Survey: Many consumers misunderstand how buy now, pay later works

Buy now, pay later (BNPL) flexible installment payments are growing in popularity, but consumers' understanding of them may not be increasing at the same pace.

 Thirty-one percent of U.S. adults have used a BNPL service, according to a new survey on consumer sentiments and understanding around BNPL from BNPL platform Zilch.  However, the data demonstrates a widespread lack of understanding around how BNPL companies make money.

More than four in 10 (43%) respondents mistakenly believe these companies make money on the interest they collect from consumers. And more than one in four (26%) respondents believe that products sold through BNPL are marked up with BNPL providers collecting the difference in cost, and another 21% said BNPL firms earn money through secret/unadvertised fees that are paid by the consumer. A total of 31% of respondents said they don’t know how BNPL companies make money.

When respondents were asked if they would use a credit card over BNPL, 48% said no because they like earning points and/or cashback rewards from credit cards. Twenty-five percent said they did not trust or understand BNPL, and 20% said their credit card interest rate is lower than using BNPL.

When asked about hesitations around using BNPL, 25% said that BNPL companies do not offer rewards points or cash back like credit cards. Sixteen percent said BNPL is not regulated and 13% said they simply do not understand how BNPL works.

Respondents also expressed a lack of loyalty towards BNPL providers. Only 13% indicated that they have a specific provider they always use, and 19% of respondents said they used whatever option was available on a retailer’s website when making a purchase.

Notably, confusion surrounding BNPL remains highest among older consumers. Forty-seven percent of respondents over the age of 55 believe that BNPL can charge extra fees, while only 25% of consumers ages 18-34 share the same concern. In turn, only 11% of respondents over the age of 55 would recommend using BNPL to friends and family, compared to 35% of respondents ages 18-34.

Despite possible consumer misunderstandings and misgivings, analysis shows that BNPL is quickly growing in popularity. According to data from eMarketer, more than 45 million U.S consumers (ages 14 and older) will use a BNPL platform in 2021, up 81.2% over the previous year.

Frustrations with credit card options
While credit cards are still the primary tool consumers use to finance purchases, 50% of respondents said they believe consumers need options beyond credit cards for making purchases and paying for them in installments, and 54% said they think credit card companies have too much impact on credit scores.

In addition, 40% of respondents said that their credit card charges an interest rate over 12.99% and another 26% did not know the interest rate they were being charged.

Of the respondents who said they are not happy with the current credit card options available, 56% said the interest rates are too high on all credit cards. Another 36% said they are not happy with the annual fees that the best credit cards charge.

Respondents also blame credit card companies for challenges in securing loans:

• Of the consumers surveyed who have had a hard time getting approved for a loan, more than three in four (76%) blame credit cards.
• 26% were not able to secure a loan because they defaulted on a credit card for a small amount (less than $2,000).
• 30% were not able to secure a loan because they paid their credit card bill late (less than three times).
• 19% were not able to secure a loan because the vendor or retailer incorrectly charged or reported a transaction.