Not Just Free Money: Buy Now, Pay Later

It seems that in the past few years, the option to pay in installments has appeared next to the checkout button on every e-marketplace. Buy Now, Pay Later (BNPL) companies such as Affirm and Klarna market themselves as flexible, modern ways of financing purchases. However, BNPL’s meteoric growth in popularity is in no small part due to its practice of weaponizing flexibility, consumer desires, and instant gratification. The overuse of BNPL threatens to normalize debt and debilitate a generation with poor financial habits. 

BNPL programs are exactly what they sound like. They are plans that allow consumers to buy something now and pay the cost off later, usually through routine payments spread out across weeks or months. BNPL is, in a sense, a credit card alternative, but it’s far less regulated and thus encourages even more overspending than credit cards—all while primarily appealing to young people who are not as financially literate. The tech startups behind these services may pride themselves on adhering to the philosophy of “moving fast and breaking things,” but their methods need to be reevaluated when what’s being broken is people’s bank accounts. 

Understanding the dangers of BNPL begins with understanding how profitable these programs can be for the companies that provide them. It’s easy to think that, like credit cards, these companies make money off of interest payments and late fees. These fees definitely exist and can have real consequences on consumers who are lured in by companies’ promises but find themselves unable to make timely payments. However, many companies, such as Affirm, charge neither late fees nor interest on shorter payment plans. The more sinister aspect of BNPL programs, one that differentiates them from credit cards, is their partnerships with sellers. Affirm and Klarna both work with large retailers like Amazon, Walmart, and Apple, while AfterPay is more popular with individual brands, especially those in the fashion industry. The relationship between these companies and their retail partners creates a perverse incentive to drive up purchases in order to increase profit; the more money people spend using websites affiliated with BNPL services, the better both sides do. Retailers benefit from increased purchasing and web traffic they wouldn’t otherwise receive. In fact, to retailers, there is no difference between a purchase made in one go and one made using BNPL. They receive the full amount either way. If BNPL companies can effectively drive up profit, they can negotiate even larger deals with companies to further increase the revenue of both parties. In these contracts, BNPL companies usually are entitled to a percentage of each purchase made, further increasing their incentive to make customers spend more. Affirm’s investor slideshow explains that a higher number of consumers gives them more influence to increase their network of accepted retailers, which then increases revenue—a cycle of growth that comes at the consumer’s expense. This in and of itself is reason enough to be highly skeptical of installment buying, but there are other ways consumers are negatively impacted by BNPL.

A large problem consumers commonly experience is the feeling of buying something without truly paying for it up front. In a similar vein to TikTok’s “Girl Math,” a trend where users perform mental gymnastics to justify large purchases, BNPL makes it feel like you’re saving money. This is similar to how people complain that credit cards make it too easy to spend money, because tapping or swiping a card doesn’t feel like a real transaction; it effectively downplays how much people are actually spending. BNPL takes the effect of paying an intangible sum to the extreme. A $500 pair of shoes isn’t $500, it’s just $125 every two weeks for two months. In fact, 29 percent of users reported overspending when using BNPL. Irresponsible spending using credit is a dangerous cycle to be caught in, precisely because of how quickly things can fall apart if you’re not careful. The Consumer Financial Protection Bureau found that most users of BNPL have subprime or poor credit and higher amounts of debt. 

Perhaps most egregious of all, though, is how installment paying is set up to appeal to younger consumers. A J.D. Power survey highlighted this well: out of 1,000 Gen-Z consumers polled, 54 percent reported using BNPL, and only 50 percent used credit cards during the holiday season. This is not to say that credit cards are being eschewed in favor of BNPL, but rather that during times of high spending, such as the holidays, BNPL is an increasingly popular option. More recently, 60 percent of Coachella attendees said that they paid using BNPL to finance their experience—yet another warning sign of the popularity of using BNPL to afford trending attractions and attain instant gratification at the cost of possible long term economic burdens.

BNPL, like most things in life, is not purely bad. If used correctly and responsibly, it can actually be an incredibly helpful tool. BNPL allows people to afford necessities or finance large expenses they know they’ll be able to afford in the future. It allows people to buy things they need in the stretch between paychecks, and savvy users can pay off installments with credit cards to gain reward points—this comes with the risks of paying off credit with more credit, but financially responsible and stable consumers can certainly benefit from it. However, many people, especially those who are younger, lack the financial skills or funds necessary to utilize BNPL without incurring possibly harmful economic consequences.

What, then, is to be done? It is unreasonable to outlaw BNPL. Just like credit, it is simply a tool—a tool currently being used primarily by people unaware of the dangers associated with it. One of the simplest and cheapest ways to combat this is to simply use our existing school system to teach young people basic financial literacy. It doesn’t have to be a full class—a workshop, much like the guidance push-ins at Stuyvesant, could have many benefits for young consumers without being too much of an expense on our government and burden on faculty and students. In fact, just spreading the FTC’s article about the basics of the BNPL system to students is a good first step. Agencies could consider creating lesson plans for teachers to teach, which would be a cost-effective way to educate future consumers. 

Since BNPL is really just credit under a different name, it should logically also be subject to our existing regulations on credit cards. In fact, this has already been done. Unfortunately, the Consumer Financial Protection Bureau responsible for such has been eradicated under the Trump administration, so much legislation has been rolled back. This is a large mistake from an economic standpoint, and the regulation should be reimplemented immediately. In a perfect world, companies would sustain monetary losses to protect the consumer. What has to be understood about most companies is that it is in their best interest to seek profit above all. It is unreasonable to believe that companies will act of their own accord to improve this issue. The best way to create these necessary regulations is not to have faith that the companies will self-regulate but instead to pass targeted legislation and enforce it effectively. 

 While BNPL has the potential to be an excellent tool if wielded responsibly, the system built around encouraging people to overspend makes it a risky option to use. At the end of the day, personal responsibility is crucial for all forms of payment, and the safest way right now to evade the issues that come with BNPL is to avoid it completely.