Americans Are Spending Billions With ‘Buy Now, Pay Later’

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When Brianna Gordley got to college her freshman year, she wasn't prepared for the winters.

Born and raised in Texas, and I went to Kentucky for school, so clearly there's a weather difference there. I needed more pants, a lot more sweatshirts and jackets, But.

As a full time student and a part time bartender, Brianna didn't have that much extra cash to spend on new clothes. So when her friend told her about something called buy now, Pay later, she remembers being intrigued. It seemed almost too good to be true. But then Brianna downloaded an app and it confirmed what she'd heard. She could get around one hundred dollars worth of winter clothes from Forever twenty one and pay the bill off over four smaller installments.

That made sense to me, like, oh, I can have easily twenty five dollars in the next two weeks to make this one purchase.

But that one purchase quickly snowballed.

It started from things I needed to just oh, my gosh, I have all this access to buy things I didn't really need but that I thought I wanted.

In less than a year. Brianna remembers spending about fifteen hundred dollars on clothes, makeup accessories. Soon to started missing payments and getting hit with late fees. Eventually, debt collectors started.

Calling, and that's when I got very scared. It was crippling, definitely crippling anxiety, crippling fear until I was able to come out of it.

Brianna is one of a growing number of American shoppers who have made online purchases using services called Buy Now, Pay Later, also known as bnpl They're offered by companies like a firm Klarna and after Pay and the interest free payment plans can be used for just about anything.

If you want to go on a trip, Expedia offers a pay and for option. If you want to go on a big shopping spree, there's a chance that it'll be available at any retailer you can imagine. Credit cards are also starting to offer options too.

It's Paulina CaCrO, a personal finance reporter at Bloomberg, and she and Paige Smith, a consumer finance reporter, have been digging into the world of buy Now, Pay Later. Paulina and Page say that on top of trouble for individual consumers like Brianna. Concern is growing about just how little we know about this debt. That's because many of those BNPL companies don't share the same data that other types of lenders share.

At least one expert at Wells Fargo estimates that there's about forty six billion dollars in phantom debt, and that's just from buy now, Pay Leader, and that's just in the US alone, And there are actually also some other estimates that have projected that globally the buy now Pay Leader industry could be seven hundred billion a year, But again these are just projections.

It just is a pretty large blank spot for a number of folks who rely on credit scoring data to be able to make underwriting decisions of their own, and also for economists.

And that specter has got economists and financial experts concerned because a lot of other data on consumer spending right now makes it look like lots of Americans are doing fine, but by now pay later debt is largely missing from that picture, and without an understanding of all the debt people hold, it's hard to know how healthy the economy really is.

Today.

On the show how much Phantom debt could be lurking within the buy now, pay later market and what it means for shoppers, economists, and regulators. I'm Sarah Holder. This is the big take from Bloomberg News. Bloomberg's Paulina Cacero says, not everyone who uses buy now Pay later ends up in trouble, but there are lots of ways things can go wrong.

If you're a responsible person who keeps up with everything that you own, you know exactly when things are own, how much you have in your bank account at all times. It's fantastic.

For everyone else, it's a slipperysop. Paulina told us that while some serve may advertise zero interest, the devil is often in the details. Yeah.

So, a lot of the buy now, pay later services do charge late fees or a percentage of your purchase when you fall behind on payments.

This is actually part of the business model for these companies. Late fees are a source of revenue for some of them, and on top of their fees, if your payment was supposed to come from a bank account or debit card, but you don't have enough money in that account to cover the payment, you could face other fees from.

Your bank you might get hit with an overdraft fee or a non sufficient fun fee from your bank account, and that's where people start to fall behind. And if you fall behind late enough, these companies can actually turn over your loan to a debt collector and that can impact your credit score.

So just how many people are struggling with paying off this kind of debt, well, we don't really know because the companies in the space don't provide data on installment loans that are split into four payments, which is a popular option for consumers.

These large and very much still growing by now pay later providers do not furnish their data to both credit bureaus and credit scoring firms. So the big ones that you and I know of, like Fico but also TransUnion experience.

The reason they don't share this data well, Page says that depends on who you ask.

There's a little bit of a back and forth here between these companies because you have the likes of Klarna and a firm and after pay saying that they don't want to provide this data to these other entities until they know that the consumer's data will be safe and secure, and they also don't want consumers credit scores to be hit if they turn over this data.

Basically, some of them are arguing, hey, by not reporting our data, we're actually helping our customers. That's because they claim that the current credit scoring models don't accurately account for these kinds of pay and four plans, and therefore even those who pay on time could still see damage to their credit scores. Pauline, do you buy that argument from companies that this is protecting consumers credit scores?

I think the buy now, pay later industries really positioned themselves. It's almost like a financial equalizer for consumers. They're granting credit access for people who have found it hard to access other forms of credit. But if you fall delinquent enough on a loan, and if the company decides to turn over that debt to debt collectors, your credit score

As for the entities that buy now, pay later, firms would share their data with Page says they say they're ready to receive it.

We have folks like Fico and Experience and other credit bureaus saying they're ready to accept this data and willing to accept this data.

It's been a bit of a blame game. People are pointing fingers about why this hasn't happened.

But earlier this year there was some movement in the stalemate after a big report on the industry from the Consumer Finance Protection Bureau came out. Apple pay Later, Apple's version of Buy now Pay Later, did decide to share their data for these transactions with the credit bureau Equifax.

When Apple decided to furnish data, they became the first big buy now Pay Later provider to do so, and it kind of threw cold water and the reasons that a lot of the other buy now, Pay Later pioneers and titans have brought up as a reason for why they're not furnishing data.

But with so many companies and retailers offering buy now, Pay later and most of them not sharing their data, that still means we have a gaping hole in what we actually know about this industry, and that could be a problem for other lenders because typically when you want to get a credit card or other types of loans, the provider will look at your entire financial picture to see what you owe to whom and how good you've

Because none of these buy now payladter providers furnished data, no one knows when a consumer is overextended and whether or not they can afford to take out more money.

And Page and Paulina say that's not just a problem for lenders, it also matters to economists and anyone who's trying to take the temperature of the entire economy. One analyst that Page and Paulina spoke to even put a name to the estimated billions and buy now pay later debt we can't see. They called it phantom debt.

This phantom debt is out there, and we just don't know how much it is, and how large it is, and how much it weighs on sort of the average hoshold income on any given month.

We should also note that there's other debt that economists can't really see, including from payday lenders, car title loans, and some other really high interest loans. So, you know, a lot of researchers just don't have a full picture of the debt obligations that Americans have.

And Page and Paulina say, that's especially concerning at this moment where we're seeing consumers fall behind on other types of credit.

Consumers are starting to fall behind credit cards, auto loans, mortgage payments, etc. So people are concerned that it's you know, hiding consumer distress.

And the economy.

Page and Paulina and our other colleagues here at Bloomberg really wanted to know more about this glaring buy now, Pay later blind spot. So Bloomberg commissioned a poll. One thing it revealed, people aren't just using buy now Pay Later for big ticket items. Almost half the people they surveyed are using it or have considered using it for essentials.

So from this survey poll, we found that about forty three percent of those who do owe money to buy now, Pay later services reported falling behind on payments in some capacity, and twenty eight percent said they were delinquent on other debt like credit cards mortgage payments because of what they were spending on buy now, Pay Later.

Paulina says that given how sticky inflation has been, many people's budgets are tighter and they're starting to turn to buy now, pay later to fill in the gaps.

We are at the point where more and more people are starting to use them fornessities that they need. And you know, two years into a period of really high inflation, where the cost of everything from food, gas, groceries, rent has gone up so much, we are starting to see that people are using it to afford things that they need.

And the fact that people are using the NPL for daily essentials is really important. If you look at the story of the US economy today, lots of key economic data shows that consumer spending continues to be higher than was expected. It seems like people feel very comfortable spending right now, but the buy now, pay later debt complicates that picture.

It seems like people have continued on this what we called a COVID nineteen revenge spending spree, and a lot of that data, you know, has encouraged economists and other financial institutions to say, hey, the American consumer is doing fine. We need to keep interest.

Rates higher for longer.

However, because we're starting to see consumers start to fall behind on every other credit product. We know that the Americans are holding onto one trillion dollars worth of credit card balances. The fact that there's more buy now, pay later loans on top of that is kind of daunting.

One way to shed light on what's actually going on with buy now, pay later debt would be regulation. I asked Paulina and her colleague Page Smith, a consumer finance reporter, if any new regulations are coming for this industry.

So basically, the CFPB, you know, they did this big groundbreaking report on the buy now, pay later industry two years ago, and since then they have said that they would issue guidance on whether the buy now and pay later industry should be regulated like other forms of credit. You know, nothing clear has really come through so far.

And then another regulator, the controller of the currency, essentially warned banks about entering this space and kind of caution them of some of the risks associated with buy now, pay later lending because it is fundamentally different from traditional lending in some ways, but in other ways it is quite similar.

The issue has also gotten the attention of Congress. Senator Shared Brown led a hearing about the risks of buy now, pay later in twenty twenty two.

Companies tell us these new products are innovative, they're easy to use, they'll give people more options, But so often innovation is just a new way for companies to make money while trapping people in debt.

And one person who was called to testify was Brionna Gordley, who racked up all that buy now, pay later debt.

In college production and thank you Kimney members for this opportunity to provide a virtual testimony on my experience with buy now, pay later products.

Brianna, you testified about your experience in twenty twenty two. What did you hope to communicate with lawmakers there?

Yeah, I was very scared to do it. But what I really wanted people to see is that this can't happen to anyone. It's funny how I was using these apps and I don't. I don't think I ever knew what they really were. And if I had known what I have still agreed to use what actually can be a complicated product to someone who's just eighteen or nineteen.

And if there had been more regulation on this industry at the time when you first gotten to BNPL debt, how could that have changed your experience? Have you thought about that?

I do.

I think things would have been more clear. There are times when I thought is this a credit card? Or the times where I thought are they checking my credit? I just had no idea what I was even doing, and I was still doing it. And so there are times when I wonder if would regulation helped, would it have made these products their business model just a little bit more clear for me to understand. So I think about it a lot, and I think it would have been extremely helpful.

Today. Brianna works in consumer advocacy at an organization called Texas Appleseed. She actually advises people on financial products, including by Now Pay Later.

I think a lot of these products can be very helpful and give people away to access things that they wouldn't normally be able to. And then I say, but you have to be careful. You have to know what you're getting yourself into, and let me help you with that. You need to really read the terms and let me read them with you. And I'm equal sad and angry and frustrated and just wondering how it's gotten here and how regulation may or may not help.

Thanks for listening to The Big Take podcast from Bloomberg News. I'm Sarah Holder. This episode was produced by Jessica Beck. It was edited by Caitlin Kenney and Craig Giamona. It was mixed by Veronica Rodriguez. It was fact checked by Adrianna Tapia. Naomi Shaven and Kim Gettelson are our senior producers. Our senior editor is Elizabeth Ponso. Nicole beamsterbor is our executive producer. Sage Bauman is Bloomberg's head of Podcasts. If you liked this episode, make sure to subscribe and review