Mastercard enters the “buy now, pay later” race. But experts say these loans come with risk.
Mastercard said on Tuesday it would begin offering installment loans known as “buy now, pay later” products amid strong consumer demand during the pandemic. But such offers can come with risks, such as hidden fees and a lack of consumer protection, that may not be immediately apparent to borrowers, experts warn.
Mastercard said its “buy now, pay later” (BNPL) program will allow consumers to take out interest-free loans that will be split into four equal installments, with money coming from debit, credit or prepaid cards. The financial services giant said the program will allow banks, lenders, fintech companies and other businesses to offer the loans, which can be provided with an online purchase.
BNPL products experienced high double-digit growth during the COVID-19 crisis, overtaking rival unsecured loan types such as credit card debt, as more Americans flocked to trade electronics during the pandemic, according to McKinsey. Demand for loans is expected to continue to outpace other types of consumer loans, with the advisory firm forecasting compound annual revenue growth of up to 20% through 2023.
Many consumers have adopted BNPL as a way to purchase an interest-free product in installments, while loans are also approved during the purchase process. More than 4 in 10 Americans have used a BNPL product, according to Credit Karma.
“Many consumers are drawn to instant gratification, easy access and predictable payouts,” noted Ted Rossman, senior industry analyst at CreditCards.com. “The line between credit cards and buy now pay later is becoming increasingly blurred. For example, Mastercard’s new offering works with digital wallets and on retailer websites.”
Sellers love BNPL loans because they can entice consumers to open their wallets. Mastercard said that for merchants, such loans 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, which are used by thousands of retailers including Walmart and Target, are recognized as pioneers of the product.
Mastercard said its BNPL product will differentiate itself from competing offerings by offering certain credit card protections, such as “zero liability fraud protection” and the ability to dispute charges that consumers do not recognize.
Risks like these are among the reasons finance advocates warn consumers should understand 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, some consumers who have returned products to merchants have reported difficulty getting loans cleared, according to Consumer Reports.
Risks to credit scores, fees
When BNPL loans are working well, such as when consumers have no problem with the products they have purchased and make their payments on time, they can be convenient, experts say.
But it’s not uncommon for consumers to run into problems. Of the 4 in 10 Americans who used a BNPL loan, nearly 40% missed at least one payment – and many of them reported a drop in their credit rating, according to Credit Karma.
Typically, BNPL companies perform a “soft” credit check on potential borrowers, which does not affect credit scores. But missing a payment can cause some BNPL lenders to report the late payment to credit bureaus, which can hurt a consumer’s credit rating, the personal finance site found.
Some BNPL products also have fees and interest that might not be apparent without reading the fine print. Most BNPL lenders charge late fees, the CFPB warned. That’s why consumers should take the time to understand the lender’s terms and conditions before accepting a loan, the agency said.