Buy Now, Pay Later and Financial Wellness

By: Sheba Wallish, Strategic Product Manager, PSCU

In today’s increasingly digital environment, it is easy to pay for almost anything, especially an online purchase, via installments. Buy Now, Pay Later (BNPL), point-of-sale installment payment plans are everywhere. If you’ve purchased anything online recently, you’ve probably seen a BNPL option from a company like Affirm or Klarna available in the checkout process.

BNPL payment plans offer consumers a way to pay for purchases over a fixed time period via a short-term loan. Interest rates may or may not apply, and consumers can choose the repayment term that works best for them. Such installment payment plans give consumers more control over their finances and the ability to budget for larger purchases. As consumers are taking an increasingly active role in managing their finances, the demand for such convenient and flexible payment options has increased tremendously.

However, while BNPL options can give consumers more control over their finances, there are risks, just as with any type of loan. It is important for credit unions to do what they can to mitigate those risks – for themselves and for their members.

With Growth, Comes Risk

Accelerated by the pandemic, the usage of BNPL has grown significantly over the past few years and shows no signs of slowing down. Aite-Novarica Group estimates that 47% of American adults made a purchase using a BNPL option between July 2020 and June 2021, and a report from Insider Intelligence estimates there will be $680 billion in BNPL transaction volume by 2025.

Spending has also increased. Consumers realize the benefits of splitting purchases up into installments and are taking advantage of the offers. In a report by SFGate, the average Affirm customer spends $365 on a single purchase, as opposed to the $100 average shopping cart size recorded in 2020.

On the other hand, the hype and ease of Buy Now, Pay Later offerings can easily cause consumers to spend beyond their means. Consumers often make multiple BNPL purchases across various BNPL products, making it difficult to keep track of upcoming payments, with 30% of BNPL users struggling to make their payments. This leads to an increase in delinquency and credit risks, which is especially concerning as these types of loans will soon be included on credit reports.

Meanwhile, the current state of the economy, soaring inflation and the volatile geopolitical situation has consumers thinking twice about buying items on credit. Regulators are increasing their attention on BNPL offerings because of rising consumer debt and the potential of further destabilizing the economy. This has led to a devaluation of some of the bigger companies offering BNPL, which can be seen in the layoffs at Klarna, for example.

Best Practices for Adding a Buy Now, Pay Later Product Offering

While the current state of Buy Now, Pay Later product offerings does include some uncertainty, there are steps you can take to make it more of a benefit than a risk for the financial wellness of your members – as well as less risky for your credit union.

  • Use a product that is tied to your existing credit card. The cardholder is then using their already-established (existing) line of credit to make purchases and then converting them into installment plans – a seamless user experience for them. This presents less risk to your credit union, as you have already determined the credit line was appropriate for the cardholder. Your credit union also does not have any additional lending decisions to make.
  • Look for an offering that is customizable. Buy Now, Pay Later products shouldn’t be one-size-fits all. Credit unions know their members better than anyone else. Use that history and knowledge to set up a product that fits your members’ needs. For example, your credit union should control eligibility from a cardholder and transaction perspective. Utilize information like delinquency history and credit bureau score to determine eligibility and to set up the installment plan offers.
  • Get the right installment plan offer to the right cardholder. Ensure BNPL installment plans and services are easy to understand, provide reasonable terms and would be a good fit.
  • Provide educational materials. It is critical for members to understand how BNPL offerings work so they don’t get caught up in the hype and ease of use. Do your members understand the following about your installment plan offering?
    • What is a BNPL installment plan? How does it work?
    • How can paying via installment payments be helpful to their budget?
    • What are the risks of BNPL plans?
    • What happens if the member can’t make a payment?

Time will tell if BNPL offerings continue to evolve or fade like the once-popular layaway programs. If you are uncertain about how to choose the right BNPL option for your members, consider partnering with a fintech or credit union service organization (CUSO) to determine how you can offer the right installment plan to the right member. When you do that, you both win – a cardholder’s trusted credit union is providing them the flexible payment options they are looking for, with repayment terms that they can handle.

Sheba Wallish is a Strategic Product Manager at PSCU, where she is responsible for the strategic direction of PSCU’s credit payment products. She also led the development and launch of PSCU’s Installment Payments solution. Sheba has 20 years of credit card industry experience prior to joining PSCU.