A BOOMER ECONOMY
Why the government is raising an eyebrow at Gen Z's favorite new way to spend: 'Buy now, pay later'

bwinck@businessinsider.com (Ben Winck) 

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Buy now, pay later companies like Affirm, Afterpay, and Klarna are making big marketing pushes. Don Arnold / Getty Images

Buy Now, Pay Later services have exploded in recent years, and the government is playing catch-up.

The Consumer Financial Protection Bureau opened an inquiry into the sector last month, citing debt concerns.

The firms' rapid growth and popularity with young shoppers bring a spate of credit risks, experts say.

Americans — and mainly Gen Zers — have been increasingly tapping Buy Now, Pay Later (BNPL) services for instant gratification and delayed payment.

That's sounding debt-risk alarms in Washington.

The services essentially do what they say on the tin. Shoppers using BNPL take on short-term, often interest-free loans to pay for their purchases and sign on to a scheduled repayment plan to pay back the debt.

But the services' surging popularity has raised concerns over how much debt these BNPL businesses are letting people assume, and how quickly it's happening. Additionally, a lack of oversight has also clouded whether the lending is safe, or potentially the foundation for a broader financial mess.

The firms in question aren't just handing out free cash over the internet. Participating businesses pay BNPL services a small cut for the extra business — yet details around these terms and disclosures to consumers are murky.
BNPL has led to a pandemic-era spending and debt boom

BNPL services emerged before the pandemic, but the health crisis lit the fuse for their explosive growth. The businesses boomed as people stuck at home moved their shopping online. The option is most popular with younger consumers, with 61% of Gen Z having already used a BNPL service, according to a March survey conducted by The Ascent.

That meteoric rise has sparked some concern with regulators around just how much debt risk BNPL could be creating. The Consumer Financial Protection Bureau opened an inquiry into BNPL firms including Affirm, Klarna, and Afterpay on December 16, citing concerns around debt growth, data harvesting, and consumer disclosures. Since the services don't yet face the same regulations as other forms of borrowing, they pose new risks of a possible credit bubble, according to the agency.

"Buy now, pay later is the new version of the old layaway plan, but with modern, faster twists where the consumer gets the product immediately but gets the debt immediately too," Rohit Chopra, the bureau's director, said in a statement.

The debt pile could be massive. Cornerstone Advisors estimates BNPL purchases totaled nearly $100 billion in 2021. That's up from just $24 billion the year prior. Separately, CB Insights projects the global BNPL industry could surpass $1 trillion in yearly volume as early as 2025.

Gen Z could be facing a debt cliff

BNPL's top users are possibly an even bigger risk. The services have successfully attracted a younger audience that "might not be credit-worthy or have a lot of experience with traditional types of credit," Marisabel Torres, director of California policy at the Center for Responsible Lending, told Insider.

Gen Z is also the most likely to be caught off guard when student loan repayment is set to resume in May. The generation's oldest members have spent more time post-graduation with their payments frozen than not due to the federal government's pandemic moratorium. The May 1 deadline could be "concerning" for those who can't balance student loan obligations with delayed BNPL payments, Torres said.

It isn't just government authorities that are catching up to the BNPL boom. Credit-rating agencies including Equifax and TransUnion are still working on adding BNPL debt to their reports and aim to start the services in the coming weeks, American Banker reported earlier in January.

The firms probably aren't too late to catch a major bubble, but their slow action is some cause for concern, especially with the financial crisis still a recent memory, Susan Sterne, president and chief economist at Economic Analysis Associates, told Insider.

"The three big agencies that follow consumer debt have yet to really get their hands around this as its a relatively new concept," Sterne said. "They've been diligent post-financial crisis, but I guess nothing has changed. They should have been more aware of this."

The fine print could trip up borrowers

The CFPB's inquiry represents a "great first step," but the BNPL industry needs more transparency if it's to keep growing at its current pace, Torres said. Regulation can put new protections in place so buyers aren't tripped up by each services' differences. Even something as simple as returning an item can be confusing and put buyers at risk, Torres said. Where people can expect refunds in a certain number of days with a traditional purchase, those guidelines don't exist for BNPL shopping. One service could require someone to pay off the remainder of their loan, while another could give refunds of only the amount paid back.

The complications around returning items are only one example where the law hasn't caught up to the industry. The longer the government waits, the greater the chance shoppers fall in the gaps between existing regulations, Torres said.

"We've been flooding the market with all this credit and no one's been keeping track of what's been happening," she said. "Unfortunately, if it seems too good to be true, it might be. This is not always the free financing option that it's marketed to be."