When online shoppers are considering a purchase, many see an option on their screen to pay in installments, without incurring interest charges or fees. This fintech credit option is called buy now, pay later (BNPL)—offered by firms such as Affirm, Afterpay, and Klarna—and allows retailers to notch up sales while shoppers essentially get interest-free loans as long as they make payments on time.

But though this innovation may sound good, it may not always be prudently used by consumers. The rapidly expanding, relatively new, and largely unregulated form of financial services has barely been studied to assess the risks, warn Chicago Booth PhD candidate Benedict Guttman-Kenney and University of Nottingham’s Chris Firth and John Gathergood. They analyzed credit-card data and find that many consumers, in particular those who were younger and in poorer areas, transferred one or more of these “interest free” payments to credit cards, incurring annual interest rates of up to 20 percent.

The researchers examined anonymized data on about 1 million credit cards held by UK consumers and the associated BNPL and non-BNPL transactions from January 1, 2019, through December 31, 2021. Each credit-card transaction included the amount of spending and information on where the spending occurred. Each cardholder’s age range was also recorded, along with the postal code of the cardholder’s address.

BNPL transactions have become widespread, totaling £2.7 billion (US$3.7 billion) in the United Kingdom in 2020, according to the Financial Conduct Authority (FCA), the United Kingdom’s financial services regulator. There isn’t yet an equivalent official estimate for US BNPL transactions, but professional services company Accenture put it at $21 billion in 2021.

Managing debt

Charging credit cards to pay for buy now, pay later installments increased more than twentyfold in the United Kingdom in the past three years.

“We find it is common for UK credit cardholders to charge BNPL transactions to their credit card: 19.5 percent of active credit cards in December 2021 had at least one transaction by a BNPL firm on their credit card during 2021,” says Guttman-Kenney.

“This itself is a potential warning flag for regulators as it indicates cardholders may be paying off debt with debt: with a 0 percent interest BNPL debt potentially leading to a debt spiral incurring 20 percent credit card interest rates,” the researchers write.

What fraction of BNPL is put on credit cards? One UK BNPL lender reported that less than 10 percent of its customers repay using a credit card, but the researchers note it may be higher for some lenders in the UK and the US.

Their study finds that it’s more common among young consumers and those in poorer areas to move BNPL payments to credit cards. These consumers may be the most vulnerable, Guttman-Kenney notes. Although individual BNPL purchases are typically for small amounts, with a median value of a BNPL installment just £19.65 in 2021, they add up quickly with multiple installments and repeat purchases. The researchers find that during 2021, among individuals who transferred any BNPL payments to their credit cards, the median value of their transfers was £157.

Guttman-Kenney, Firth, and Gathergood’s research is informing discussions about how to oversee BNPL, which is mostly unregulated in the UK, the EU, and the US. In the UK, the FCA has expressed some concern that BNPL could encourage consumers to spend beyond their ability to repay and in February told four companies to redraft service terms that risked hurting consumers. In the US, the Consumer Financial Protection Bureau has also recently started gathering evidence for an inquiry into this sector.

More generally, the researchers add, this research is a proof of concept for how financial-services regulators can use real-time transaction data to monitor the growth and risks of regulated and unregulated products.

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