"Buy now, pay later" scheme could be the next hidden source of consumer debt

There are plenty of opportunities nowadays when it comes to online shopping and subscription-based services. Analysts explored the pattern and said it could source the new consumer debt. Especially among young customers, they are a large target for companies, and they made it easy to purchase items in the "buy now pay later" scheme.

Square's 2019 annual report said transactions and loans came to a loss during the 2019 business year (Q4), and it grew by 44% than the previous year.

Credit card balance misleads and debt may increase due to the trend as online-based payment systems increased. Using credit cards made our lives easy, even in the online sector. But some fees go unnoticed if the user is not careful enough, and sometimes, we have very little to do as the service is primarily online, and it's efficient to buy via cards or online mediums. And to increase sales, those companies started offering services free of charge in the first place and charges later once a subscription is active or the trial period is over. Sometimes it becomes a hassle to remove or get out of the subscription, and the customer fell under the auto purchase scheme. We saw antivirus company McAfee charging more to existing customers auto-renewal and subscription purchases than new subscribers. This kind of matter is quite common if customers don't know what to do and expect.

Services such as BNPL provide an option to pay in instalments both in the online and offline sector with no late fees and a high loan limit. It is a tremendous move to satisfy customers, but, in the end, those customers may fall into high debt, calculating other aspects of life. Square wanted to buy Afterpay (an Australian company) for $29 billion as the "buy now, pay later" took off, boosting the company's highlight. Few others do not even check for background credit of customers before offering them the service, and as a result, those customers, if in debt, fall into the well of debts which is not efficient at all.

Instalments and subscription-based services are there from the past, and items sold in these packages are primarily expensive household items that are required components for living nevertheless. Companies are now targeting young individuals and offering them as low as $10 and as high as thousands of dollars worth of items or services in the pay later scheme. Another U.S. based company Affirm offers $17,500 as a single payment with plans as a maximum amount. Similarly, other financial tech companies offer instalment for purchase within their apps. According to CNBC, these apps sometimes offer "no late fees, low or no interest, high loan limits and no credit checks required", and these conditions vary from provider to provider.

Fitchratings said, "BNPL users may find themselves unable to afford the periodic repayments and may turn to credit cards or other forms of high-interest debt to repay BNPL debts." Many individuals are suffering from credit card debt, and with the pandemic hit, their financial situation came to a loss. So, on top of that easy purchase method of "buy now, pay later" became quite a problem rather than a hefty solution. U.S. Federal Reserve took a hit during the second quarter as debt rose highest in 14 years. The housing market surged up, and credit card balances also grew $17 billion from Q1 and came to a total of $787 billion.

Finding by the Australian Securities and Investment Commission showed that 15% of customers depend on the scheme, and they took additional loans to cover up those debts to clear up the BNPL plan. A central bank in the U.K. said over 660,000 customers paid their "buy now, pay later" service, which exceeded 10% of their balance limit per month. Even there are integrated "safety features", customers and some companies like to go around it and fall in the pattern anyway without truly calculating the result. More action plans will take place on the matter as it is becoming a serious concern by financial authorities.