BNPL users twice as likely to miss a payment: survey

Consumers using buy now, pay later (BNPL) for purchases are more likely to default on payments. Yet, most say they plan to continue using the financing option to make larger purchases, a recent survey said.

Eighty-four percent of respondents said they used BNPL to pay for purchases they wouldn't be able to afford otherwise, according to management consultancy firm cg42's survey. Those users are also twice as likely to miss a debt payment, the study said.

BNPL users' behavior of particular concern in a more challenging economic environment, according to Hugh Tallents, a partner and financial services practice lead at cg42.

"With layoffs expected to increase in the New Year, many BNPL users are spending right now banking on receiving future paychecks that they may never get," Tallents said. "When you combine that reality with the fact that BNPL users have an average of 1.5x more debt products than non-users and are more likely to have had an adverse financial event occur in the past, the New Year will bring a perfect storm for debt."

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Unemployment expected to rise in 2023: Fitch

The economy added 263,000 jobs in November, according to the latest jobs report from the Bureau of Labor Statistics (BLS) and the unemployment rate stood at 3.7%, unchanged from October. This means the number of unemployed people in the country remains at about 5.6 million.

However, Fitch Ratings' unemployment forecast for 2023 paints a less optimistic picture. Labor demand is expected to fall significantly next year "as Fed tightening weighs on economic activity," Fitch said.

"The lagged impact of aggressive Fed tightening, the drag on real wages from high inflation, and knock-on impacts from the downturn in Europe will drive the U.S. economy into recession territory next year – with the unemployment rate increasing to 4.7% at the end of 2023, and peaking at 5.3% in 2024," Olu Sonola, Fitch's head of U.S. regional economics, said.

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Use of BNPL to grow as traditional credit becomes harder to get

A more challenging economic environment could make it harder for consumers to access credit because lenders are more risk-averse and enforce stricter measures to lower their credit risk, according to Tallents.

"Our research shows that BNPL is overwhelmingly used by people under 35, and users are 40% less wealthy than non-users, meaning BNPL will only become a more appealing option as traditional credit becomes harder to obtain," Tallents said.

BNPL providers partner with retailers to allow shoppers the ability to split the cost of their online purchases into multiple installments at checkout. Part of the appeal is that the installment payments, which typically begin within a few weeks of the purchase, are interest-free. However, missed payments can result in late fees and other penalties.

BNPL services face the challenge of increasing profitability and could begin to levy new user fees, Tallents said. That shift could help "weed out users most likely to default on their payments," he said.

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