Q&A: How ‘Buy Now Pay Later’ Affects Financial Health


November 16, 2022

Buy now pay later spending is projected to reach $1 trillion globally by 2025, but little is known about its effects.pixabay

“Buy Now Pay Later” platforms like Afterpay and Affirm offer consumers near-instant access to credit for retail purchases without a hard credit check. Weather BNPL Spending projected to reach $1 trillion globally by 2025, little is known about its effects.

Typically listed as an option during checkout on a retailer’s website, BNPL typically requires an upfront payment followed by three biweekly payments. While there are no fees if payments are made on time, missed payments may result in late fees from the BNPL provider and overdraft fees from the customer’s bank.

Total BNPL loans issued by the largest US providers tripled in a single year, from $8.3 billion in 2020 to $24.2 billion in 2021. BNPL can benefit consumers without credit or replace credit cards high-rate or payday loans, but it could also allow customers to overspend and face the financial consequences.

Previous surveys show that 70% of users report spending more with BNPL than they otherwise would, 42% have not made payments, and 25% signed up for BNPL to avoid extensive inquiry, which can affect the a person’s credit score and remain on a credit report for up to two years. Soft checks do not affect credit scores.

ed dehaan, an associate professor of accounting at the University of Washington Foster School of Business, has been studying the impact of BNPL on financial health. Their research finds that, compared to non-users, BNPL users faced rapid increases in bank overdraft fees and credit card interest and fees.

Ahead of the biggest retail spending season of the year, UW News spoke with deHaan to learn more about BNPL.

What are the risks involved with BNPL?

Ed deHaan: Fintech companies are doing amazing things and coming up with all sorts of products that could improve our lives and make us happier and better. But there are also some risks involved, especially when for-profit companies begin to enter the everyday spaces of the home economy.

Here we have an innovation, Buy now and pay later, which due to some peculiarities of the regulatory system does not fall under the existing regulations that we have for products like credit cards. So it’s kind of a free rein. This is not a product provided by the financial regulation system. What we’re seeing is that, in its current form, a lot of consumers are embracing BNPL who don’t really have the financial literacy or access to resources to understand what they’re using, and they’re getting into financial trouble.

How can research contribute to the future of BNPL as it continues to grow in popularity?

IT IS: Not surprisingly, some people have been concerned about the effect of BNPL on users for various reasons. We’ve seen time and time again that when we start giving easy credit to consumers, a lot of people use it well. But there is a significant number of users who end up in financial difficulties. We have seen it for mortgages. We have seen it for credit cards. I recently taught my students a case about Sears credit cards in the 1990s and how the company got into a lot of trouble through predatory lending and then unethical debt collection practices. We have plenty of evidence that this happens repeatedly. BNPL is just another version of easy credit, and we suspect this hurts some people.

Regulators are clearly concerned that this product bypasses existing regulation. I think if anyone had anticipated BNPL, it would have been regulated by now. The current debate in the United States and around the world by regulators is not so much whether something should be done to regulate BNPL, but how far those regulations should go.

Our analyzes indicate quite sharp and sudden declines in the main indicators of financial health for people who adopt BNPL. We can’t say anything in general terms about whether these people in the network are better or worse. That is very difficult. For example, if they are using this credit to pay for baby formula, then they might be better off overall. But certainly, BNPL seems to have all the leading indicators of a financial product that could cause people problems.


To contact deHaan for more information, please contact Lauren Kirschman at [email protected]



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