The very convenience that makes buy now, pay later (BNPL) financing an attractive option to consumers may come with risks to providers, according to a recent report from Fitch Ratings.
Among those risks is "adverse borrower selection" in the payment method. As Fitch analysts said in the report, "[B]orrowers attracted to the ability to split even small-value purchases into several monthly repayments may have only limited additional financial headroom in case of adverse life events."
Because buy now, pay later providers rarely report statistics to credit bureaus, there is little visibility into consumers' BNPL borrowings. That means those providing financing to consumers "could underestimate a borrower's debt level when underwriting new debt," Fitch analysts said in the report, which was emailed to Retail Dive.
BNPL providers are rushing to the U.S. market as brands and retailers build the option into shopping experiences. The domestic market is still seen as relatively new by international players, making it a frontier for potential growth. Just this week, Square announced plans to buy the Australian BNPL player Afterpay for $29 billion.
But with opportunities come risks, heightened by the fact that many product areas of BNPL are relatively unregulated compared to other forms of consumer credit. And while the costs tend to be low, the underwriting process is typically "very fast" and based on "'soft' credit checks" rather than more thorough vetting required in other forms of credit, Fitch analysts said.
The overall risk embedded in the market is difficult to discern, in part because even measuring the size of the market in the U.S. is difficult and not straight forward, according to Fitch. Moreover, the performance of the debt itself — including most importantly how often it is repaid — is an "opaque" matter, the analysts said.
The Fitch report cited survey data showing that 31% of U.S. respondents have made a late payment or incurred a late fee using BNPL methods. But, the analysts added, "there have not been any reports of significant performance issues related to actual BNPL credit to date, despite the above survey results."
They also said that most BNPL providers "have not set aside large provisions for losses and report minimal bad debt."
And then there are the risks built in to the BNPL offer itself. The Fitch report noted that those attracted to the small payments and ease of borrowing may be those least financially able to make payments if they suffer a job loss or other disruption in their economic life.
Further, the Fitch analysts point to younger customers — often the target consumer of BNPL options and marketing campaigns — as typically "fac[ing] greater employment uncertainty in an economic downturn." This, they added, "may be exacerbated by a focus on impulse purchases and glamourizing the need to follow fast-changing trends."