Buy now, pay later: a cross-country analysis

GiulioCornelli giulio.cornelli@bis.org LeonardoGambacorta leonardo.gambacorta@bis.org LiviaPancotto livia.pancotto@strath.ac.uk Buynow,paylater:across-countryanalysis1 Buynow,paylater(BNPL)schemesletconsumersspreadtheirspendingoveranumberofinterest-freeinstalments,whicharetypicallyunreportedtocreditbureaus.BNPLisgrowingstrongly,especiallyincountrieswithstronge-commerce,higherinflation,inefficientbankingsystemsandlessstringentregulations.Usedtoagreaterextentbyyoungadults,whoaretypicallyheavilyindebtedandhavelowcreditscores,BNPLschemessufferhigherdelinquencyratesthantraditionalconsumercredit. JELclassification:D12,G40,G50,G51. Buynow,paylater(BNPL)schemeshavesurgedinpopularity,allowingconsumerstodividetheirspendingintointerest-freeinstalments.Thecostoftheplatform-basedBNPLserviceisborneprimarilybymerchants.Thus,consumerscanmanagetheirexpenseswhileincurringonlysmallfeesornone.However,imprudentspendingorapoorunderstandingofBNPLtermscanleadtooverindebtedness. ThisspecialfeaturereviewsBNPLpaymentschemes.First,itprovidesanoverviewoftheBNPLbusinessmodel,discussingthebenefitsandcostsforeachagent(merchant,userandplatform).Second,itdocumentstheglobaldiffusionofBNPLservices,mappingusers’gender,age,educationandriskprofiles.Third,itaskswhytheadoptionofBNPLserviceshasvariedwidelyacrosscountries.2 Themainfindingsareasfollows.First,merchantspayhighfeestotransfercreditrisktotheplatformsandbroadenthecustomerbase.BNPLschemesareaccessibleeventoconsumerswithoutacredithistoryorstableincomeanddonottypicallyaffecttheircreditscores.Relyingprimarilyonfeerevenues,platformshavefacedprofitabilitychallengesduetohighoperatingcostsandrisingcreditlosses. Second,BNPLuserstendtohaveariskiercreditprofilethanthoseoftraditionalconsumercreditproducts.BNPLusersaretypicallyyounger,withlesseducation,higherdebtburdensandlowercreditscores.Accordingly,latepaymentsandlossesforBNPLintheUnitedStatesarehigherthaninthecaseofcreditcards. 1WethankDouglasAraujo,ClaudioBorio,JohannesEhrentraud,JonFrost,GastonGelos,JanKeil,BenoîtMojon,HanQiu,AndreasSchrimpf,HyunSongShin,NikolaTarashev,KaramfilTodorov,RaihanZamilandSonyaZhuforcomments.TheviewsexpressedinthisarticlearethoseoftheauthorsanddonotnecessarilyreflectthoseoftheBankforInternationalSettlements. 2OurempiricalanalysisfocusesonfirmswhosecorebusinessisBNPL,thusexcludingfirmsthatofferBNPLsolutionsaspartoftheirdiversepaymentoptions(egPayPal).Thus,thedatareportedbelowarelikelytounderstateactualBNPLuptakeandvolumes. Keytakeaways Buynow,paylater(BNPL)customerspayinterest-freeinstalments,whicharetypicallynotreportedtocreditbureaus,whilemerchantspayfeestoincreasesalesandshiftcreditrisktoBNPLplatforms. Comparedwithtraditionalconsumercredit,BNPLusersaretypicallyyounger,withlesseducation,moredebt,lowercreditscoresandhigherdelinquencyrates. BNPLismorewidespreadincountrieswithgreatere-commercepenetration,higherinflation,moreinefficientbankingsystems,andlooserfinancialandconsumerprotectionregulation. Third,BNPLuptakevarieswidelyaroundtheworld.Adoptionisstrongerincountrieswitharobuste-commercebase,higherinflationandlessstringentregulation.OurfindingsalsorevealhigherBNPLusageincountrieswithahigherlevelofhouseholddebtandbankinginefficiencies. Therestofthespecialfeatureisorganisedasfollows.ThefirstsectiondiscussesthecharacteristicsofBNPLandhowitdiffersfrommoretraditionalformsofconsumercredit.Thesecondsectionanalysesusers’characteristicsandhowBNPLusehasevolvedworldwide.ThethirdsectioninvestigatestheeconomicandinstitutionaldriversofBNPL.Thelastsectionconcludes. BNPL:whatitisandhowitworks BNPLpaymentschemesletcustomerspayfortheirpurchaseswithinterest-freeinstalmentsratherthanpayingthefullamountatcheckout.Theyarewidelyusedbyconsumersforonlinepurchasesone-commerceplatforms.BNPLisrapidlyexpandinginphysicalstorestoo,facilitatedbytheuseofscannablebarcodesandQRcodes. Withsomesimplification,aBNPLtransactioninvolvesthreeagents:amerchant,acustomer,andaBNPLplatform(Graph1).3WhencustomersdecideonapurchaseandselecttheBNPLoptionatcheckout,theplatformapprovesacreditline(seebelow).Uponapproval,theplatformpaysthemerchantthefullamountofthegoodspurchasedandtakesonthecustomer’screditrisk.Customerspaythefirstinstalmentupfronttotheplatform,whiletheresidualamountistypicallydueinweeklyinstalments.Themostcommonformofpaymentis“pay-in-four,”ierepaymentwithinfourweeks,althoughoptionswithlongerrepaymenthorizonsarealsoavailable(DiMaggioetal(2023)).PopularBNPLservicessupportborrowingupto$1,000andareinterest-freeifinstalmentsarepaidontime.Otherwise,latefeesorinterestapplytomissedpayments,muchasinthecaseofacreditcard(seeTable1). 3TheexampledescribesthetypicalfeaturesofaBNPLtransactionwithina“merchantpartneracquisitionmodel”.Analternativestrategyisthe“app-drivenacquisitionmodel”whereBNPLproviderspre-approveconsumers’creditapplicationswithintheirproprietaryapps(ConsumerFinancialProtectionBureau(CFPB)(2022)). BNPLpaymentscheme:ahighlystylisedexampleGraph1 Source:Authors’elaboration. BNPLvscreditcards:typicalfeaturesTable1 Buynow,paylaterCreditcard Natu