So, you are buying a pair of shoes which costs slightly more than $100 and using the retailer’s offer to make bi-weekly payments over next 4-6 weeks. No finance charge or fee, if one pays each installment on time. I frequently read opinion that young people are either broke or buying things they cannot afford with these BNPL plans. In my opinion, BNPL gives debit card users features that savvy credit card users have always had.
A large portion of US credit card users pay off their balances every month (transactors in industry terminology). These customers get a free loan for a time ranging from few days to over a month depending on when the item is purchased. For example, if someone buys a shoe on 18th March and their statement cycles on 17th of each month, they may not have to pay for the shoe until May 15th. That is a no interest loan for almost two months .
During great recession millennials were disproportionately impacted due to tighter credit card underwriting criteria. Since regulation requires applicants to show ability to pay, younger people cannot get credit easily. Even young people with stable income but large student debt have found it hard to qualify for credit. So younger generations (millennials and gen Z) have been using more debit card than older generations.
Source: Forbes based on data from WSJ, Visa and Mastercard.
BNPL offers debit card users a no interest loan option like the one transactors get from credit card. I rarely see articles asking customers not to use credit card at all. In fact, most of the advice in popular media suggest consumers have 1 or 2 credit cards, use a small portion of the available credit line and pay off the entire balance every month. Now BNPL provides consumers the same option of stretching the payment for a month or two without paying interest or fee. Though credit card is often an option in BNPL, industry data shows that most users prefer debit card.
The biggest risk consumers face in using debit card based BNPL is mismatch of timing between paying BNPL provider and cash in their checking account. My advice? Get an online checking account at a bank like Chime which doesn’t have overdraft fee. There is the late fee some BNPL providers will charge for missed payment but that’s the same as credit card.
It is time to chill and accept BNPL as a good innovation for consumers.
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