Many clients who use the “buy now, pay later” method are getting their orders denied. However, it’s possible that this doesn’t accurately reflect the customer’s credit.
A report by the Consumer Financial Protection Bureau consumer-complaint database found that users with payment plan systems such as Klarna, Affirm, Zip, and others are being declined more frequently. Many are active customers of these payment systems who have never experienced denials in the past. While some customers have been told the platforms couldn’t verify personal information or that their credit scores were too low, the real culprit is the soaring interest rates and looming recession.
Fox Business reports that the entire business model behind the “buy now, pay later” industry is being challenged, especially for those who rely heavily on credit scores. Klarna, Sezzle, and Affirm are implementing stricter credit standards. These companies are moving away from growing and putting their focus on making money. For customers who have not been right out denied, they have been hit with lower spending limits, despite having a positive history with these apps.
Unlike banks, “buy now, pay later” providers must borrow from other lenders and investors in order to issue loans. Unfortunately, since this type of funding has skyrocketed in cost due to rising interest rates, offering these installment plans with zero interest is becoming nearly impossible. Another factor is the rising delinquency rate of “buy now, pay later” plans. According to the Consumer Financial Protection Bureau report, the delinquency rate among borrowers aged 18-24 reached 5.7% in 2021. That is an alarming increase from 2% in 2020.
In their annual report, Klarna confirmed they might lend less to new shoppers and trust them to make the “right decisions” in a quickly changing economy. Their default rates still sit below 1%, though that could change.
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