BNPL schemes’ “opaque” financial reporting is putting lenders at risk of defaults

Buy now, pay later (BNPL) schemes are putting both lenders and customers at financial risk according to analysts who warn a downturn could see customers “buy now and not pay later”.

According to a recent report from Fitch Ratings, lenders are at risk of underestimating borrowers’ levels of debt because BNPL companies’ debt performance reporting is “opaque”.

Debt from delayed payment services like Klarna, Laybuy, and Afterpay, which was purchased for a whopping $29 billion last week, is often not visible on a customers’ credit file and borrowers can often rack up debt from numerous BNPL services.

Speaking to CNBC, Argus Research’s director of financial institutions research Stephen Biggar warned that “these companies are not doing any kind of credit background check on these individuals”, meaning that defaults were “one of the primary risks”.

READ MORE: BNPL giant Afterpay bought by Twitter boss Jack Dorsey’s Square for $29bn

Alongside posing a risk to lenders, Fitch also warned that borrowers could also rack up credit card debt to pay of their BNPL loans.

According to its research, one UK bank said that 10 per cent of its 660,000 customers who repaid BNPL providers went over their existing overdraft limits the same month.

It comes as the industry has experienced staggering growth over the pandemic, seeing usage jump 215 per cent in the first two months of this year in the US.

Shoppers using these services also placed orders that were 18 per cent larger compared to the same period in 2020.

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