Phantom debt boom in deferred payment services | Financial markets

Let’s say you would like to buy the most fashionable Adidas sneakers. Samba – but they cost about 120 euros and you won’t get paid until the end of the month. Why not pay in four simple payments of 30 euros? This is the consumer loan market buy now, pay later (BNPL, abbreviation in English, buy now, pay later), payment method that caught my attention millennials and generation Z since then…

Let’s say you would like to buy the most fashionable Adidas sneakers. Samba – but they cost about 120 euros and you won’t get paid until the end of the month. Why not pay in four simple payments of 30 euros? This is the consumer loan market buy now, pay later (BNPL, abbreviation in English, buy now, pay later), payment method that caught my attention millennials and Generation Z since the start of the health crisis. The appeal of these deferrals is their simplicity and informality: most firms in the sector do not report their activities to regulators or creditor lists, and therefore they have no impact on a customer’s credit history.

Additionally, these institutions, which operate like banks but are not subject to the same regulation, do not charge interest on their loans, which typically last up to six weeks, and make the customer appear to have more purchasing power than they actually have. . Tim Quinlan, chief economist at Wells Fargo, was the first to note that these fintech They’re creating the perfect storm phantom debt, that is, loans that do not appear in the credit history. “Clients buy now, pay later “On average, they are more likely to be in debt and change their credit cards,” Quinlan said in a note to clients. For its part, the Bank of Spain warned that these services could “give a false immediate sense of savings and could therefore create a real risk of over-indebtedness if multiple purchases are financed through this system.”

In Spain, these short-term loans – which bypass the traditional financial system – are the fastest growing payment method and are expected to increase at a compound annual rate of 39% over the next five years, according to consultancy WorldPay. . This is no small phenomenon: the merchant finance market will reach $700 billion in 2028, according to the same consulting firm. At the same time, an online shopping boom is in full swing during a health crisis.

Samantha Korpi, a student from Mexico City, moved to Spain in 2023 and started using Klarna to cover some initial expenses. “When I arrived, I had to buy a vacuum cleaner, a coffee maker, a blender and other things for the house,” he tells the newspaper. Korpi now regularly shops at Zara, Mango and Nike. “I think this is a good option for young people; it’s more convenient to pay by month.” A similar case occurred with Luis Beltran from Monterrey, Mexico, who financed an Iberia flight from Madrid to Mexico City through 12 automatic payments through Aplazame. The Madrid firm, in exchange for other lenders of its kind, carries out risk assessments and does not issue loans to clients included in any files of defaulters. Beltran told the newspaper that his experience with these providers so far has been “better than with credit cards.”

millennials and Generation Z are among the age groups with the highest percentage of credit card debt: nearly 60% millennials Respondents surveyed by consulting firm PYMNTS say they have outstanding charges on their credit cards, followed by Gen Z at 45%.

This global trend has particularly caught the attention of young people, who have negative perceptions of credit cards and the interest they charge. Klarna, ah fintech based in Stockholm and with more than 2.5 million users in Spain, is a prime example of this trend: it does not charge interest for deferred payments, but does charge interest for late payments. The Swedish company ended 2023 with more than 7 million euros in outstanding loans from customers, up 16% from last year, according to its annual reports. Unlike competitors, it is one of the few operators that informs regulators about its loans, and therefore they are reflected in the customer’s credit history. In addition, the company is registered in the register of credit institutions of the Bank of Spain under the parent company Klarna Bank.

Klarna representatives confirmed to the newspaper that they are now informing Spanish lenders and only giving loans to people who can repay them. “Using Klarna is not guaranteed and we do not provide an open line of credit like predator cards,” Klarna sources explain. Five days. “We are a regulated bank with strict underwriting processes throughout our business and because we assume all default risk. Before making a new lending decision, we analyze a number of different data sources, including previous use of our products, information from credit reporting agencies and, in some cases, open banking data,” they explain.

So if these companies don’t charge interest, how do they make money? Klarna, like most of these firms, makes money by charging businesses that offer these payment options to their customers costs similar to what businesses pay to process credit card transactions, the company confirmed. In addition, another part of their income also comes from late payment fees that they charge from customers who do not have enough funds in their bank account.

Aplazame did not respond in time to the newspaper’s requests.

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