Why Banking Providers Need to Have ‘The Talk’ With Customers About BNPL

BNPL is often credited with increasing economic empowerment and financial inclusion, but ample evidence suggests consumers don’t fully understand the concept — and don't always consider it debt. Banks and credit unions can and should help customers be more aware of the product's realities.

If consumers hadn’t been exposed to BNPL financing before the 2021 holiday season, they likely encountered such offers on Black Friday, Cyber Monday and every other recent shopping day. Going forward, they’ll face even more exposure as Klarna, PayPal, Afterpay, Affirm and other fintech companies that propelled BNPL to its current high-profile position add more merchants. Several big card issuers have already launched their own versions of BNPL, adding more fuel to one of the hottest financial product categories.

Between March 2020 and June 2021, the consumer user base for BNPL grew a staggering 85%, according to PYMNTS.com. As with most fintech innovations, younger consumers tried BNPL first and older generations followed.

BNPL undoubtedly represents a financial boon to everyone on the selling side of the aisle. The benefit from the buyer’s perspective is less certain, and consumer misunderstanding about how BNPL works compounds this uncertainty. For that and other reasons, the Consumer Financial Protection Bureau opened an inquiry into the risks that BNPL poses to consumers.

Knowledge Gap:

A 2022 study by The Ascent shows that only one in five consumers who use BNPL apps actually understands how they work.

BNPL also has the potential to be a great line of business for financial institutions. So far it’s mainly been big card-issuing banks getting involved. In fact one early 2022 survey of 426 banks by IntraFi Network found that 80% of them had little interest in offering a BNPL product. However, a late 2021 consumer survey by PYMNTS.com found that 70% of current BNPL users would be interested in a bank-provided option, so it’s an interesting dynamic.

Whether they choose to implement a BNPL product or not, banks and credit unions can serve as a valued resource of financial literacy for their customers. It’s a great opportunity for community financial institutions in particular to leverage their customer relationships to help people make more informed decisions about BNPL, especially since many of their customers may already be using the product. How they use it can lead to financial stability or significant debt.

Read More: The Dark Side of Buy Now, Pay Later: Risks Facing the Banking Industry

5 Important BNPL Facts to Share with Customers

A LendingTree survey found that 31% of shoppers had financed a purchase with BNPL, and that 62% of these BNPL users had financed five or more purchases this way. The survey also revealed that younger shoppers had a greater tendency not to think of BNPL as a debt. This false impression is driven by marketing that touts BNPL as an interest- and fee-free alternative to credit cards. This leads to the first important BNPL fact:

Fact 1. Easy credit still comes due
In this digital age, consumers demand convenience, and few loans are as easy to get as BNPL. All it typically takes to get approved is the consumer’s name, email address, mobile number, date of birth and a bank or credit card account. Unless it’s for a very large purchase, most BNPL loan approvals don’t even require a hard credit inquiry, which is particularly appealing to those with thin or spotty credit histories.

Even so, consumers need to understand that BNPL financing is still a debt that needs to be repaid as agreed, the same as their credit cards and other revolving or installment loans.

Fact 2. Consumer protections are lacking
Many younger adults have a general distain for credit cards because they fear getting into too much debt. This mindset drives the shift toward BNPL as an alternative financing option. However, CFPB warns that consumers may be switching one type of credit for another that doesn’t afford the same level of protections. Accordingly, its inquiry will study these potentially harmful inconsistencies that are prevalent within the BNPL industry:

  • Lax adherence to consumer protection laws, including disclosure requirements.
  • Little to no provisions for dispute resolution and protection.
  • Disparate policies on interest rates and late fees.

Additionally, CFPB wants consumers to understand another important fact about BNPL. Unlike those who use credit cards for purchases, buyers who return merchandise paid for with a BNPL loan may still need to make payments, typically due biweekly, until their returns are completed by the merchant.

Read More: Major Card-Issuing Bank Takes on Fintechs with Its Own BNPL Plan

Fact 3. Credit bureaus report BNPL
While Experian already includes data from a small number of BNPL companies in its credit reports, according to the Wall Street Journal, Equifax has plans to fully incorporate BNPL payments into credit reports as of the first quarter of 2022, as reported by The Financial Brand. Consumers may not realize this or understand how it could affect their credit scores.

On the positive side, this development will give BNPL borrowers who pay on time a way to build credit histories and possibly increase their credit scores, but the opposite is true for those who pay late or default on BNPL loans. Additionally, consumers should be aware that the longer they hold a particular credit account in good standing, the more it boosts their credit score. The short-term nature of most BNPL loans contradicts this principle, which credit bureaus have long used to help determine creditworthiness.

Fact 4. Spending sprees mount
Critics say financing through BNPL causes consumers to buy more, which is the exact pitch that BNPL providers use to convince merchants to offer it. Afterpay, for example, boasts that BNPL increases cart conversion by 20% and order value by 40%. Affirm touts a 20% repeat purchase rate.

Survey results back up this criticism. LendingTree found that two-thirds of BNPL users overspend. Similarly, C+R Research discovered that 59% of those using BNPL amid the pandemic purchased “an unnecessary item that they otherwise couldn’t afford,” and another 57% said they regretted a BNPL-financed purchase because it was too expensive.

5. Free debt is an illusion
The most common BNPL loan type has a term of just six weeks, during which the consumer makes four interest-free payments, hence the name “Pay-in-4.” It’s not a bad deal, if you pay on time. But not all consumers can or do, especially given the overspending tendency associated with BNPL.

A third of BNPL users in a Credit Karma survey admitted to being late one or more times. Just over half (56%) polled by C+R Research indicated they had fallen behind, and 70% of those answering the LendingTree survey said they had incurred fees or interest due to missed payments.

In some cases, fees on late payments can run as high as 25% of the original purchase price, the sting of which can be compounded by overdraft charges if the account the consumer tied to their BNPL loan doesn’t have enough to cover their payments plus interest or fees.

Use BNPL Knowledge to Deepen Customer Loyalty

As BNPL becomes more mainstream and more customers become accustomed to it, it’s likely that the average consumer will have several BNPL transactions going at once, in fact this is already occurring. So, what if financial institutions begin to offer consolidated payments to their consumers, providing another layer of convenience (and protection) they won’t find elsewhere?

Even without providing that service, from an education standpoint, banks and credit unions can differentiate their brands by firmly establishing themselves as their customers’ go-to choice for financial literacy, which should include honest assessments of the latest banking innovations like BNPL. Those who do will be richly rewarded with deeper customer loyalty leading to stickier banking relationships.

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