Buy now, pay later debt could become a problem for the U.S. economy
Buy now, pay later (BNPL) options are becoming increasingly accessible to consumers. According to a recent NerdWallet report, a quarter of Americans surveyed in April 2024 said they had used BNPL services in the past 12 months.
The number of BNPL loans increased by nearly 1,100% between 2019 and 2021, based on data from the Consumer Financial Protection Bureau.
This rapid growth has raised concerns among analysts, as where there are loans, there is debt — but the exact amount of this debt remains unclear.
A December 2023 report from Wells Fargo noted that while the BNPL market might currently be small, the uncertainty around its growth rate means we cannot predict when it might become problematic.
“We’ve often referred to this as phantom debt, where it’s sort of flying under the radar and not really something that anybody has a good grasp on,” Shannon Grein, one of the authors of the December note, told CNBC.
“The notion of this phantom debt being out there is just not true,” said Penny Lee, president and CEO of the Financial Technology Association (FTA), a trade group representing major BNPL providers like Klarna, Afterpay, Zip, and PayPal. “We know from publicly reported information how many folks are taking out loans and how many of them default. And it’s a very, very low number.”
Grein emphasizes that the concern is not that the debt will explode, but rather the inability to track its extent and how many consumers are behind on payments.
“I think the biggest challenge and first thing that really needs to come to fruition is some sort of monitoring of its size,” she said. “And then we can really understand if it is a challenge or something that’s a concern for the consumer under the surface.”
The consequences of unmonitored debt
Currently, there is no way for economists, regulators, and analysts to accurately track the growth rate of BNPL loan debt, which could lead to unforeseen economic consequences.
“To fully or accurately assess the health of the financial sector, you have to understand how much of a debt burden is out there and how that’s manageable against the income side for households generally,” said Grein.
BNPL companies generally do not report information to the major credit bureaus, meaning these loans typically are not reflected in people’s credit scores.
“Regulators are trying to regulate this segment similar to credit card debt, even though it’s not equivalent, just to wrap their hands around it and have it monitored, so that it isn’t an area of financial instability from a household debt perspective,” Grein said. “If someone falls delinquent on one of these loans, it will show up in a bankruptcy report, but that’s the only way it shows up on a consumer profile.”
BNPL is not directly comparable to credit card debt because the loans are tied to a specific purchase rather than opening a longer-term, revolving line of credit.