Buy now, pay later comes with the risk of fraud, a new study suggests

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Before signing up for BNPL, make sure to understand what you're getting into

With Apple signing on to the concept of buy now, pay later (BNPL), this consumer financing option may have gained some credibility — but new research reveals that 181 million Americans are at risk of BNPL fraud.

The research, conducted by SEON, found that the appeal of BNPL may be that, especially for younger consumers, the payback method seems like an interest-free loan, which comes off as a great option for those without a credit history or who've never used credit cards. In a nutshell, “Buy now, pay later will result in more pain later as more consumers are coerced to buy more stuff they don't need and can't afford but will still need to pay for,” Ed Mierzwinski, senior director of the Federal Consumer Program at US PIRG, told ConsumerAffairs. 

Merchants also like BNPL – maybe a little too much. “Businesses that offer Affirm at checkout have reported as much as 85% higher average order values compared to other payment methods, said Affirm’s chief revenue officer Geoff Kott.

Both consumers and merchants can feel the sting

At the moment, both sides of the BNPL coin are pretty messy. SEON’s Jimmy Fong said that even though BNPL providers should be held liable if anything goes wrong, a retailer’s reputation can also take a considerable hit. Also, if the customer files a chargeback complaint, the merchant can end up losing their inventory without payment, even if they’re not liable.

Fong explained that there are a number of preventative measures merchants and BNPL providers can take, but until the total BNPL landscape is made much less risky for buyers, consumers might still be subject to fraud issues related to this type of financing.

Late last year, 89 consumer and civil rights groups, including U.S. PIRG, sent a letter to CFPB Director Rohit Chopra in December 2021, warning that “BNPL products do not underwrite for a consumer’s ability to repay, can rely on the expectation of late fees, can be difficult to manage, and can trigger punitive overdraft or non-sufficient fund fees if linked to a bank account. Further, these products can lead consumers into taking on unmanageable amounts of debt and lack the same dispute or refund rights that credit cards have should a consumer be unsatisfied with their purchase.”

If you're thinking the lure of BNPL is too good to pass up, it's important to take the time to understand all the risks and implications.

“At the point of purchase, a BNPL offer of six weeks or two months with no interest may seem better than the revolving monthly interest rate if you don’t pay your credit card bill in full,” said Mike Litt, U.S. PIRG Education Fund’s consumer campaign director. “But at the end of the day, buyer beware if you don’t make all your payments on time. The CFPB needs to make sure that no matter how you pay, you get consumer protections.” 

How consumers can protect themselves

To avoid the potential traps of BNPL, there are several things consumers can do. At the top of US PIRG’s lists of pitfalls is the all-too-familiar “do your homework before agreeing” admonishment. “This means reading the terms and conditions. If you don’t want to take the time to read the fine print, you shouldn’t agree to the payment plan,” PIRG wrote.

Another thing to keep in mind: Some BNPL programs charge interest (though most don’t if you make your payments on time). PIRG warns that if you’re late on a BNPL payment, providers might charge late fees. In some cases, you may have to pay interest not just for one month, but for the duration of the entire repayment period.

For those who are good at paying things off on time and think using a BNPL account to do so might increase their credit score, they should think again. “Know that most BNPL programs don’t report your dealings to the credit bureaus that determine your credit score,” US PIRG’s Consumer Watchdog team said. “If you’re looking to build credit, there are better avenues, such as a secured credit card, rather than purchasing products with BNPL.”

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