The Bank for International Settlements (BIS) has warned that the unfettered growth of buy now-pay later (BNPL) financial services poses major risks to financial stability and customers.
BNPL customers typically pay interest-free instalments, which are typically not reported to credit bureaus, while merchants pay fees to increase sales and shift credit risk to BNPL platforms, BIS said in its December quarterly review.
Compared with traditional consumer credit, BNPL users are typically younger, with less education, more debt, lower credit scores and higher delinquency rates, BIS said, adding that BNPL plans are more widespread in countries with greater e-commerce penetration, higher inflation, more inefficient banking systems, and looser financial and consumer protection regulation.
It is thus important to establish whether BNPL schemes take advantage of financially constrained individuals through misleading promotions and inadequate information, BIS said.
As BNPL platforms suffer from high delinquency rates, a sustained growth of these platforms would warrant monitoring of their direct and indirect links with the rest of the financial system,” authors Claudio Borio, Gaston Gelos, Benoît Mojon, Hyun Song Shin, and Nikola Tarashev wrote in the report.
Profitability has proven elusive for major BNPL platforms such as Afterpay, Affirm and Klarnas they operate with high fixed expenses, BIS said.
Afterpay, Affirm, and Klarna are major BNPL platforms based in Australia, the US, and Sweden, respectively.
Most common BNPL credit agreements have fallen largely outside the scope of existing regulatory regimes. While India does not have a dedicated regulatory framework for BNPL, it enforces rules for non-banks that encompass e-commerce and consumer protection.
A 2022 directive from the Reserve Bank of India affected the BNPL sector by prohibiting non-banks from combining prepaid payment instruments with credit lines, the report said.
Recently, several governments started to amend their regulatory frameworks in a way that would bring BNPL into their ambit.
Some countries, including Australia, have set lending charge limitations, as well as increased warning and disclosure requirements.
In the US, suppliers may be required to get state licences and must adhere to consumer credit regulations.
Late payments and losses for BNPL in the US are higher than in the case of credit cards, the report added.