What are the risks of buy now pay later (BNPL)?

Buy now, pay later (BNPL) schemes can be an appealing option for many consumers. In total, over half the population used services like Klarna, PayPal, and Afterpay in 2021. 

However, a new study has found that it comes with the risk of fraud. It also highlights the need for more awareness to make sure borrowers understand what they’re signing up to. 

Why is BNPL so popular?

Apple is the latest in a line of companies to start offering buy now, pay later schemes to its customers. But, despite this financing option gaining credibility, many are unaware of the risks. 

This latest research, which is conducted by SEON, found that for many younger consumers, BNPL is an appealing option as it seems like an interest-free loan. This can be beneficial to those without much credit history or access to credit cards. 

However, there are risks involved. For example, the research suggests that it puts consumers at a greater risk of fraud. Additionally, consumers could end up being coerced into buying more items than they need and it could be unaffordable in the long run. 

BNPL allows customers to finance items with little or no payment and pay the rest later over a few installments. This is popular with buyers, as well as with merchants, who see an average conversion rate of approximately 2.1% higher than usual. 

But, 60% of consumers report buying something they didn’t need using BNPL that was outside their budget, and around 31% have made a repayment late. 

What are the risks of BNPL?

The research shows that one of the risks of BNPL is potential fraud. At the moment, providers aren’t always liable for this, and if the consumer files a complaint, the merchant can end up losing out financially while their reputation takes a hit.

The report continues to point out that BNPL providers can take a number of steps to prevent this, but consumers can still end up being the victims of fraud in some cases. 

Additionally, late last year, a group of consumer groups, including U.S. PIRG, sent a letter to the CFPB warning that “BNPL products do not underwrite for a consumer’s ability to repay, can rely on the expectation of late fees, can be difficult to manage, and can trigger punitive overdraft or non-sufficient fund fees if linked to a bank account. 

Further, these products can lead consumers into taking on unmanageable amounts of debt and lack the same dispute or refund rights that credit cards have should a consumer be unsatisfied with their purchase.”