Effects of Buy Now, Pay Later on Financial Well-Being

Abstract

Many American consumers have limited access to credit, raising the question of whether an increase in credit access would make them better off. Fully rational individuals would use an increase in credit access to smooth consumption, yet real consumers may make financial mistakes by accumulating debts they cannot repay. I study the effects of making small, low-interest loans known as “Buy Now, Pay Later” (BNPL) accessible to American consumers, including those who otherwise have limited access to credit. This paper provides the first causal evidence of how access to BNPL affects severe measures of financial distress and credit scores. Using credit bureau data and a two-way fixed effects strategy that exploits geographic and temporal variation in availability of BNPL at a large retailer, I find that access to BNPL reduces financial distress arising from late or missed debt payments. The total amount past due decreases by 2.4% and the number of current delinquencies decreases by 0.2%. Heterogeneity analysis reveals that these effects are strongest among consumers with “fair” credit scores, the second-lowest credit score category. I also find that BNPL access increases credit scores by an average of 1.6 points and increases use of non-BNPL credit. These results suggest that access to BNPL reduces financial distress rather than causing consumers to accumulate unsustainable debts.

Keywords: buy now pay later, loan, credit access

JEL Classification: G2, G21, G23