The Buy Now Pay Later Industry is in Crisis

John Suder
Jun 2, 2022

The Buy Now Pay Later Industry is in crisis. Consumers are realizing that they are not getting the best deals possible and are starting to shop around more. This is causing the industry to shrink, as people are not buying as many loans. Additionally, companies are having a harder time borrowing money to fund these purchases, as investors are becoming more cautious.

BNPL is a deferred payment option available at the point of purchase from certain retailers, typically for larger items. The terminology surrounding BNPL has changed over time; it was originally known as ‘Buy Now Pay Later’ but is now commonly called ‘Pay in 4’,  ‘Klarna’, or  ‘Afterpay’.

There are several dangers associated with BNPL, the main one being debt. When using BNPL, shoppers need to be aware of interest rates (if any) and fees associated with late payments, as well as how long they have to repay their debt. In some cases, failure to repay on time can result in debt spiraling out of control.

While BNPL services offer an easy way to spread the cost of big purchases over time, they can be risky for consumers who don't understand the terms and conditions. These services often have high interest rates and can be difficult to cancel.

While BNPL can be helpful in times of financial difficulty, it also poses a risk of excessive debt. To prevent this, retailers need to use credit scoring to identify high-risk applicants and either deny them credit or set limits on how much they can spend. By taking these measures, retailers can help protect consumers from falling into debt traps and instead help them manage their finances responsibly.

BNPL services are particularly popular among millennials, who are already struggling with high levels of student debt and credit card debt. In order to avoid getting into too much debt, millennials need to be aware of the risks associated with BNPL services and shop around for the best rate.

Unlike previous generations, millennials are unwilling to take on high-interest debt in order to purchase items they can't afford outright. This has led many consumers to turn to buy now pay later services as a way to spread out payments over time. However, with interest rates rising and more lenders entering the market, these services are becoming increasingly expensive.

As a result, many millennials are choosing not to use them at all. This could have serious consequences for the industry as a whole, which is already struggling with increasing defaults and shrinking profits.

Affirm, Klarna, and other providers have laid-off workers, and credit companies are seeing increased inflation rates. The industry's troubles are largely due to millennials' reluctance to take on debt.

Klarna CEO Sebastian Siemiatkowski did not disclose which units would experience layoffs, only saying that impacted personnel would be notified in the upcoming days.

Siemiatkowski explained to the Financial Times that Klarna is prioritizing short-term financial soundness over long-term growth. Klarna's first-quarter net loss quadrupled to $254M.

BNPL-fueled mistakes could contribute to an extended recession (or worse) in the broader economy. The borrowing construct is introducing real risk into the system: Consumer debt jumped $52 billion in March, the largest increase on record. In California, 91 percent of consumer loans made in 2020 were BNPL loans. More than 40 percent of Gen-Z consumers will have used BNPL by the end of the year, the highest penetration of any age group. And now those debts are going bad.

Photo by Blake Wisz on Unsplash

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