BNPL's $46B Phantom Debt Risks, 43% Users Behind on Payments

Key Takeaway

• "Buy Now, Pay Later" (BNPL) services are creating an estimated $46 billion in "phantom debt" in the US, complicating financial oversight.
• Nearly 43% of BNPL users have fallen behind on payments, impacting their financial stability and potentially hiding consumer distress.
• Lack of regulation and data sharing by BNPL companies obscures true consumer debt levels, posing risks to both the economy and individual credit health.

BNPL Debt: A Growing Concern

The "Buy Now, Pay Later" (BNPL) market has seen a significant surge in popularity, with services like Affirm, Klarna, and Afterpay offering interest-free payment plans for a wide range of purchases, from essentials like groceries to luxury items and travel. However, this convenience comes with a hidden cost. Many BNPL providers do not report consumer debt in the same way traditional lenders do, leading to what some experts are calling "phantom debt." Wells Fargo estimates this untracked debt at approximately $46 billion in the U.S. alone, with global projections reaching up to $700 billion annually. This lack of transparency poses a challenge for credit scoring and financial decision-making, obscuring the true extent of consumer indebtedness.

The Slippery Slope of BNPL

For consumers like Briana Gordley, what started as a convenient way to afford necessary winter clothing quickly spiraled into $1,500 of debt across various purchases. The allure of BNPL's easy access and manageable installment payments can lead to overspending, late fees, and eventually, debt collection and credit score impacts. Despite some BNPL services advertising zero interest, the reality is that late payments can result in significant additional costs, including bank overdraft fees for failed automatic withdrawals. This situation highlights the potential dangers of BNPL for consumers who lose track of their spending or face unexpected financial difficulties.

The Impact on Credit Reporting and the Economy

The reluctance of BNPL providers to share data with credit bureaus and scoring firms like FICO and TransUnion exacerbates the issue. This lack of data sharing means that timely payments through BNPL plans do not contribute to building a consumer's credit score, while delinquencies can still lead to negative impacts if debts are turned over to collection agencies. The absence of BNPL debt from broader financial analyses also presents challenges for economists and lenders, who rely on comprehensive credit reporting to assess consumer financial health and make informed lending decisions. This "phantom debt" could mask underlying economic distress, as consumers fall behind on other credit obligations while continuing to accumulate BNPL debt.

Regulatory and Market Responses

The Consumer Finance Protection Bureau (CFPB) and other regulators have begun to take notice of the BNPL market's rapid growth and the potential risks it poses to consumers and the financial system. While some movement towards regulation and data sharing has occurred, such as Apple Pay Later's decision to report transactions to Equifax, the majority of BNPL transactions remain outside traditional credit reporting mechanisms. This regulatory gap, combined with the ongoing debate between BNPL providers and credit bureaus over data security and consumer impact, leaves significant uncertainty about the future of BNPL regulation and its integration into the broader financial landscape.