The hidden costs of “Buy Now, Pay Later”

Arizona PIRG Education Fund

Years ago, before credit cards were widespread, department stores offered layaway plans on some items. You paid in advance over a weekly or bi-weekly schedule and the store guaranteed that the item would be in stock after you’d paid the total cost (including some fees for the service). Variants included Christmas clubs and other “holiday club” plans.

Layaway has largely been supplanted, first by the ubiquity of credit cards and, largely in just the last three years, by the explosion of Buy Now, Pay Later (BNPL) plans. Non-bank financial firms — known as fintechs — have innumerable new partnerships with retailers.  Fintechs such as Affirm, Klarna, Sezzle and Afterpay have contracted with retailers that let you take it home now but pay over time, such as with the popular “pay in four installments” plans.

The programs are often advertised as “free” to the consumer if all payments are made on time. The service is primarily funded by fees paid by merchants to the providers. Merchants pay similar, but lower, merchant discount fees to Visa, Mastercard, AmEx and Discover to accept credit or debit cards. Although merchants are sharply critical of the fees, the motivation for merchants to participate in the higher fee BNPL programs may be to increase the size of the “shopping cart basket,” earning greater profits to offset the higher fees.

Our findings, based on a review of complaints to the Consumer Financial Protection Bureau (CFPB) and the Better Business Bureau (BBB), show that hidden fees, interest and debt collection problems can harm consumers. We also find that consumers also face problems with customer service.

Based on the findings of this report, Arizona PIRG Education Fund is concerned that the general BNPL business model is non-transparent and may be an effort to evade existing consumer protection laws. Surveys also show that a successful BNPL demographic target is young people, who may not understand the business model. In addition, increasing the size of the “basket” leads to consumers buying more stuff that they don’t need and can’t afford.

The exploding use of BNPL and its uncertain regulatory status suggest a need for further research. We looked at the CFPB’s searchable public consumer complaint database to find out more.