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Payment Uncertainty

  • annalhowell511
  • Dec 6, 2022
  • 7 min read

Buy Now, Pay Later services provide consumers with alternative financing options posing potential disadvantages for both retailers and consumers.

BYLINE: Anna Howell


Instant gratification and commercialism have a longstanding history since the dawn of retail shopping almost 200 years ago. Consumers have been lured by postponed payment options. Whether lacking in actual funds or struggling to manage existing funds, breaking purchases into smaller installments has been an attractive option for customers of all budget sizes.


Modernized financial repayment services such as Affirm, Afterpay, Klarna, and PayPal Credit are enhancing the instant gratification and ease of online shopping for consumers. Specifically, today’s buy now, pay later (BNPL) plans do not charge interest or other service fees. By providing upfront fixed repayment schedules, consumers know prior to their purchase exactly what their payment will be and when those payments are due. Even more important, Nikki Baird, VP of retail innovation at Aptos, explains that consumers “love” these new BNPLs because they can “hedge and hold onto money, just in case.” In short, today’s BNPL provides consumers with a sort of unsecured loan.


Customers can sign up for BNPL services for free and shop at any of the online retailers the platform offers. The only requirements these platforms have are that users must be 18 or older and be an authorized holder of a debit or credit card. Mostly, purchases also need to be over $35. Users can then go to their favorite online store and begin purchasing items. Customers can even choose to go to the stores in person if desired. All the customer must do is log into their account and purchase items. If a user’s credit card information is already programmed, it only takes a few clicks to complete the checkout process.


Today’s buy now, pay later market is unlike the lay-away services of yesteryear, where customers made direct and incremental payments to stores that only gave customers their merchandise once the product was completely paid for. These layaway payment plans dominated the buy now, pay later market from the Great Depression to around the late 1970s, making it possible for retailers to sell products to customers with limited disposable cash. Before the pandemic, customers enjoyed the in-person, hands-on experience of going to stores. Now, there are more options for touch-free shopping where customers do not have to interact with the employees. Brands such as Walmart and Target had to adapt to this change, therefore creating more options for online shopping. Consumers strapped for cash relied on the flexibility of this payment option until the widespread use of credit cards ended the marketplace’s reliance on layaway finance systems starting in the 1980s.


However, the pandemic has recently ignited another shift in consumer finance options: buy now, pay later finance services that do not charge interest. The pandemic abruptly ended retail shopping in 2020, leaving no other choice but for people to start purchasing items online. This has continued to affect in-person shopping through 2021. In a recent survey to assess consumer purchases post-COVID, 60% of respondents claim they have used BNPL services. Consumers learned how easy it could be to make a few clicks rather than go to stores. People are spending more time shopping online. They also feel concerned about economic uncertainties from the volatile marketplace or changes in their financial status. As a result, they are increasingly relying on buy now, pay later options that do not charge the high-interest rates of conventional credit cards. While allowing customers to achieve instant gratification with purchases, these modernized finance plans pose serious concerns for both customers and retailers because they not only encourage customers to overspend but also capture customer data that retailers would prefer to keep proprietary.


Pointing to the popularity of today’s BNPLs, according to a report issued by Accenture, a global technology and consulting firm, BNPL spending is up 230% since 2020. PayPal, an online payment platform, claims BNPL volume increased 400% on Black Friday alone. With companies such as Afterpay having millions of global customers and hundreds of thousands of merchant partners worldwide, BNPL companies are making it easier for consumers to make both online and in-store purchases through their zero-interest loans and access to rewards programs and multiple customer service channels.


More significantly, for the BNPL consumer, is the threat of overspending. According to a recent survey by Lending Tree, an online lending marketplace that allows borrowers to connect with numerous loan operators in search of optimal terms, consumers can spend anywhere from $100 to upwards of $1,000 with the stroke of their keypad. For example, Lending Tree’s survey found that two-thirds of consumers said they spent more money using BNPL platforms than they would have if they had to pay the total amount at the time of purchase. Another survey found that 70% of BNPL shoppers have admitted to overspending while using these services.


“People who use these platforms can avoid overspending and going into debt if they treat them like any other credit card or load,” says Tootsie’s sales manager Carrie Johnson. “Most BNPL platforms target younger consumers who do not have financial maturity, and therefore, they are more likely to overspend and overextend themselves,” says Neiman Marcus client advisor Jose Espinosa. “For retailers, this is good. Most retailers are hoping services like Afterpay can persuade their clients to spend more. Merchants have definitely seen an increase in spending by clients since offering BNPL payment options.”


If this seems like a win-win for retailers looking to maximize profits, the potential risk is that consumers might not have the cash to make their future payments. For example, a 2020 study of 2,200 purchasers produced by the statistical research firm, Morning Consult Data, found a “substantial overlap between people who receive overdraft fees and those who use BNPL services,” which has consequently drawn increasing “scrutiny” from U.S. regulators. Accordingly, Marguerita Cheng, a certified financial planner, wants consumers “to make sure you have the money set aside for those bills when they come due”. Grant Halverson, CEO of Financial Services, stated that “66% of online shoppers believe BNPL apps are financially risky. 59% have purchased unnecessary items they otherwise cannot afford. 57% regret financing a BNPL purchase because it was too expensive. And 56% admit to falling behind on making payments.” The tendency of customers to overspend is very high — leading customers to go into debt. As of now, no BNPL services have publicly acknowledged the overspending concern.


When BNPL companies collect personal data from customers during the check-out process, it poses a concern for both retailers and consumers. When customers shop on sites such as Afterpay and Klarna instead of the official brand website, they allow another company to have valuable information about who that customer is. This breach can lead to “synthetic identity fraud,” where scammers can paste together pieces of information stolen from real people (a name, a birthday, a social security number) to create a Frankenstein identity that they use to buy goods and services through a BNPL provider.” According to data provided by the data services firm, Auriemma Group, this fraud costs banks and lenders upwards of $6 billion annually. More dramatic, the U.S. Federal Reserve claims that this is the fastest-growing financial crime in the United States.


BNPL services make it easier for fraud to occur. Since BNPL services are payment installments, it takes longer to detect fraud. Realtors prioritized customer loyalty. Building a relationship with their consumers causes a loyal relationship which can be beneficial for the retailer. Consumers’ customer data is jeopardized due to BNPL services — leaving both consumers and retailers worried. A synthetic identity can pass identity verification checks where they can access bank accounts or loans.


Application AI is a solution to prevent synthetic identity fraud in BNPL services. Applications of AI is a kind of technology that requires several applications to provide genuine security. The service can track fraudulent behavior by looking at previous transactions. AI analyzes vital identity factors during account creation, cross-verifies critical identity data, and flags potential high-risk behaviors. Consumers using BNPL services can apply for AI to ensure security. There are several other identity theft protection services like AI, such as Identity Guard. As of now, there have been no other solutions to BNPL’s fraud concerns and no ongoing lawsuits.


Source List

Jose Espinosa Jose Gatorobic@aol.com

Lalonde, M. (https://www.retailmenot.com/blog/list-of-stores-with-the-best-layaway.html

Lalonde, M. (https://www.retailmenot.com/blog/list-of-stores-with-the-best-layaway.html


Ancillary Content:

Interview with CEO of Afterpay, offering an exclusive insight into their platform. Questions from the audience. Streaming on YouTube

Global feedback survey for retailers and customers to discuss concerns on BNPL services.

National zoom call for BNPL subscribers to ask questions and discuss.


Sidebar:

Buy Now, Pay Later services are more popular than ever. Social media is just one of the many factors causing the rise of such platforms. Social media platforms motivate consumers to overspend by adding pressure to follow specific trends. Apps such as TikTok and Instagram are filled with influencers posting “cool” content, convincing users that if they buy what they are wearing, they will fit the same “aesthetic.” The influencer’s post is typically attached with a link where you can buy what they’re wearing. Most of the links offer the BNPL service. Young users on social media use BNPL to save money and keep up with trends. This is only leading to unwanted spending. If BNPL users do not budget their payments into their finance, it can lead to a “silent accumulation of debt,” according to CNBC journalist Jack Pedigo. This is mainly found in young consumers who aren’t thinking about how the future installation payments will add up. BNPL has paired with several companies, from clothing stores to hardware stores, to provide an easier way to pay for items. BNPL is meant for an essential one-time purchase item — not simple wants that lead to overspending. The rise of e-commerce has made it easier to purchase items quickly online. BNPL apps such as Klarna and Afterpay are two platforms that provide easy payment plans. Consumers who overspend on these apps typically can’t afford future payments. If users are late paying their next installment, apps like Klara and Afterpay will charge you an additional $10.


Retailers signed on with these payment services to hopefully bring in new shoppers. Many retailers hope that the BNPL will convince them to spend more. Still, according to Sheena Butler-Young, a Business of Fashion journalist, some retailers are having second thoughts about what will happen to their customer’s data once they click to purchase.


 
 
 

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