Buy now, pay later is a pretty straightforward enterprise: Make a purchase today, then pay it off in a series of installments over some set period of time. Unlike layaway systems, instead of waiting to receive the goods until consumers have finished paying them off, the buy now, pay later system allows buyers to take possession of their desired television, appliance, Peloton, or shoes to enjoy while they continue to make payments.

It sounds good, right? But a thorny problem can arise when the consumer, while using the product, grows dissatisfied for some reason, or when—as occurred for Peloton—a recall is issued. In such cases, consumers want a refund, and they are finding that the return process in a buy now, pay later scheme is extremely complex and difficult.

Consider Dr. Hannah Renno, a pediatrician who bought a Peloton on a two-year, interest-free, buy now, pay later plan. She paid off the $5,000 loan before it was due, but then, Peloton issued a recall for the treadmill model she had purchased. Renno’s effort to receive a refund took months of effort, as she jumped through various hurdles associated with the payment method. Scores of emails and phone calls got her nowhere. Finally, Renno tweeted at the CEO of the firm that issued the loan (Affirm), which provided a quicker response; a check arrived four days later. The end result thus might have been fine, but it was hardly a best practice experience that led to Renno’s strong customer satisfaction with either Affirm or Peloton.

A buy now, pay later loan is offered by a lending company—in this case, Affirm, the biggest player in the buy now, pay later market. The lender charges the manufacturer a fee to provide the convenient service, and it also may collect interest on consumers’ payments. But consumers do not generally interact directly with Affirm. Rather, all their communication and interactions involve the company from which they purchased the product, such as Peloton. Then the manufacturer is supposed to communicate with the loan provider, telling it to issue a refund. And then of course, the lender should issue it directly to the consumer.

But that isn’t what tends to happen. Whereas credit card companies have developed and established a smooth and streamlined refund process for users, returns under a buy now, pay later plan are far more complex and usually require human intervention, particularly when buyers still owe on the loan, want to return only some portion of an order, or seek a partial refund of the amount they already have paid back. In these situations, the lender and manufacturer together must determine how many of the consumer’s future payments should be dismissed, how many previous payments should be refunded, and the remaining balance. Such calculations are even more complicated if the loan involves interest charges. Next, the lenders and manufacturers must negotiate how much of the fee that the manufacturers paid for the lenders’ service should be refunded to the company.

Other problems with buy now, pay later systems arise when buyers fall behind on payments and thus rack up fees and interest. These delinquent loans are rising in both number and costs, which represents a troubling issue for all the parties involved, companies and consumers. Such problems are likely to grow in intensity as interest rates keep rising, due to the Federal Reserve’s efforts to keep inflation in check.

But for all these cautionary tales, buy now, pay later continues to expand its reach, catching on in various product markets. A recent LendingTree report indicates that an increasing number of U.S. consumers appreciate buy now, pay later plans: 43 percent have used them, up from 31 percent a year ago. However, of those adherents, 42 percent told LendingTree that they have made at least one late payment. And 23 percent say they have regrets for entering into the agreement, suggesting some challenges for the lenders’ continued growth.

Discussion Questions:                              

1. What could be done to make buy now, pay later systems better for consumers?
2. Should consumers use buy now, pay later systems for big purchases? What about smaller ones?
3. Do you think the buy now, pay later market will continue to grow?

Source: AnnaMaria Andriotis, “Shopping With Buy Now, Pay Later Is Easy. Getting a Refund Is Harder,” The Wall Street Journal, June 24, 2022; Penelope Wang, “The Risks of Buy Now, Pay Later Programs,” Consumer Reports, November 30, 2021; AnnaMaria Andriotis, “Amazon Is Doing It. So Is Walmart. Why Retail Loves ‘Buy Now, Pay Later’,” The Wall Street Journal, September 16, 2021; Jackie Veling, “What Is Buy Now, Pay Later?” NerdWallet, May 6, 2022; Sabrina Escobar, “Buy Now, Pay Later Comes of Age. Affirm Is the Standout in the Space,” Barron’s, January 28, 2022; Matt Schulz, “42% of Buy Now, Pay Later Users Have Made a Late Payment,” LendingTree, April 18, 2022