The working paper, authored by Harvard Business School professors Marco Di Maggio and Emily Williams and HBS doctoral student Justin Katz, shines a spotlight on BNPL risks just as the payment method lures more consumers amid high inflation and rising interest rates. And it sheds light on the trend as consumers are tapping the method for yearend holiday purchases. (A working paper is typically an early version of an academic article.)
That BNPL leads consumers to spend more is exactly why merchants are willing to pay higher fees to offer the payment method to their customers, but that idea may be concerning for regulators who have consumer financial protection in mind. Especially during the spend-heavy holiday season, BNPL can prevent consumers from fully grasping what they are spending, Williams told a HBS publication.
Many consumers tried BNPL while stuck at home during the COVID-19 pandemic with more funds in their bank accounts; now, as credit delinquencies rise and a recession looms, “the existing portfolio of these products is likely to be highly risky,” Di Maggio told the HBS publication.
BNPL use, which researchers called widespread, is most common when consumers perceive its expense-smoothing benefits as especially helpful. For example, BNPL spending “increases substantially in periods when weekly salary drops substantially,” researchers wrote.