherent to BNPL means that these same fraudsters have more time to get away with their misdeeds as well.

These BNPL safety pitfalls can come in the form of:

1. Real-time credit decisions: BNPL providers have to approve purchase decisions as soon as consumers complete their transactions. And while this lightweight process makes life easier for shoppers, it also paves the way for bad actors to make large purchases and escape with the loot with the least resistance.

2. Delay in repayment: BNPL providers allow users to spread their purchases across installments. This is to guarantee the convenience and ease BNPL is known for. Unfortunately, bad actors often exploit this lengthy repayment method by hacking accounts to make unauthorized transactions, paying just 25% base value, and skipping the remaining payments.

3. Absence of formal credit checks: Most BNPLs use alternative credit scoring checks rather than standard checks utilized by big banks and credit card companies. Instead, they use internal algorithms to determine creditworthiness based on the available information. When not done well, this opens up opportunities for fraud risks like account takeovers, synthetic identity theft, and never-pays.

7 Types of BNPL Fraud Risks

Fraudsters see your BNPL company as a lucrative target for the above reasons. But what risks do they pose?

1. New Account Abuse

Opening a BNPL account is a breeze.

In most cases, buyers can sign up by simply submitting copies of documents (e.g. a driver’s license). Scammers can easily acquire that information through data breaches, forgery or phishing.

Unfortunately, the KYC & AML for most BNPLs aren’t enough to stop scammers from perpetuating this method. So they’re able to successfully create accounts with stolen data, thereby having access to a default line of credit all new accounts enjoy.

2. Synthetic Identity Fraud

Closely related to new account abuse is synthetic identity fraud , a $6 billion problem often happening at the enrollment stage.

Here, fraudsters combine accurate and false personal information to create a new identity. They can pair a real Social Security Number with a fictitious name, address, and date of birth.

This hybrid method makes detecting and fighting fraudsters challenging.

Also, synthetic fraud activities can pass as “good” consumer behavior. For example, a Federal Reserve analysis showed that 70% of suspected synthetic identity accounts temporarily exhibited normal consumer patterns. And so, whenever these accounts defaulted on payments, their BNPL service providers simply wrote the fraud off as “bad debt”.

3. Account Takeovers (ATOs)

Just as you cherish user accounts with excellent payment history and high lending limits, fraudsters love them too!

As a result, they leverage credential stuffing, phishing, and SIM swapping to hijacking user accounts via account takeover fraud , which allows them to steal personal data and make illegal purchases with victims’ BNPL accounts.

4. Fraudulent Chargebacks

A fraudulent chargeback ( chargeback fraud ) is when a mischievous owner claims they never made a transaction and asks the provider to return the funds to their account. An innocent version of this is when a family member (e.g., a child) of a BNPL account owner completes a transaction without the owner’s consent.

In both cases, the result for the BNPL will be the same, as you’ll have to cover chargeback costs, as well as handling and processing fees.

5. Transaction Laundering

As a BNPL provider, you rarely get to conduct customer due diligence on merchants’ financials due to the need for speed. But this oversight often translates to a money laundering risk known as transaction laundering.

Transaction laundering occurs when an undisclosed business uses an approved merchant’s credentials to process transactions for another, secret, store selling illegal products and services.

6. Never-Pays Fraud

Never-pay fraud is a consequence of other fraud risks, particularly new account abuse, ATOs, and synthetic identity fraud.

When fraudsters create accounts with stolen identities or hack someone else’s, they can easily make huge purchases without paying back. Sometimes, bad actors will steal cards and use them to access BNPL services.

7. Trojan Horse Fraud

This more elaborate type of BNPL fraud sees fraudsters sign up with a merchant using a BNPL account, and later change their payment method on the merchant’s site to a stolen or otherwise illegally acquired credit card.

Because chargeback liability falls onto the BNPL company rather than the merchant, merchants tend to apply lower fraud defenses when BNPLs are involved. Having signed up (or even completed a couple of purchases) using a BNPL payment scheme, the fraudster will be seen by the merchant as a known, trustworthy user, at which point they can switch payment methods to conduct credit card fraud and other types of fraud.

How to Prevent BNPL Fraud

BNPL fraud can be prevented using technologies such as real-time payment transaction monitoring , rule-based assessment and real-time digital footprint analysis.

Let’s take a closer look.

1. Implement Rule-Based Risk Assessment

Rule-based risk assessment involves using insights from historical data to identify potential fraud attacks and make safe credit decisions. And while internal data (e.g. transaction amount and velocities) is a great place to start, fraudsters are becoming more aware of how internal rules systems work.

Also, your fraud knowledge might be regional, mainly if you operate in one market. This might stall your risk assessment as fraudsters targeting your company could be from other countries where an unfamiliar scam technique is the norm.

For this reason, you need to improve your risk assessment process with holistic, live data sources.

SEON customers counter BNPL fraud risks by leveraging default rules, adding their custom rules, or even relying on machine learning rule suggestions:

Say a fraudulent user is trying to register on a SEON BNPL customer’s site. Here’s how the SEON dashboard could deliver their risk score based on the customer’s set rules.

The high fraud score tells the company they’re dealing with a fraudster, automatically blocking the registration.

To stay competitive and profitable, you need to remain vigilant against potential BNPL fraud threats.

2. Augment Risk Assessment with Real-Time Data Enrichment

Real-time data enrichment lets you learn more about users and make better risk assessments without asking customers to fill in extra fields. It also gives you a 360° view of user actions during account creation, onboarding, login, or checkout, helping you watch users closely.

Here’s how SEON simplifies crucial data enrichment processes.

Email Address Data Enrichment

This module generates a risk score associated with a single email address based on deep social and digital profiling and domain verification through an email risk API.

With it, you can quickly spot and flag suspicious users just from their email addresses:

[With a risk score of 0, it’s safe to say this user’s email address is legitimate]

You can also batch-check multiple email addresses at a go:

[With these risk scores, you shouldn’t be worried about the legitimacy of these users’ email addresses]

IP Address Data Enrichment

This module generates a risk score associated with a user’s IP address.

With it, you can accurately figure out if a user is trying to mask their location with a VPN, Tor, or proxy. Just paste an IP into the IP address field and click on Submit:

[With a risk score of 0, it’s safe to say this user actually lives in California, USA]

BIN Data Enrichment

This module gathers extra information through external data sources like Bank Identification Numbers (BIN). This helps by detecting if a card is virtual or not, as well as the country of the issuing bank.

All you need to do is paste the first six digits of a card BIN into the platform and hit Submit:

[Since this user has an invalid credit card, you should further scrutinize them]

Phone Data Enrichment

This module combines open and reachable data to investigate a phone number in depth, returning several useful data points. You can use this module to flag fraudsters based on their phone numbers:

[With a risk score of 0, it’s safe to say this user’s phone number is legitimate]

The higher a user’s fraud score is, the more suspicious you should be about them. And if the score is above a reasonable limit, you can flag them or even automatically block them.

3. Consider Custom Rules

Note that the fraud scores normally generated by the data enrichment modules are based on SEON’s default rules. However, if you’re not pleased with them, you can fully modify them or add new ones via the Scoring Engine page.

In fact, everything about SEON’s rulesets and risk scoring is transparent, granular and customizable , from tweaking existing rules and adding brand new rules linked to hundreds of different data points to the way each rule impacts the score, and what happens from there.

Further, you can make data enrichment a breeze by simply integrating SEON’s APIs directly into your onboarding flow, which does the above checking for you. In addition to reviewing customer data, you can review all transactions from a bird’s-eye view or search directly for specific transactions. Through this, you can immediately block a suspicious action before it’s too late.

Read how Mokka a leading BNPL provider, projected to have lowered fraud rates by 50% and saved costs on automated checks by 6%

SEON’s fraud prevention software doesn’t only strengthen your onboarding process to ward off bad actors. It also leverages device fingerprinting into a more effective fraud detection tool, further improving your risk assessment process.

As we’ve seen, fraudsters often hijack legitimate users’ accounts via credential stuffing, phishing, and sim swapping. You can stop these attempts by using SEON’s device fingerprinting to collect thorough insights about suspicious tools, setups, and settings on users’ desktop and mobile devices – so you easily avoid ATOs, multiple signups, and bot attacks.

Whichever workflow you use, data enrichment – when combined with device fingerprinting and machine learning – simplifies and scales your fight against BNPL fraud.

Trends in BNPL Fraud in 2023 and Beyond

BNPL is believed by many to have a very bright future. In fact, Precedence Research estimates that the market size will expand by 43.8% by 2030, to reach $3268.26 billion .

This is good news for the sector – but also for fraudsters, who will doubtlessly continue to devise ways to target both companies and consumers linked to it.

In terms of what to expect, we have spotted trends related to the below:

Account takeovers : The more members of the public partake in BNPL payments, the more opportunities for ATOs. These attacks are on the rise across the full spectrum of online activity because there is much more to gain from them in recent years. In the case of BNPL, gaining access means being able to use credit pre-approved for a known, trustworthy user – which is very appealing to fraudsters.
Trojan horse techniques : As we’ve touched upon earlier, merchants tend to lower their defenses when they know it’s someone else who is at risk of chargebacks for a change. BNPLs bear the brunt of such decisions.
Biometrics hacking : For those BNPLs relying on biometrics-powered methods to authenticate their users, it can be a rude awakening: Biometric verification is hackable. For instance, a feature in Fortune published as early as 2018 explained how AI can generate fake yet convincing fingerprints. What’s more, biometric spoofing can even fool liveness detection, and deepfakes aren’t going anywhere.
Legislation loopholes: As more authorities take notice of BNPLs and put in place laws and consumer protection regulations, criminals will continue to be on the lookout to both take advantage of the ensuing confusion and any loopholes that are created.

Protect Your BNPL Market Share from Fraud

Leave fraud risks unaddressed, and you risk losing market share to BNPLs who fight fraud in an effective, customer-friendly manner.

A ML-powered fraud prevention tool can stop that from happening. With SEON’s data enrichment modules to obtain alternative data signals and device fingerprinting, you detect bad actors quickly without chasing away legitimate customers and prospects.

These features have helped companies like FairMoney stop fraudsters in their tracks, making Juris Rieksts, their Head of Risk, rave about SEON:

SEON’s end-to-end fraud prevention comes with free support and a 30-day trial. To see in practice how SEON can help your BNPL, speak with an expert today.

Tearsheet : Fast approval fertile for stolen and synthetic identities: BNPL’s fraud problem
The Motley Fool : Study: Buy Now, Pay Later Services Continue Explosive Growth
Help Net Security : How Buy Now, Pay Later is being targeted by fraudsters
eMarketer : BNPL is the latest fraud target—and providers should act quickly to avoid losses
GlobeNewswire : Buy Now Pay Later Market Size to Hit US$ 3268.26 Bn by 2030
Fortune : Artificial Intelligence Is Giving Rise to Fake Fingerprints. Here’s Why You Should Be Worried

Frequently Asked Questions

Depending on both the BNPL provider and the credit agency, BNPL microloans do now affect your credit rating. Some credit agencies may provide BNPL loan data, including defaulted payments as part of a holistic credit score, or as additional data alongside that score for the use of credit reference agencies and lenders.

On the consumer side, the apparent spending power that BNPL microloans provide may result in more overspending. Around Christmas BNPLs tend to see an uptick in usage, but many of those customers end up making payments late, accruing interest rapidly. On the lender side, BNPL’s tendency to favor low friction over security makes them an easy target for account takeovers, with more time to get away with the crime. These ATOs then often lead to chargebacks and a huge drain on human resources.

Showing all with ` ` tag

How to Detect Payment Fraud in Buy Now, Pay Later

Kyc and aml for buy now pay later (bnpl).

BNPL Global Trends in 2023

Transaction Monitoring for Buy Now Pay Later

Speak with a fraud fighter.

Jimmy Fong is the Chief Commercial Officer of SEON. His expertise in payments saw him supervise the acquisitions of companies by Ingenico, Visa and American Express. Jimmy’s enthusiasm for transparent sales and Product-Led-Growth companies drives SEON’s global expansion strategy, and he interviews both fraud managers and darknet fraudsters in our podcast to stay on top of the latest risk trends. Yes, it’s also him wearing the bear suit on our YouTube channel.

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GD Topic: Buy Now Pay Later (BNPL): A convenience or a trap

Please fill you information here, register now for latest mba exam & admissions updates.

Buy Now, Pay Later, popularly known as BNPL is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. The recent rise of BNPL culture can be accounted to the pandemic. With the increased demand for e-commerce services due to lockdowns and consumers preferring to break down large expenses into smaller interest-free EMIs, BNPL has become a popular option. While ‘Buy Now, Pay Later’ offers many conveniences, it is still a loan that consumers need to pay! In India, quite a few online merchants and fintech companies are offering BNPL facilities to customers as a convenient payment method. However recent RBI guidelines have but a roadblock on many of these offerings. Read this MBAUniverse.com article to understand all about BNPL financing. This is an important GD Topic for MBA and other entrance exams as it involves consumers, banking and regulation. Let’s get started.

What is BNPL Payment? BNPL also known as Buy Now Pay Later is a payment option where you can make a purchase without having to pay the full amount at the time of purchase. Typically, you sign up with a company providing this facility who makes the payment when you make the purchase. However, once the lender pays on your behalf, you will have to repay the amount within a specified time period. When compared to a personal loan, generally no interest is levied under the BNPL scheme. You can either pay it as a lumpsum amount, or you can pay it via no cost Equated Monthly Instalments (EMIs). If you fail to pay the amount within the given repayment tenure, then the lender will be liable to charge you interest on your amount. Further delay could impact your credit score.

How does BNPL work? Here's how BNPL usually works:

Customer make a purchase at a participating retailer.
Opts for the ‘Buy now, pay later’ option.
Makes a small down payment of the overall purchase amount and completes the transaction.
The remaining amount shall be deducted in a series of interest-free EMIs.
The payment of EMIs is made via bank transfer, cheques, credit card, debit card or directly from the bank account.

Advantages of BNPL Some of the benefits of BNPL are:

Increases affordability
Instant access to credit
Safe and secure transaction
Can choose repayment tenure
No cost EMI
Simple process

Disadvantages of BNPL Some of the problems associated with BNPL are:

Lack of transparency. Sometimes consumers are not aware that bank loan has been taken in their name.
Undue promotion of consumerism
Undue loans and debts on citizens

Difference between Buy Now Pay Later and Personal Loan Some of the main differences between BNPL and personal loans are mentioned below:

Difference between Credit Card and BNPL There are certain differences between credit cards and the ‘Buy Now, Pay Later’. Let us take a look at them:

BNPL players in the Indian Market Banks such as Axis Bank, Kotak Mahindra, ICICI Bank, etc. are offering the BNPL facility to their customers. Some of the leading specialized BNPL players in the Indian Market are:

Bajaj Finance
Amazon Pay Later
Ola Money Postpaid
Paytm Postpaid

How does BNPL companies make money? BNPL makes money from both sellers and consumers. In case of sellers, they pay BNPL a fee ranging between 2% and 8% of the purchasing amount if the customer uses the BNPL facility. BNPL players also make money from customers by charging an interest on delays ranging between 10% and 30% based on their credit score, repayment tenure, etc.

Latest update - Buy Now Pay Later Schemes Halted By Fintech Firms After RBI Scrutiny Many fintech firms have stopped the buy now pay later (BNPL) services after a recent Reserve Bank of India notification. The new guidelines, issued by the RBI last month, stopped non-bank prepaid payment instruments (PPIs) from being loaded with credit lines. The central bank's move comes amid rising concerns over card-based credit services and PPIs being loaded through credit lines.

According to the RBI, the new credit instruments could result in systemic risk. The new-age fintech firms are using lines of credit from banks and non-banking financial companies (NBFCs) to load customer wallets. The bank regulator is apprehensive about a lack of due diligence while loading the PPIs through credit lines.

The new RBI guidelines, issued on June 20, have sent the fintech companies into a tizzy and many have temporarily stopped prepaid instruments. According to the new directive, non-banking companies cannot offer credit cards or other PPIs without the prior approval of RBI. However, the customers can load their pre-paid wallets with cash or use credit and debit cards issued by their banks for the same.

Fintech firms have requested a clarification from the RBI as the new guidelines have caused a disruption in the industry, especially adversely affecting small players.

IMAGES

How To Use The ‘Buy Now Pay Later’ Strategy For Your Business
Buy Now Pay Later App Development in 2022: Quick Guide
A Beginner's Guide to Buy Now Pay Later
Learn How Does Buy Now Pay Later Work
What is Buy Now, Pay Later? The new popular way to get into debt
Buy Now Pay Later Solutions

COMMENTS

Buy now pay later: The pros and cons of installment payments
Nearly 45% of shoppers have now signed up for at least one buy now, pay later plan, according to a survey by DebtHammer.org — a 41% jump since April of last year. Of those who've used the ...
The Appeal and Proliferation of Buy Now, Pay Later: Consumer and
" External Link Study: Buy Now, Pay Later Services Continue Explosive Growth." The Ascent, March 22. Bruce, Beverly. 2021. " External Link Major Retailers Are Starting to Ged Rid of This Popular Perk." BestLife, September 27. CB Insights. 2021. " External Link Disrupting the $8T Payment Card Business: The Outlook On 'Buy Now, Pay ...
How and Why Do Consumers Use "Buy Now, Pay Later"?
Felix Aidala, Daniel Mangrum, and Wilbert van der Klaauw. In a previous post, we highlighted that financially fragile households are disproportionately likely to use "buy now, pay later" (BNPL) payment plans.In this post, we shed further light on BNPL's place in its users' household finances, with a particular focus on how use varies by a household's level of financial fragility.
Buy Now, Pay Later: The "New" Payments Trend Generating ...
Buy Now, Pay Later to Reach $100 Billion in 2021. The percentage of Gen Zers in the US using BNPL has grown six-fold from 6% in 2019 to 36% in 2021.
Full article: Buy now pay later services as a way to pay: credit
Buy now pay later, financialization and consumers. Due to their relatively recent emergence as a significant market force BNPL services have been addressed predominantly in relation to the regulatory challenges that they pose in the extant literature (see Gerrans, Baur, and Lavagna-Slater Citation 2021; Johnson, Rodwell, and Hendry Citation 2021).BNPL services are, however, situated within ...
What Is Buy Now, Pay Later (BNPL)?
Buy now, pay later is a type of short-term financing. Consumers can make purchases and pay for them over time after an up-front payment. Buy now, pay later plans typically charge no interest.
Economies
The Millennials and Generation Z use online shopping for a holistic experience and buy more expensive or better-quality products with buy now pay later payment methods for their highly demanding needs. The authors aimed to deepen understanding of this phenomenon by finding related knowledge fields and discovering the type of economy that will represent an increasing market share for the method ...
Hidden Risks of Buy-Now, Pay-Later Plans
Buy-now, pay-later programs, also called point-of-sale loans, work like a layaway plan in reverse. Instead of making payments over time in order to qualify for a purchase, you receive your item up ...
Buy Now, Pay Later by Sudhanshu Sekhar Pani :: SSRN
This paper examines the strengths, opportunities, and challenges presented by the Buy Now Pay Later (BNPL) product/service from the perspective of the consumer, service providers, investors, and regulators. We present a microeconomic model of BNPL consumers and firms. The model and simulation to the model highlight the strength of the BNPL product.
'Buy now, pay later' and personal finance
In the winning essay of the 18-19 age group in our Young Financial Journalist competition, Linus Barnett looks at the pros and cons of Buy Now, Pay Later (BNPL) schemes. Covid-19 and BNPL schemes. No set of circumstances could better have accelerated the widespread adoption of BNPL schemes than those of the Covid-19 pandemic.
Credit Card Interest vs. Buy Now Pay Later: Which Is Better for My
With a typical "Pay in 4" buy now, pay later model, borrowers have to pay 25% of the purchase upfront, and then the remaining 75% in three payments over the course of six weeks.
Should You Buy Now, Pay Later? Tread Carefully
This friction-free option to pay off items in chunks — called " buy now, pay later " — was popularized by Afterpay, a financial tech firm based in Australia and founded in 2014. Throughout ...
For Retailers, a Direct Link from 'Buy Now, Pay Later' to the Bottom
Ron Shevlin, "Buy Now Pay Later: The 'New' Payments Trend Generating $100 Billion in Sales," Forbes, Sept. 7, 2021, accessed April 29, 2022. TRC, commissioned by PayPal, April 2021. TRC ...
Is Buy Now, Pay Later Worth It?
Buy Now, Pay Later (BNPL) is a payment option has been around for some time and has been quickly gaining traction among consumers in recent years.. The onset of the COVID-19 pandemic caused a consumer paradigm shift towards online shopping, a change that did wonders for BNPL's popularity as people began relying more on the internet for purchases.
Buy now, pay later
Essay; Schools brief; Business & economics. ... Buy now, pay later ... margin debt is now at its highest since the late 1920s, an era that was a by-word for speculation (and resulted in the crash ...
Sustainability
Fee-based Buy-Now-Pay-Later services (BNPL) are becoming widely adopted in many developed countries, including Australia. Across a variety of regulatory approaches there appears to be relatively minimal regulatory coverage of fee-based BNPL. This review applies a results-oriented, behaviourally informed market failure approach to assess the regulatory outcomes of fee-based BNPL.
Affirm and Afterpay Soar as Customers Buy Into Paying Later
Kimberly Williams, who uses installment services to pay for clothing, says it's important to closely monitor their place in her budget.Michael Stravato for The New York Times. That $128 pair of ...
Buy Now, Pay Later Is the Success of the Credit Card Essay ...
Buy Now, Pay Later Is the Success of the Credit Card Essay examples. Decent Essays. 630 Words; 3 Pages; ... Scurlock's essay made the reader aware of the downfalls and hardships that can occur when credit cards are constantly used for purchases compared to Kevin O'Donnell's "Why Won't Anyone give Me a Credit Card".
BUY NOW-PAY LATER -TRENDS IN PURCHASE DECISIONS
Week — from Nov. 23 to Monday — jumped 29 % year over year, according to Salesforce. data. Buy Now, Pay Later: The "New" Payments Trend Generating $100 Billion In Sales. (Sept, 2021), The ...
Are Buy Now Pay Later Payments a Convenience or a Trap?
Risks of Buy Now Pay Later payments. Some of the dangers include the ones listed below. 1. Unaffordable debt. It's easy to spend more money than you can really afford. Prices can seem cheaper when you split them into smaller repayments, but the truth is that you may end up losing track of how much you owe.
Buy Now Pay Later Fraud (BNPL): Prevention & Risks
The Motley Fool: Study: Buy Now, Pay Later Services Continue Explosive Growth; Help Net Security: How Buy Now, Pay Later is being targeted by fraudsters; eMarketer: BNPL is the latest fraud target—and providers should act quickly to avoid losses; GlobeNewswire: Buy Now Pay Later Market Size to Hit US$ 3268.26 Bn by 2030
GD Topic: Buy Now Pay Later (BNPL): A convenience or a trap
Read more about this development in the article below. Buy Now, Pay Later, popularly known as BNPL is a type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. The recent rise of BNPL culture can be accounted to the pandemic. With the increased demand for e-commerce services ...
Essay On Buy Now Pay Later
Essay on buy now pay later Paying four installments of over the course of four months makes a 0 purchase feel more in reach. While customers may have a basic understanding of how these plans work, many are unfamiliar with the consequences of late payments. 8 purchases since cost of living began to surge Buy Now Pay Later is a deferred payment service offered by many in the financial world.