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• Buy Now, Pay Later: Recent Developments and Implications
• Buy Now, Pay Later: Market Impact and Policy Considerations
• The Rise of Buy Now, Pay Later Plans

Transcript

Tim: My guest today is Zhu Wang, vice president for research in financial and payment systems at the Richmond Fed. Zhu, welcome back to the show!

Zhu: Thank you, Tim. Glad to be back.

Tim: As regular listeners will know, providing and safeguarding payment services is one of the core responsibilities of the Federal Reserve System. In recent years, "buy now, pay later" [hereinafter abbreviated as BNPL] has taken off as a new payment option, particularly for online shoppers. Even if you haven't used it, you've probably seen it as an option during checkout. These plans allow shoppers to split a purchase into multiple installments paid over time.

Zhu, you recently wrote an article examining the growth of BNPL plans and what implication these developments might have for consumers and the broader economy. Let's start with some definitions. There are many different ways these plans can be structured, but some designs are more common than others. What type of plans did you look at, and why did you choose that focus?

Zhu: My article focuses on a narrow definition of BNPL, namely "pay-in-four" loans. These are short-term, zero-interest consumer loans that are typically repaid within six weeks. They require four equal installments, with the first payment due at the time of purchase and the remaining three installments due at two-week intervals.

This type of BNPL loans raises ongoing policy concerns. They typically involve light or soft credit checks and historically have not been reported to credit bureaus. That combination makes them largely invisible in standard credit data, raising concerns about consumer lending practices and potential threats to financial stability.

Most BNPL firms also offer longer-term, monthly installment plans, ranging from three to 60 months for larger purchases. The longer BNPL loans look more like conventional installment credit. They usually involve hard credit checks and are reported to credit bureaus. As a result, they're largely picked up by individual consumers' credit scores and aggregated consumer credit data, and do not create the same policy concerns as pay-in-four loans.

Tim: What data did you look at to measure BNPL usage?

Zhu: In the article, I draw on the latest information released by the Consumer Financial Protection Bureau (CFPB), which used its supervisory and data collection authority to obtain detailed pay-in-four loan data from six leading BNPL providers from 2019 to 2023.

Tim: Based on that data, how has the volume of BNPL loans grown in recent years?

Zhu: The data show a distinctive pattern. BNPL lending had explosive early growth, with annual nominal transaction value increasing more than tenfold in the first two years, between 2019 and 2021. Growth then decelerated sharply, settling into a more stable pace of about 30 percent a year between 2021 and 2023.

In light of this pattern, I estimated BNPL loan growth of the six leading firms. The result allows me to forecast their loan size in 2025. I then scale the loan size of the six leading firms based on their market shares to obtain total U.S. BNPL transaction value in 2025, which is roughly $70 billion. That was about 1.1 percent of total credit card spending in the same year.

Tim: So, a fairly small share of overall credit but still pretty rapid growth with the 30 percent a year. Why do we care about the growth and scale of BNPL loans?

Zhu: Because the pay-in-four loans are generally not reported to credit bureaus, they become "hidden debt" and have raised concerns about financial stability. Their explosive growth in the early years further amplified these concerns. My estimates of the growth and scale of BNPL show that BNPL is still a relatively small component of the consumer credit landscape and its impact on financial stability has been limited to date.

Tim: From the data we have, do we have any sense of who is using BNPL?

Zhu: That's a good question.

According to a CFPB report released in January 2025, 21 percent of consumers with a credit record used at least one BNPL loan with one of the six leading BNPL firms in 2022. From 2021 to 2022, borrowers with subprime credit scores — those are consumers with FICO scores below 620 — and borrowers with no credit scores together accounted for about 65 percent of BNPL originations. Among them, borrowers with deep subprime credit scores — those are consumers with FICO scores below 580 — were the largest user group, accounting for 45 percent of BNPL originations.

Tim: How consistently do consumers repay their BNPL loans, and how does that compare to other types of consumer debit like credit cards?

Zhu: BNPL has maintained a relatively low default rate over the years. The CFPB report I just mentioned shows that consumers with no FICO scores or deep subprime scores had higher default rates compared to consumers with higher FICO scores. But they still repaid their BNPL loans 96 percent of the time.

Another CFPB report shows that the BNPL loan charge-off rate declined from 2.6 percent in 2022 to 1.8 percent in 2023. This was lower than that credit cards — by comparison, the charge-off rate on credit card loans at U.S. commercial banks was 4.2 percent in the fourth quarter of 2023. The CFPB report attributes the decline in charge-off rates, in part, to the BNPL providers improvements in risk control.

There are some reasons that BNPL users may prioritize BNPL repayment over other debts. For example, BNPL loans require autopay using debit cards or credit cards. BNPL payment amounts are smaller than most other credit products, so they are easier to repay.

Tim: As a new form of consumer payment, do you think that BNPL benefits or harms consumers who use it?

Zhu: Studies have found that BNPL users are more likely than non-users to hold higher balances in other unsecured credit products such as credit cards, personal loans, or retail loans. However, this relationship may not be causal. There is no clear evidence that BNPL induces increases in non-BNPL credit usage. It is also plausible that increases in other forms of credit make consumers more likely to finance purchases using BNPL.

In theory, BNPL can have mixed effects on consumer debt and welfare. On the one hand, BNPL provides borrowers with access to lower-cost credit, meeting their liquidity needs. On the other hand, BNPL may adversely affect consumers with limited financial planning or liquidity management. For these consumers, BNPL may encourage higher near-term spending, potentially reducing liquidity buffers and increasing vulnerability to future financial shocks. Therefore, it remains an empirical question to evaluate the overall effect of BNPL.

Tim: As I mentioned at the outset, payments is definitely something that the Fed watches very closely. What kind of things will you be keeping an eye on as BNPL continues to evolve?

Zhu: Some leading BNPL firms recently have begun reporting their loans to credit bureaus. This may help close data gaps and mitigate the hidden debt concern. It may also benefit consumers by allowing responsible BNPL repayment behavior to contribute to credit scores.

Meanwhile, some other BNPL firms are concerned that traditional credit scoring models may misinterpret risks associated with BNPL use, potentially penalizing BNPL users. This is a new development worth monitoring.

Tim: Zhu, thank you so much for joining me today.