Rich and poor consumers use BNPL for different reasons: Fed data

It's difficult to generalize why consumers use buy now/pay later loans because motivations vary widely between those whose finances are weak versus strong, according to a new study from the Federal Reserve Board of New York.

More than half of financially fragile consumers — classified by the Fed as those with credit scores below 620, who were recently declined for credit or who are at least 30 days delinquent on a loan — typically use BNPL loans to smooth gaps in their household budgets, most often for purchases that average $250.

Consumers with solid credit and stable finances use BNPL loans to buy higher-ticket items between $1,750 and $2,000 in order to avoid paying interest or carrying a balance on their credit cards, according to the New York Fed's report, published Feb. 14.

The New York Fed's deep dive into the financial status and motivations of BNPL loans could shed light on an area of lending where little is known about how and why households use the mostly interest-free loans, because of the lack of regulation in the niche, the Fed said in its study.

The study was based on consumer loans that are payable in four or fewer installments and carry no finance charges. These are generally offered to shoppers at checkout. BNPL plans have grown increasingly prominent in recent years and are used for online purchases for more expensive items like furniture, and also for very small purchases, including fast-food delivery, according to the study's authors.

The Fed's study drew on data gathered in October 2023 from about 200 users of BNPL loans within a panel of 1,000 consumers, adding special questions to the regular poll within the Survey of Consumer Expectations that's conducted every four months. 

The results could help determine the consumer utility — and risks — surrounding BNPL loans as the Consumer Financial Protection Bureau prepares this year to provide regulatory guardrails to the industry. So far there has been only light federal action on BNPL loans, with the Office of the Comptroller of the Currency offering guidance for banks in December meant to help inform lenders of potential risk in the niche.

"The landscape around BNPL [loans] is fast changing," said the study's authors, noting that while only about 20% of all U.S. households have used BNPL loans within the last year, other data indicates many consumers tried out the loans for the first time during the 2023 holiday shopping season.

"It is rare for people to use BNPL just once," the Fed's study said. About 72% of financially stable users and 89% of financially fragile users have made multiple BNPL purchases over the previous 12 months.

Financially fragile BNPL users are almost three times as likely as financially stable users to take out multiple BNPL loans, according to the study.

"This suggests that high-frequency use may grow if the product continues to be adopted by financially fragile households," the authors wrote.

Among wealthier BNPL users surveyed, about two-thirds have used BNPL loans at least twice in the past year, while 23% have used it five or more times a year and 14% have used it 10 or more times. 

"This reveals that use by financially stable [households] tends to drop off substantially after a few instances, but there is a small group of financially stable users who use BNPL more frequently," the study's authors wrote.

After controlling for income, financially fragile households make BNPL purchases that are on average about $220 smaller than financially stable households, and these more vulnerable users make about four more BNPL purchases per year than wealthier households.

When asked specifically why they opted to use BNPL loans, financially fragile consumers emphasize their ease of use and overall affordability. 

Wealthier households cited the advantage of not necessarily having to pay interest on BNPL loans plus the ability to stretch payments out over months, according to the study.

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Some financially stable users said they see BNPL loans as a way to build credit, an unlikely outcome. 

"Because BNPL lenders generally do not furnish data to credit bureaus, the latter statements may indicate some degree of misunderstanding" in the way the relatively new loans work, the study's authors said.

The diverging usage between poorer and wealthier households may become more relevant if overall economic stress grows this year, according to the Fed.

The Financial Technology Association, a Washington, D.C.-based trade organization representing some BNPL lenders, said the New York Fed's study affirms demand for BNPL loans across the income spectrum.

"As prices for everyday goods and services continue to rise, consumers of all income levels are increasingly turning to alternative payment methods like Buy Now Pay Later to manage their finances responsibly," said Penny Lee, president and CEO of the FTA, in a Wednesday press release. 

The FTA said 79% of consumers polled in a recent survey report having a positive experience with BNPL loans, and 94% said they preferred the loans because they could easily understand the terms and services. Morning Consult conducted the online survey on FTA's behalf Sept. 1-3, 2023, among 2,210 U.S. adults.