Affirm, the largest player in the Buy Now Pay Later (BNPL) space, recently declared its intention to begin reporting consumer data to TransUnion in the USA. They hope to bring this practice to Canada in the near future. This transition is part of a wider move by BNPL providers to align themselves with credit-reporting systems more widely used in the consumer finance sector. Meanwhile, Sezzle, another key provider, is already sharing data with ratings agencies through its Sezzle Up program, allowing users to build credit.
For consumers, as BNPL options rapidly multiply, they offer both opportunities and risks. With flexible promises and tempting terms, many of these providers leave borrowers with debts they cannot possibly manage. 15 BNPL options are typically very visible at online checkouts or through a cashier. This makes it easy for consumers to ignore the eventual consequences of their borrowing choices. As industry experts are quick to point out, zero-interest financing is alluring on face value. This promise can tempt users to borrow beyond their means without fully understanding the ramifications.
The Rise of Credit Reporting Integration
Affirms announcement marks continued movement towards transparency within the BNPL size. We believe this move will encourage better quality lending and help build the positive credit outcomes we need to see. Consumer advocates and some industry observers caution that integrating BNPL data into current credit-reporting models could end up harming consumers.
Sezzle’s approach, which allows participants in its Sezzle Up program to build credit by reporting their BNPL activity, stands in contrast to Affirm’s current practices in Canada, where it does not share data with credit-reporting agencies. Adding BNPL data to credit reports could change the way consumers understand their financial wellbeing.
“We believe that reporting to credit agencies supports responsible lending and promotes positive credit outcomes.” – Affirm
While the vast majority of BNPL users successfully pay off their debts, Affirm boasts a credit loss rate of just 0.54%. The potential for stacking debt across multiple accounts remains a serious concern. The increasing number of BNPL providers complicates financial management for consumers, raising the question of whether they are truly equipped to handle such debt.
Understanding the Risks of BNPL Services
This increase in usage of BNPL has raised concerns about the longer-term impact on consumer behavior. In an example of the harm this often causes, Natasha Macmillan, a financial services expert, illuminated how these services result in skincare-related debt.
“Because of the zero-interest appeal, it almost gives people a false sense of affordability.” – Natasha Macmillan
It’s easy for consumers to be lured into sudden purchasing decisions without appreciating the long-term debt obligation they’re incurring. Doug Hoyes, a fellow insolvency specialist, urged consumers to understand the overall costs of several BNPL agreements running at once.
“The real caution I would provide is ensuring that, if you do have one or multiple, you’re looking at the total cost of all of the Buy Now, Pay Later programs that you have ongoing.” – Doug Hoyes
The average BNPL debt is in the low hundreds to low thousands of dollars. Most importantly, it’s imperative for consumers to evaluate their total financial health before entering into a second payment plan.
The Role of Merchants and Consumer Awareness
Merchants typically subsidize BNPL services by promoting them to boost customers’ spending. Implementing this strategy can significantly increase retailer sales and make retailers a lot more profitable. It puts the onus on consumers to be aware and proactive with their financial choices.
Some BNPL services offer longer-term loans, often loaded with interest somewhere between 0% to 30%. People should be cautious because there are real dangers associated with these financing vehicles. As Klarna wrote earlier this month in response to other recent moves toward subscription models in the sector,
“As there is little clarity on the potential long-term impacts to the consumer, we believe this approach is too risky.” – Klarna
The challenge for consumers lies in distinguishing between responsible use of credit and impulsive spending driven by attractive financing options. Hoyes went further to stress the benefits of utilizing credit products. He noted the problem with them is when they lead to unexpected spending.
“There’s nothing wrong with using a credit card or Buy Now, Pay Later or a car loan or a mortgage… It’s when you don’t have a plan, when it becomes an impulse purchase… that’s when you can get into a bit of trouble.” – Doug Hoyes
