Should You 'Buy Now, Pay Later' When Checking Out?

Summary

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WSJ Your Money Briefing

Episode: Should You 'Buy Now, Pay Later' When Checking Out?
Date: September 16, 2021
Host: J.R. Whalen
Guest: Anna Maria Andriotis, Wall Street Journal Consumer Credit Reporter

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Episode Overview

This episode explores the rapidly growing “Buy Now, Pay Later” (BNPL) payment programs featured at online checkouts. WSJ’s consumer credit reporter Anna Maria Andriotis discusses how these plans work, why they’re so popular, the potential benefits, and key risks for consumers—especially in comparison to traditional credit cards.

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Key Discussion Points & Insights

What Are “Buy Now, Pay Later” (BNPL) Programs?

• Functionality:
  • BNPL programs allow shoppers to split payments over several weeks or months, with fixed installment amounts.
  • Unlike putting a purchase on a credit card and paying over time (which can accrue interest indefinitely), BNPL offers set payment schedules and an exact end date for repayment.
• Distinction from Credit Cards:
  • With BNPL, consumers know up front what they owe and when, and typically pay off the purchase by a certain date ([02:21]).
  • Credit cards, in contrast, may carry a balance with ongoing interest if not paid in full, and purchases can linger for months or years ([02:21]).

"It's essentially a program that allows for fixed payments... the consumer knows that as long as they make that set payment whenever it's due, they will be done paying... by a specific end date."
— Anna Maria Andriotis, [02:21]

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Why Are BNPL Options So Popular?

• Budgeting Tool:
  • The fixed payment schedule acts as a budgeting mechanism:

    “It's almost like a budgeting tool that, you know, okay, I'm going to be able to pay this off by X specific date…”
    — Anna Maria Andriotis, [04:09]

• Affordability Framing:
  • The way payments are broken down (e.g., $25 every few weeks instead of $100 upfront) makes purchases seem more manageable ([00:50], [04:09]).
• Accessibility:
  • BNPL programs are often easier to qualify for than credit cards; they approve consumers who may have low or no credit ([04:09]).
  • Approval rates are higher for BNPL plans compared to traditional credit cards ([04:09]).
  • BNPL might serve as a gateway to building credit and eventually qualifying for traditional credit cards ([04:09]).
• Merchant Integration:
  • Each plan is tied to a specific merchant and purchase, rather than an overall credit limit ([04:09]).

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Types and Mechanics of BNPL Programs

• Program Structures:
  • Programs may be structured as a pure loan (repaid monthly) or as a payment plan attached to an existing debit or credit card ([06:34]).
• Approval Process:
  • Application and approval occur at checkout.
  • Underwriting methods vary:
    • Some conduct credit checks, some don’t.
    • All consider alternative data points ([06:59]).
  • Providers track user history within their network for future approvals ([06:59]).

"If a consumer gets an affirm payment plan, for example, with one merchant, and then doesn't manage that payment plan well... Affirm has that payment information, has that track record."
— Anna Maria Andriotis, [07:37]

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How BNPL Companies Make Money

• Merchant Fees:
  • Main revenue stream: charging merchants 3-5% of the purchase price ([08:13]).
  • Merchants accept these fees anticipating higher sales volume and larger orders ([08:13]).

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Risks and Drawbacks for Consumers

• Interest Charges:
  • Some plans have zero interest; others may charge high interest (20-30%) depending on provider and consumer risk ([09:04]).
• Missed Payment Consequences:
  • Penalties vary:
    • Some providers charge late fees, others don’t.
    • Missing payments can be reported to credit bureaus ([09:04]).
  • In many cases, negative impacts mirror those of missing credit card payments: added fees, credit report dings ([09:04]).
• Potential for Overspending:
  • BNPL’s ease of use may encourage consumers to buy more than they can truly afford ([08:55]).

"There are drawbacks... there can be interest charges. Those interest charges can run pretty high. They can be... 20% range, if not 30%. But there are also programs that don't charge any interest."
— Anna Maria Andriotis, [09:04]

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Notable Quotes & Memorable Moments

• "It's essentially a program that allows for fixed payments... the consumer knows that as long as they make that set payment whenever it's due, they will be done paying... by a specific end date."
  — Anna Maria Andriotis, [02:21]

• "It's almost like a budgeting tool that, you know, okay, I'm going to be able to pay this off by X specific date, because that's just how this plan works. I can't just carry this debt forever."
  — Anna Maria Andriotis, [04:09]

• "These programs are meant to encourage people to make purchases they otherwise might not make."
  — Anna Maria Andriotis, [04:37]

• "This is a costly service for merchants, but with the fees that they're paying, they expect... an increase in sales... shoppers who are actually executing these purchases who otherwise wouldn't have been."
  — Anna Maria Andriotis, [08:13]

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Timestamps for Important Segments

• What is BNPL and how does it differ from credit cards? – [02:21]
• Why is BNPL popular? – [04:09]
• Who qualifies for BNPL & approval process – [06:59]
• How BNPL companies make money – [08:13]
• Risks/Drawbacks for consumers – [09:04]

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Summary

This episode breaks down the mechanics and appeal of Buy Now, Pay Later programs, highlighting how these alternatives to credit cards are carving out a large niche in the checkout experience by offering easier access, transparency, and the illusion of affordability. However, Anna Maria Andriotis warns that the ease of spending and potential for interest/penalty fees means consumers should approach with caution—fully aware of the terms and their ability to repay.

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Transcript

[Deel Representative]

Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ.

[J.R. Whalen]

Here's your money briefing for Thursday, September 16th. I'm J.R. whalen for the Wall Street Journal. You've probably seen advertisements or offers of the online checkout page for so called Buy Now Pay later programs that allow consumers to pay for products in installments.

[Anna Maria Andreotis]

This is a $100 item. Pay $25 a month or $25 every couple of weeks with this payment provider with this Buy Now Pay later program and suddenly, huh, $25. That's totally manageable for me every couple of weeks or every month.

[J.R. Whalen]

So how do these programs differ from other payment methods and what risks do they come with? Our consumer credit reporter Anna Maria Andreotis has been keeping tabs on this growing industry. We'll ask her about those questions and more after the break.

[Deel Representative]

Deal replaces fragmented Payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e-l.com WSJ.

[J.R. Whalen]

No credit card, no problem. Millions of Americans with poor credit or who don't qualify for credit cards at all can still make purchases through Buy Now Pay later programs. Companies like Affirm, afterpay and Klarna and team up with merchants and allow shoppers to pay for big purchases over time. But it's not that simple. There are plenty of finer points consumers should be aware of before using these services. Let's bring in our consumer credit reporter Anna Maria Andreotis to talk about it. Anna Maria, thanks for being with us on the show.

[Anna Maria Andreotis]

Great to be speaking with you.

[J.R. Whalen]

So how do these Buy Now Pay later programs work and how are they different from someone using say a credit card to buy something and then just paying it back over time?

[Anna Maria Andreotis]

These programs allow shoppers to split up payments for a purchase that they're making over several weeks or several months. And it's essentially a program that allows for fixed payments. The consumer knows that they are going to, for example, be buying a $100 dress and that over the course of a few weeks or a few months they'll be making a fixed payment amount that will in the end in them having paid off that dress by a certain Period of time, so that the consumer knows that as long as they make that set payment whenever it's due, they will be done paying for this dress or sweater or whatever item it is that they are buying by a specific end date. There are controls in these programs that for many consumers, do bring peace of mind because there is a difference between, okay, I'm going to buy this dress with my credit card and just leave it on my credit card and pay a little bit at a time and incur interest charges. And in the meanwhile, I'm making other purchases on the credit card. And for people who aren't paying their credit card bills in full every month, the charges that they put on credit cards can basically be on their cards and be incurring interest on their cards for many months, if not longer.

[J.R. Whalen]

Now, these programs have been around for a while, and of course, the idea of layaway has been around for ages. But we've seen a number of big retailers offering Buy Now Pay later as an option more recently. So why is this payment method becoming so popular with consumers?

[Anna Maria Andreotis]

It's almost like a budgeting tool that, you know, okay, I'm going to be able to pay this off by X specific date, because that's just how this plan works. I can't just carry this debt forever. Another reason why they've really become very popular is because so again, let's say somebody's buying a $100 item and they're thinking, well, you know, do I. Am I going to be able to afford this item or should I do this? The way that they're positioned in many merchants websites is that, okay, this is a $100 item, pay $25 a month or $25 every couple of weeks with this payment provider, with this Buy Now Pay later program. And suddenly the consumer thinks, huh, $25. That's totally manageable for me every couple of weeks or every month. Yeah, you know, so essentially these programs are meant to encourage people to make purchases they otherwise might not make. The other element of Buy Now Pay later that resonates with many consumers is that these programs can be easier for people to qualify for than credit cards. In fact, some of the larger Buy Now, Pay later providers, companies like Affirm and afterpay and Klarna, say that they are able to approve more people for their programs than people who can get approved for credit cards. Essentially that there are people who they can approve who would get rejected for credit cards or other kind of traditional financing provided by banks. Also, the payment plans are for that specific purchase that's being made. So you're not looking at a credit card with a $1,000 or $5,000 spending limit that a person gets approved for when they're buying $200 worth of stuff. And it's not be put to use anywhere. It's specific to that merchant and to the item that the person is buying. So for people who can't get approved for credit cards, this is a way in, this is a way in to be able to buy the item they otherwise might not be able to buy. And in many cases, it does become a way for these individuals to build credit to be able to eventually get approved for credit cards.

[J.R. Whalen]

Now, in terms of how they work, what are some of the different kinds of buy now, pay later programs out there?

[Anna Maria Andreotis]

So there's a variety of ways in which these programs work, but they generally are either a pure loan that the person has to repay on a monthly basis or a payment plan that's attached to an existing debit or credit card.

[J.R. Whalen]

Now, you mentioned that some of these programs are geared toward consumers who haven't qualified for a credit card. Is there an approval process for consumers to prove that, you know, they have the means to pay?

[Anna Maria Andreotis]

So they'll have to apply for these payment plans when they are at checkout and are deciding that they want to pursue this type of payment plan. The way that the underwriting works varies by company. Some will check people's credit reports, some won't. All companies say that whether or not they do check their credit reports, they do look at other data beyond that. Part of what's going on here is that these payment companies are building an ecosystem of merchants because again, talking about some of the more popular ones in the U.S. what's happening is that they're basically racking up thousands of merchants within their own, let's call it network, so that if a consumer gets an affirm payment plan, for example, with one merchant, and then doesn't manage that payment plan well, and then is shopping at a different merchant and tries to apply for an affirm loan, for example, with a different merchant. Affirm has that payment information, has that track record. So that will diminish the person's ability to be able to get approved again for an affirm plan at a different merchant.

[J.R. Whalen]

So how do these buy now, pay later companies make money? Is there a fee they charge a merchant like a credit card would?

[Anna Maria Andreotis]

There is, and this is the main revenue generator for a lot of these buy now, pay later companies. Generally speaking, these fees will be somewhere in the ballpark of 3 to 5% of the purchase price. So this is a costly service for merchants, but with the fees that they're paying, they expect a specific upgrade, an increase in sales, more sales and more sales in a couple of ways. One, that they are getting shoppers who are actually executing these purchases, making these purchases who otherwise wouldn't have been. So new shoppers coming in as well as an increase in the dollar amount of the purchases that consumers are making.

[J.R. Whalen]

Okay, so these programs might make it easier for consumers to buy, maybe a little too easy in some cases. But. But are there other drawbacks or risks consumers face when using them?

[Anna Maria Andreotis]

So there are drawbacks to begin with. Again, this varies depending on how risky or not the buy now, pay later provider views the specific consumer as being. But depending on the provider, there can be interest charges. Those interest charges can run pretty high. They can be 20 in the 20% range, if not 30%. But there are also programs that don't charge any interest missing payments. The repercussions for that varies by the company as well. Some companies say that they don't charge late fees, others do charge late fees. And if people don't make their payments, repercussions can include being reported as being late to the credit reporting firms. The repercussions for using these programs in many ways aren't that different from what happens if you miss your payments on your credit card or the interest that one would be charged for carrying a balance on their credit card. But they do vary. So this is an area where consumers could potentially get tripped up.

[J.R. Whalen]

All right, that's Wall Street Journal reporter Anna Maria Andreotis Anamaria. It's been great having you on the show.

[Anna Maria Andreotis]

Great to speak with you. Thanks so much.

[J.R. Whalen]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[Deel Representative]

Still running global payroll like A relay race, deal replaces fragmented payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already workday SAP Netsuite operate like a local everywhere Visit d e e l.com WSJ that's d e e l.com WSJ.