Buy Now, Pay Later is just a way of spreading out the cost of a purchase over a few installments.

Usually it's four at zero percent, so it's pretty attractive for a lot of people.

The number of Buy Now, Pay Later loans increased nearly 1,100 percent between 2019 and 2021.

That rapid growth has some analysts concerned because where there are loans, there's debt.

But exactly how much debt is still unclear.

You know, we've often referred to this as phantom debt, where it's sort of flying under the radar, not really something that anybody has a good grasp on.

Our back-of-the-envelope estimates put the BNPL market at somewhere in the neighborhood of $50 billion.

So you're talking comfortably a third of the transaction increase in credit card volume.

That could imply that households are more in debt than we even know because we're not really measuring this booming space of Buy Now, Pay Later.

I think you could be missing or misrepresenting how healthy the consumer is.

The notion of this phantom debt being out there is just not true.

We know from publicly reported information how many folks are taking out loans and how many of them default, and it's a very, very low number.

Buy Now, Pay Later users are more financially vulnerable.

It's those users who are using Buy Now, Pay Later more frequently for household goods, for essentials.

So that type of user and that type of pattern is the big concern.

Here's why phantom debt is looming over U.S. consumers and the economy.

It was first called phantom debt in this Wells Fargo report that called attention to the fact that there is no hard measure of how many Buy Now, Pay Later loans are out there,

how consumers are doing with these loans, whether they're really keeping up with their payments or falling behind.

Not having a clear read of underlying debt burdens in general, particularly for the household sector, can be a concern because you could be assessing the health of the household sector and looking at debt-to-income ratios, net worth being higher across the income spectrum, income growth,

all of these variables that suggest that the household sector and consumer in general are actually doing fairly well despite elevated inflation and challenges in the broader economy.

But if you're missing a piece of that puzzle, right, if you're looking at all of household debt and thinking it's all household debt, but there's this other component that's lurking in the background of this phantom debt Buy Now, Pay Later segment,

I think you could be missing or misrepresenting how healthy the consumer is.

The most recent information comes from data disclosed at the discretion of individual Buy Now, Pay Later companies, as well as various privately conducted consumer surveys.

This lack of centralized data has made it difficult to reach a consensus about exactly how much high-risk debt is out there.

Since Buy Now, Pay Later loans are not currently reported to the major credit reporting agencies, it's a challenge for lenders to know how many loans a consumer has outstanding and how well they're doing paying back those loans.

According to Afterpay, one of the major five Buy Now, Pay Later companies, 98% of their purchases did not incur a late fee as of the fourth quarter of 2023.

The Financial Technology Association is a trade group that represents four of the largest Buy Now, Pay Later providers, Klarna, Afterpay, Zip and PayPal.

I do think the concern over phantom debt is overblown.

When you look at the industry, even under Wells Fargo's own report in which they estimate the Buy Now, Pay Later industry to be around $45 billion, less than 2% are in default or what we would say not making their payment.

2% of $45 billion is less than $1 billion.

Compare that to over $1 trillion worth of credit card debt.

And so I think we need to put it in perspective.

But a 2024 survey by Harris Poll on behalf of Bloomberg found that 43% of consumers who owe money to Buy Now, Pay Later services said they were behind on payments.

Consumer Reports also conducts surveys on the issue.

We found in one of our surveys that the top reason for using Buy Now, Pay Later was to purchase something that the consumer couldn't otherwise afford.

So it's clear that Buy Now, Pay Later, it can lead to consumers making purchases that they can't repay and then running behind on payments, which then triggers late fees and also just leads to greater accumulation of debt.

Buy Now, Pay Later is similar to layaway programs that became popular during the Great Depression.

Retailers were aware of how little cash Americans had.

So they created pay structures where the consumer would give a down payment to a retailer in order to pick up an item and then make payments and installments.

Layaway began to decline in popularity in the 1980s and 1990s when credit cards became more widely available.

Buy Now, Pay Later doesn't seem to be going in that direction.

Juniper Research estimates that these transactions could reach almost $700 billion by 2028.

The Wells Fargo report concluded that the Buy Now, Pay Later market may be small now, but we don't know how fast it's growing.

It logically follows that we simply cannot know when it will be a problem.

Just some sort of nationally measured data would be so helpful just to understand really just how big of a burden this is for households.

One of the challenges with this source of borrowing is just how unregulated it is.

So to my knowledge, there's not many questions that are actually asked before you're offered a Buy Now, Pay Later option when you go to check out.

Buy Now, Pay Later companies generally don't report information to the major credit bureaus, which means these loans typically aren't reflected in people's credit scores.

If someone falls delinquent on one of these loans, it will show up in a bankruptcy report, but that's the only way it shows up on a consumer profile.

There's currently no formal way for economists, regulators, and analysts to know how rapidly Buy Now, Pay Later loan debt is growing, which could lead to unforeseen economic consequences.

In order to fully or accurately assess the health of the financial sector, you have to accurately understand how much of a debt burden is out there and how that's manageable against the income side for households generally.

The biggest challenge is that regulators just don't know how much exists.

So I think you have regulators trying to regulate this segment similar to credit card debt, even though it's not equivalent, just to, again, wrap their hands around it and have it monitored so that it isn't a area of financial instability from a household debt perspective.

This lack of scrutiny about whether a consumer can pay back a loan could have consequences for the lenders as well.

Credit scores try to provide an objective assessment of how likely a person is to pay their bills.

The average FICO score in the U.S. was 715 in 2023.

Lenders use these scores to set the terms of a loan, which could dictate the spending power of the American consumer.

Having Buy Now, Pay Later activity separate from the current credit check system prevents lenders from having that data to make an informed decision about whether a consumer is likely to default on the loan.

But incorporating this data into credit scores can get complicated.

We believe that somebody consistently paying $25 over the course of four weeks or six weeks consistently, responsibly, on time should be able to score positively.

Unfortunately, today, every time you take out a Buy Now, Pay Later loan, it looks like you've maxed out your credit.

And so, unfortunately, it's scored as a negative.

So we believe that these products are consumer-friendly.

We believe they should enhance consumer scores, their credit history, and their scoring.

We have been actively working with the credit rating agencies to be able to think through how to modernize their own scoring to be able to capture that better.

But that's still a little ways away.

They're just not there yet.

And there's also consumer protections built into the Buy Now, Pay Later products.

If you are late on a payment, you are paused until you complete your payments.

That's different than one in which you're able to have a revolving debt and pay interest on it.

So there's consumer protections that are built in there.

The caveat to those safeguards is that the companies don't communicate with one another.

If a user is behind on a loan from a specific Buy Now, Pay Later company, they can still take out a loan from a different one.

That's problematic because if you are a consumer who does rely on Buy Now, Pay Later and who has maybe a few outstanding installments,

that would go against how much more leverage you can take out or how much more a lender provider would be willing to lend you money just based on your debt-to-income ratio generally.

So I think it's problematic in that it doesn't show up in the credit profile for lenders because it's sort of they're taking on a risk that they're not aware of potentially.

While there is not currently a solution for tackling the credit score mismatch, the Consumer Financial Protection Bureau issued an interpretive rule in May of 2024 that says Buy Now, Pay Later firms must comply with certain U.S. credit card laws.

It's recognizing Buy Now, Pay Later as a form of a credit card.

So that regulation means that the industry must make refunds for returned products or canceled services.

They need to investigate merchant disputes and pause payments during those probes as well as providing bills that have full fee disclosures so customers know exactly the interest rate or the late fees that could apply.

Those provisions are a really important step forward because many Buy Now, Pay Later users have highlighted issues with disputes when they receive a faulty product or they don't receive the product at all,

and they get the runaround on who to go to to stop payment or what happens when they return the product and how they get a refund from the Buy Now, Pay Later provider.

So it's a useful first step to address one of the biggest concerns for consumers.

We appreciate CFPB trying to put some definition around Buy Now, Pay Later, what it means to be a Buy Now, Pay Later company and many of the things that they are asking for companies to do,

such as full disclosure of fees, transparency on kind of what returns are.

Our companies had already doing it.

So to try to level set the industry and to ensure that all of those that are claiming or wanting to be or advertising as Buy Now, Pay Later, that they're still meeting the same standards that our companies have.

Most experts say that this new regulation just doesn't go far enough.

It's really just the tip of the iceberg because it doesn't get at the bigger problem, which is how to account for the spant of debt.

If these Buy Now, Pay Later providers are compelled to report their data to credit reporting agencies, then we would have this central agency monitoring the ballooning space of Buy Now, Pay Later.

We think that the CFPB really needs to go further and require Buy Now, Pay Later providers to assess a consumer's ability to repay and to have reasonable late fees.

In general, we're very concerned with consumers becoming more and more overextended, especially in these current times with inflation and economic pressures.

It's showing in increasing credit card delinquencies and it's showing in the consumer surveys of Buy Now, Pay Later users who are increasingly missing payments.

There are a lot of new initiatives in this space because it's been so popular.

I mean, it's clearly not going anywhere.

We're going to keep seeing Buy Now, Pay Later.

It's just a question of whether consumers are going to be able to keep on top of it.