The Hidden Pitfalls of BNPL Payments: Potential Negative Consequences
Reading time: 4 minutes

In recent years, the number of consumers using Buy Now, Pay Later (BNPL) payment options has increased significantly, particularly during the global pandemic. This trend is expected to continue, with BNPL becoming even more popular due to ongoing economic changes. Between 2020 and 2021, the number of BNPL users will double, and by 2022 this payment method will reach 360 million users worldwide. It is predicted that by 2027, there will be 900 million online shoppers globally using BNPL. However, in addition to its rapid adoption and convenience, BNPL has hidden pitfalls, particularly in the field of debt collection. It can have negative consequences for both users and financial institutions.

What is BNPL?

Buy Now, Pay Later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them over time, typically in a series of interest-free instalments. The concept is straightforward: a consumer purchases a product, often online, and selects the BNPL option at checkout. The total cost is then divided into equal payments, which are spread out over a period of weeks or months. In contrast to traditional credit cards, BNPL services typically do not charge interest on timely payments, and this makes them an attractive option for many consumers.

The spreading illusion 

The ease of use of BNPLs can be a double-edged sword.  Unlike traditional credit cards, BNPL services often eliminate the need for credit checks, making them easily accessible to a wider demographic including younger generations such as Gen Z and Millennials:

  • Gen Z (21-25 years old): 36%
  • Millennials (26-40 years old): 41%
  • Gen X (41-55 years old): 30%
  • Baby boomers (56-75 years old): 18%

This seamless payment can be misleading and potentially lead to overspending, especially when multiple BNPL providers offer their services across different online retailers.

The danger lies in the illusion of affordability. Splitting a large purchase into smaller installments creates the illusion of a lower upfront cost, potentially leading to impulse purchases that drain budgets.  In addition, unlike credit cards that offer a single monthly statement, managing multiple BNPL contracts can make it difficult to track spending and due dates, increasing the risk of missed payments and late fees.

What will be the effect of BNPL?

The answe is clear. A rising number of consumers defaulting on their BNPL payments.

Market insights

Growing risks: Approximately 10% of customers who have opted for a BNPL payment plan eventually find themselves in a position where they are contacted by debt collectors. This highlights the risks associated with deferred payments and the importance of responsible lending.

Lack of transparency: In 89% of the cases commercial players do not adequately inform consumers that they are entering into a credit agreement when using BNPL services.

Increasing debts: BNPL can create a false sense of financial security, leading consumers to accumulate more debt than they can handle. With multiple BNPL agreements, tracking and managing repayments becomes challenging, often resulting in missed payments and escalating debt.

By 2026, the U.S. alone is projected to have 10.4 million BNPL-related debtors. This alarming statistic underscores the urgency for better consumer education and more robust regulatory frameworks.

Impact on debt collection

The growth in the use of BNPLs presents both opportunities and challenges. As more consumers default on their BNPL payments, the volume of debt collection cases is expected to increase significantly. This requires advanced solutions to efficiently manage the growing portfolio of cases:

Early warning systems (EWS): Implementing early warning systems is critical to identifying high-risk debtors at an early stage. Leveraging AI-driven insights can help identify patterns that indicate potential default. By recognising these early signs, they mitigate risks before they escalate.

Omnichannel outreach:  Pre-collection strategies should also include proactive engagement with customers before they miss payments. Personalised communication on different communication channels can help remind consumers of upcoming payments. This proactive approach can prevent defaults and foster better relationships between consumers and businesses.

Cloud-based collection systems: Automated systems can handle large volumes of cases more efficiently than traditional methods. They can streamline processes, reducing the time and effort required to manage each case. Furthermore, it reduces the risk of human error, ensuring that communications and records are accurate and up-to-date. 

These systems can offer a personalised communication approach, providing debtors with clear information about their obligations and payment options. This can improve the likelihood of successful collection.

What business can expect in the future?

While BNPL offers an attractive alternative to traditional credit, it is important to identify and address the hidden pitfalls associated with it. As the popularity of BNPL continues to grow, the challenges associated with debt collection will also increase. In order to prepare for this increased volume of cases, businesses must adopt automated solutions that can handle the increased workload efficiently. In addition, consumers must be aware and informed to navigate the BNPL landscape safely. By understanding the potential negative consequences and implementing proactive strategies, both consumers and businesses can mitigate the risks associated with BNPL payments.

If you would like to learn how to achieve better collection rates due to increased demand, we recommend you read our latest white paper.

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