Lissette Monzon still feels a little guilty about a “crazy” purchase she made three years ago.

Monzon, 54, a high school English teacher in Florida, bought a $700 pair of Valentino boots in October 2018. Actress Blake Lively had been photographed wearing the mauve-colored footwear in Paris. Monzon saw the picture and fell in love.

“It was a lot of money for me, and I paid them off little by little,” she told CNN Business.

Monzon paid using Klarna, one of the several booming buy now, pay later services that let shoppers purchase products and pay in installments, often without incurring interest. Though Monzon had no trouble making her six repayments, the spending was out of character.

“It’s a slippery slope because I would have never in a million [years] — even having had the physical money — I would have never spent that on those boots,” she said.

“I couldn’t sleep at night,” she added. “I was just like ‘Oh my God, what did I do? Oh my God, oh my God,’ because it was so unlike me.”

Tens of millions of people have used buy now, pay later services. Some companies operating in the $100 billion industry charge interest on purchases, and others levy late fees, but they all offer a crucial improvement over traditional layaway: shoppers can immediately take ownership of their purchases.

Buy now, pay later firms say they are offering a safer and more accessible alternative to credit cards. But consumer advocates argue that the services can encourage people to spend more than they can afford, and there are no safeguards to prevent shoppers from using multiple services and overextending their finances.

The industry is booming, with touts popping up on shopping sites across the internet. Sweden’s Klarna doubled its US customer base to 20 million between June 2020 and August this year and UK user numbers have swelled 36% since October 2020. It now has more than 90 million active users across 20 countries.

US rival Affirm has more than doubled its active users since September 2020. It went public in January this year, and announced a partnership with Amazon in August, allowing its US customers to split up payments on some purchases over $50. Another US rival, Square, bought Australian firm Afterpay for $29 billion this summer — its largest ever acquisition.

Many shoppers turn to buy now, pay later services to help finance holiday spending. Globally, buy now, pay later use during Cyber Week — from November 23 to 29 — shot up 29% from last year, according to research by software company Salesforce. PayPal said transaction volumes through its “Buy in 4” service were up 400% on Black Friday compared to 2020.

Even though Monzon was unnerved by her pricey shoe purchase, she plans to use buy now, pay later for Christmas shopping.

“I can’t afford it any other way,” she said. “I’m a teacher.”

‘It just makes me want to spend more’

Buy now, pay later services can be cheaper than credit cards, but critics point to a lack of basic protections. Many firms don’t perform external credit checks before extending loans or communicate with each other to ensure a user is not racking up debts across multiple platforms.

Users are also missing out on important benefits — repaying buy now, pay later debts on time often does not build up a credit history, which could help customers to access mortgages and bank loans in the future.

Joshua Bivugire, 22, a tech store worker in Auckland, New Zealand, said that his buy now, pay later spending got out of hand last Christmas, although he always paid his installments on time.

“If I went over my limit or I had other payments, I’ll use another app and then I’ll use another app and then it got to the point where I’m using, like, three apps when, you know, in the beginning I just wanted to buy one jacket,” he said.

The part-time musician started using buy now, pay later apps Afterpay, Humm and Zip after he lost his job. He bought equipment — a microphone, computer and studio lights — which came to about 3,000 New Zealand dollars ($2,026) in outstanding payments.

Afterpay offers rewards to customers who consistently pay on time and, because Bivugire always did, he was sometimes given his first installment for free.

“Seeing $0 up front — it just makes me want to spend more,” he said.

Buy now, pay later is dwarfed by credit cards but growing fast. In the United Kingdom, almost 8 million consumers racked up £4 billion ($5.3 billion) in buy now, pay later debts in the first nine months of this year, according to personal finance website Credit Karma. That’s much less than the £58 billion ($77 billion) outstanding on Britons’ credit cards.

Roughly 95% of US adults had at least one credit card in 2020, according to credit scoring firm Experian. Meanwhile, a separate Credit Karma study found that 44% of Americans said they have used a buy now, pay later service.

Weak protections?

Buy now, pay later companies make most of their money by charging retailers a percentage of transactions made via their platforms. Retailers agree to partner because buy now, pay later shoppers tend to spend big — placing orders 18% larger than other customers, according to Adobe Analytics.

The industry stresses that it is not in its interest for users to spend beyond their means or get into significant debt, unlike credit card companies that charge interest and fees. The rapid adoption of buy now, pay later services is, they argue, a rebuke to the old way of doing credit.

Anthony Eisen, the CEO of Afterpay — which is called Clearpay in the United Kingdom and Europe — said the platform has “inbuilt protections” for its 16 million users and is designed to encourage responsible spending habits. Customers pay in four installments that are two weeks apart. They can incur late fees, capped at 25% of the order’s value.

“It’s not about trying to put a consumer in debt, it’s giving a consumer a budgeting tool to make purchases,” he said. “And if they can do that and manage it and enjoy the service frequently, that’s how we make more money.”

But safeguards used by credit card companies to prevent customers racking up uncontrollable debts — such as performing a credit check on applicants — are not standard across the buy now, pay later industry. Affirm said it performs external credit checks on users while Afterpay does not, instead assessing users’ ability to pay within its own system and suspending accounts if a single payment is missed.

“We approve consumers only for what we believe they can comfortably afford to repay. Because we don’t charge any late or hidden fees, our success depends on our underwriting,” Vinod Ramachandran, Affirm’s head of consumer product, said in a statement.

Some of Affirm’s higher-ticket transactions do come with interest, but many users view this option as less risky than paying with a credit card.

Rudi Schulz, 28, is one of them. He bought a $1,200 laptop using Affirm in April 2020 just before he caught Covid-19.

“I was trapped in one room in the house and I had just gotten this new computer, and that was the only thing that kept me sane for two weeks,” he told CNN Business.

The water treatment technician living in Austin, Texas said that he had no trouble managing the $97 monthly repayments. He paid off the full balance — plus $300 in interest — in October. The extra charge was worth it, he said.

If Schulz had waited and saved up the money, he would not have had a computer for a year and a half.

“I couldn’t do that,” he said.

Schulz added that he prefers using buy now, pay later options, including PayPal’s, over credit cards.

“I knew that if I got a new credit card, I would just, that credit card would never go away and it would be a problem,” he said.

Debt collectors a ‘last resort’

Demand for buy now, pay later services has rocketed in recent months. Klarna said the total value of transactions on its platform jumped to $57 billion in its third quarter, up from $35 billion the same time last year. The firm is Europe’s most valuable startup, valued privately at $46 billion.

But the SoftBank-backed firm also posted a 2.9 billion krona ($317 million) net credit loss for the January to September period, up over 80% from last year. The company told CNN Business that losses were the result of its entry into nine new markets in two years.

Alex Marsh, Klarna’s top UK executive, told CNN Business that the company does carry out credit checks on users. He said the firm sends customers multiple payment reminders and uses debt collection agencies “as a last resort”.

“It’s not in person, there’s no bailiffs. This is making phone contact and email contact out to customers to essentially try and encourage them to get in touch with us so we can work with them to help them come up with a payment plan,” he said.

Once a payment is in arrears by more than 120 days, Affirm passes it on to debt collectors who chase the customer, a spokesperson said. Afterpay also works with debt collection agencies, but Eisen said the company has never bankrupted or taken a customer to court.

Still, the proliferation of buy now, pay later options — some of which allow users to split the cost of necessities like rent and healthcare — has caused concern among debt support groups.

The Financial Wellness Group, a UK company offering free debt counseling, said there was a 49% increase between March and November in the number of clients with buy now, pay later debts, although the overall numbers are still relatively low. Some clients have as many as 14 individual buy now, pay later debts, which are often held across multiple platforms.

More regulation could be coming. The UK Treasury is consulting on how to regulate firms and, in June, the European Commission included buy now, pay later loans in proposed amendments to its rules on consumer credit. Last week, the US Consumer Financial Protection Bureau announced it would open an inquiry into buy now, pay later companies.

‘A bit out of control’

Buy now, pay later customers are often assumed to be young, Gen Z women who like to spend money on clothes. In reality, users are more diverse and their demographics are changing quickly.

In the United States, 41% of Millennials (26 to 40 years old) have used buy now, pay later services compared to 36% of Gen Z (21 to 25 years old), according to Cornerstone Advisors, a consultancy. In every age group, adoption has risen over the past three years, the data showed.

Klarna told CNN Business that, globally, its average customer is 36 years old. But in the United Kingdom, the fastest growing group is people aged 41 to 56. Afterpay said that its average European user is 37 years old.

Marsh said that it was a “misconception” that Klarna targets young and inexperienced consumers.

“There is also a lazy view that younger people aren’t financially savvy,” he said. “They’re actually the smarter ones,” pointing to their embrace of cheaper credit options.

Other factors may be more important than age.

UK consumer rights group Which? found that people who have experienced a recent “life event” — such as having a baby, falling ill or losing a job — are more likely to turn to buy now, pay later services than those who have not.

“It’s less about age group and more about life situation,” Gareth Shaw, head of money at Which?, told CNN Business.

He added that while consumers can benefit from buy now, pay later, “it can be attractive to people who are in a bit of distress.”

Bron Davies, 25, agrees. The theater producer from Cardiff, Wales, said that her buy now, pay later use ramped up during lockdown last year, in part, to make her feel like “Covid [wasn’t] happening.”

She would buy clothes, try them on, and then return those she didn’t want to keep, without paying the full cost. At some points, Davies had between five and 10 outstanding payments, totaling about £200 ($265) a month.

“Suddenly it’s like, OK actually, I am a bit out of control now, because what felt like a really easy option is actually pretty dangerous,” she said.

Davies said she still uses Klarna for the occasional purchase, but is far more circumspect.

“This is still money, it isn’t pretend,” she said.

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