Mastercard is participating in the “Buy Now, Pay Later” race. However, experts say these loans come with risks.
Mastercard said Tuesday that in light of strong consumer demand during the pandemic, it will begin offering installment loans known as “buy now, pay later” products. However, such offers can harbor risks, such as hidden fees and a lack of consumer protection, that borrowers may not immediately notice, experts warn.
Mastercard said its buy-now-pay-later (BNPL) program allows consumers to take out interest-free loans that are split into four equal installments, with funds withdrawn from either debit, credit or prepaid cards will. The financial services giant said the program will allow banks, lenders, financial technology companies and other firms to offer the loans that can be provided during an online purchase.
BNPL products saw high double-digit growth during the COVID-19 crisis, outperforming competing types of unsecured credit like credit card debt as more Americans flocked to e-commerce during the pandemic, according to McKinsey. Demand for the loans is expected to continue to outpace other types of consumer loans, with the consultancy forecasting average annual growth in products of up to 20% through 2023.
Many consumers have embraced BNPL as a way to purchase a product in multiple installments with no interest, while the credits are also approved during the purchase process. According to Credit Karma, more than 4 in 10 Americans have used a BNPL product.
“Many consumers are drawn to the instant gratification, easy access, and predictable rates,” noted Ted Rossman, senior industry analyst at CreditCards.com. “The line between credit card and Buy Now Pay Later is becoming more and more blurred. Mastercard’s new offering works, for example, with digital wallets and on retailers’ websites.”
Sellers like BNPL loans because they can encourage consumers to open their wallets. Mastercard said such loans for merchants can increase average sales by 45% and reduce “cart abandonment” by 35%.
Other financial giants like American Express, Citigroup, and JPMorgan Chase also offer BNPL loans. And so-called fintech companies like Affirm and Afterpay, used by thousands of retailers including Walmart and Target, are credited with pioneering the product.
Mastercard said its BNPL product will stand out from competing offerings by offering some credit card protection, such as:
Such risks are one of the reasons financial advocates warn that consumers need to understand the loans before signing on the dotted line. Returning an item purchased with a BNPL loan can be complicated and frustrating, an issue the Consumer Financial Protection Bureau (CFPB) highlighted in a July blog post.
For example, according to Consumer Reports, some consumers who have returned products to merchants have reported difficulties with paying out their loans.
Credit risks, fees
When BNPL loans work smoothly, such as when consumers have no problems with the products they buy and make their payments on time, they can be convenient, experts say.
But it’s not uncommon for consumers to get into trouble. Of the 4 in 10 Americans who have taken out a BNPL loan, nearly 40% missed at least one payment – and many of them reported a decline in their creditworthiness, according to Credit Karma.
Typically, BNPL companies perform a “soft” credit check on prospective borrowers that has no credit impact. However, missing a payment can cause some BNPL lenders to report the late payment to credit bureaus, which can affect a consumer’s creditworthiness, the personal finance website found.
Some BNPL products also incur fees and interest that may not be apparent without reading the fine print. Most BNPL lenders charge late fees, the CFPB warned. Because of this, consumers should take the time to understand the lender’s terms before agreeing to a loan, the agency said.