The Hidden Dangers of Buy Now, Pay Later Apps


But consumer advocates are skeptical. Marisabel Torres, California policy director at the Center for Responsible Lending, says “Buy Now Pay Later” is a misnomer. These are short-term loans repaid in installments, the terms of which can vary considerably. Some include late fees but no interest; others charge interest. Some report to the credit bureaus and some do not. Consumer advocates say the variety of offerings can be especially confusing for young users with little credit history or financial literacy.

Afterpay, for example, does not charge interest on BNPL services, but it collected A $ 87 million ($ 64 million) in late fees from users in the 12 months ended June 30. Affirm does not charge late fees but collected $ 200 million in interest payments from consumers over the same 12 month period.

“Regulators need to look under the hood to see exactly how much of the profit these companies make is from the fact that they could be charging a lot of late fees,” Torres said. High default rates and user debt could be a testament to a business model designed to take advantage of the inability to pay. “We’ve seen credit flooding the market before when no one was paying attention,” she says. “It hasn’t been good for consumers or the economy in the end.”

Lawmakers and regulators are taking note. Earlier this month, the House Financial Services Committee heard from consumer advocates about the potential risks to consumers of the services. Torres and other witnesses called for tighter regulations and more data on how often users default, the potential long-term impact on credit scores, and stricter rules regarding the approval of creditors. credit.

The Consumer Financial Protection Bureau published a blog post in July to guide consumers. Among other things, the post warned, “Don’t stretch your finances too much. “

“We’re used to working with regulators to build in a lot of the protections we’ve already had from the very beginning,” says Harris Qureshi, public policy manager at Afterpay. He notes that the service freezes a user’s account if they miss payments and offers a “hardship line” for users unable to make payments due to unforeseen problems.

In a statement to WIRED, a spokesperson for Affirm said the company does not charge late fees, informs consumers of their total costs in advance, and selects users before approving them for BNPL funding.

“We understand and support reasonable regulation and comply with regulations” enforced by state and federal agencies, a Klarna spokesperson said in an emailed comment. “We don’t believe, however, that low interest products should be regulated in the same way as high interest products.”

Merchants also pay a fee for services, usually either a flat rate of, say, 30 cents on each purchase, a commission of about 4 to 6 percent of the purchase, or sometimes both. This too is variable. Merchant fees and transactions account for about half of Affirm’s revenue, but over 90% of Afterpay’s. But some traders like the services.

“As soon as I started using it, I sold more products,” says Brittany Aaron, who sells bath and body products in her online store, Angel Kisses. Since offering Shop Pay and Afterpay early last year, Aaron says sales have increased by around 30%, with almost 70% of users purchasing goods with BNPL services.

Aaron says the fees she pays for the services are a small price for large increases in buyers’ carts. Since offering the service, BNPL buyers spend more on each trip. A recent Lending Tree survey found that a quarter of BNPL users admitted to purchasing more using the service than they would have if they had to pay out of pocket.

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