BNPL: The Fintech Industry's Dirty Secret
Definitely not "fintech for good" but a new debt trap for the young that you pay for.
Buy Now Pay Later or BNPL is the rage of the fintech community, but sadly it is the best example we have of how “fintech for good.” is a myth.
Viewed as an easy way of making things affordable and a stellar example of “embedded finance,” BNPL rapidly became a hero in the fintech world. With VC money pouring in and valuations to the moon, nothing could stop it.
BNPL grew 6x between 2019 and 2023, and as long as the money poured in, few seemed to look at its dark side of how it is turning a younger generation into debt slaves.
And just to make it even worse, you are paying for it!
“BNPL firms typically do not allow merchants to pass on the high cost of accepting their service directly to BNPL users through a surcharge. So, the benefits of competition in the BNPL market may accrue to BNPL users, subsidised by non-users as merchants recoup the cost by raising the price of goods and services generally.” Reserve Bank of Australia
BNPL is a global phenomena in part because it fell outside of the scope of regulation. Australia is a particularly large user and early adopter. They rang the alarm bell years ago and now leads in regulation. No one listened!
There is evidence from the US that BNPL users are particularly risky. On average, BNPL users in the US are more highly indebted and have lower credit scores than non-users.
BNPL users are typically younger (under 35), with less education, higher debt burdens, and lower credit scores.
“Younger and tech-savvy individuals, including "Millennials" and "Generation Z," often do not possess credit cards and are generally less financially literate than older generations.”
BNPL schemes are accessible even to consumers without a credit history or stable income and do not typically affect their credit scores.
Relying primarily on fee revenues, platforms have faced profitability challenges due to high operating costs and rising credit losses.
BNPL users tend to have a riskier credit profile than those of traditional
consumer credit products.
Accordingly, late payments and losses for BNPL in the United States are higher than in the case of credit cards.
Reserve Bank of Australia, an early BNPL adopter, found 40% of shoppers between 18 and 39 used BNPL and that….
…BNPL services have not typically conducted thorough creditworthiness assessments such as checking customers’ incomes, assets, and expenses.”
How did this happen? “Most common BNPL credit agreements have fallen largely outside the scope of existing regulatory regimes.”
BNPL schemes suffer higher delinquency rates than traditional consumer credit. But oddly BNPL credit is typically not communicated to credit bureaus and, consequently, does not affect a consumer’s credit score.
The BIS analysis of BNPL shouldn’t surprise anyone and shows how “Fintech for good.” is a myth.
Credit abuse by young people is the norm, not the exception, and giving young people access to loans without underwriting is simply insane.
In the fintech world, however, hype counts more than sanity, and BNPL sailed through regulatory loopholes because it doesn’t qualify as a loan and attracted billions in VC investment.
BNPL caught on because “free money” is an easy sell at the cash register, particularly for the young, poor, and uneducated. Fintechs knew this and didn’t care.
BNPL lenders give loans to people without credit checks or underwriting and are surprised that they go for it in droves and default. I’m shocked, are you?
You are paying for it!
The most bothersome part of all this is that we are all paying for it. As retailers can’t pass on BNPL costs to the borrower, they recoup fees charged by BNPL companies by charging more to everyone else.
Some will argue that BNPL can be used as an effective cash management tool. That may be true for some, but around 25% of BNPL users in the US pay fees, which may be up to 25% of the purchase value. So, this rationale is not born by the statistics.
Is BNPL “fintech for good”? I honestly don’t think so, and I have written about this repeatedly over the years. Regulators are finally focusing on BNPL, and it’s about time.
VC money poured into BNPL, and frankly no one cared or asked if the product was safe. Along with crypto scams, BNPL is the best example of how “Fintech for good.” is a myth.