The Rising Perils of Buy Now, Pay Later Services
We have often discussed the merits and concerns surrounding Buy Now, Pay Later (BNPL) services around the EPIC Markets desk. Some have found the platforms useful to spread the cost of high-ticket items, others have indulged in non-essentials, while the majority (mostly the seniors among us) have stayed well clear. And some may say for good reason.
Yesterday we read an article on Bloomberg which commented on the resilience of the consumer, however, it also highlighted the cracks that are beginning to form. As we have discussed previously, Americans have increasingly struggled with auto loans, and credit card delinquencies have reached the highest levels since around 2012 and are broadly increasing. Some may argue that this is in fact historically normal, and that the fiscal floor we have been treading has somewhat shielded consumers; so, possibly a return to the old normal?
Nevertheless, this new form of what is being referred to as “Phantom Debt” is more concerning in that the providers do not report these instalment loans to credit agencies, and there is currently limited regulation. BNPL companies believe credit rating agencies are unable to manage the information. They have their concerns that divulging the data could affect shoppers’ credit scores, which are important for mortgage applications and other loan applications. The major rating agencies, Experian PLC, Equifax Inc and TransUnion have asserted their readiness, while two prominent credit scoring firms highlighted their ability to test how BNPL products will impact their figures.
In the first quarter it is estimated that almost $20bn was spent through BNPL schemes, up 12.3%yoy.  Moreover, results from a Harris Poll, conducted on behalf of Bloomberg, found that over half of the BNPL users admitted to overspending. While 34% said they were worse off financially, and interestingly, almost a quarter of users said their “spending is out of control”.
Furthermore, 43% of customers who owe the BNPL have fallen behind payments, while 28% were suffering delinquencies on other debt due to spending on the BNPL platforms. Alarmingly, almost half of those using BNPL have started or considered using it to pay bills or purchase essential items, including groceries. This trend highlights the growing reliance on BNPL services, even for fundamental necessities. The reliance on BNPL extends beyond low-income households. Surprisingly, about 42% of those with household incomes exceeding $100,000 report being behind or delinquent on BNPL payments.
The reliance on these financing methods, coupled with rising credit card delinquencies, suggests many consumers are straining to keep up with costs amidst persistent inflation, plateauing wages, and economic pressures such as the end of the student loan payment pause. With consumer spending accounting for 70% of US economic activity, diminished spending power and a potential "debt snowball" from overextended households poses a major risk to sustaining economic growth. Economists warn that if this spending frenzy unravels, the US could face further economic deceleration or even a recession in the coming months.
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