‘Unregulated danger zone?’ Phantom debt from fast-growing buy now, pay later usage could be worse than anyone knows

Brook Anderson counts cash from the cash box on Black Friday at Thread at City Creek Center in Salt Lake City on Friday, Nov. 24, 2023. Consumer debt could be on the rise and hidden behind problematic reporting requirements.
Brook Anderson counts cash from the cash box on Black Friday at Thread at City Creek Center in Salt Lake City on Friday, Nov. 24, 2023. Consumer debt could be on the rise and hidden behind problematic reporting requirements. | Megan Nielsen, Deseret News

A new report attempting to dig into the burgeoning “buy now, pay later” financing market finds a lack of transparency, alongside lax oversight, could be concealing a growing consumer debt issue with negative implications for both individuals and the broader economy.

For the uninitiated, buy now, pay later financing is essentially a digitally-mediated update on once ubiquitous retail layaway plans that allow shoppers to pay for a purchase over time after an upfront payment. Most, but not all, plans provide interest-free financing through app-based or store-sponsored plans, but hidden fees are not uncommon, nor are steep charges for missed or late payments.

Wells Fargo economists published a white paper Monday that assessed both the positive and negative attributes of buy now, pay later options for consumers and finds that based on the limited data available, the current state of the multibillion industry is “not a major problem for consumer spending yet.” But, the report warns that bigger issues could be lurking behind a screen of opaque operations and questions whether an “unregulated danger zone” could be lulling customers into “a false security in which many small payments add up to one big problem.”

“Until there is a definitive measure for it, there is no way to know when this phantom debt could create substantial problems for the consumer and the broader economy,” the report reads.


Buy-now-pay-later providers have carved out a consumer financing niche, using real-time “soft” credit inquiries that don’t pull up credit scores, don’t appear on the applicant’s credit report and, should credit be issued, doesn’t report new debt obligations back to credit agencies. This opens the door for applicants who may not qualify based on their scores, want to avoid maxing out current credit cards or who simply don’t have ample credit history to pass a more in-depth credit assessment.

And it’s an option that’s signing on new clients at an incredible pace.

According to data compiled by the Consumer Finance and Protection Bureau, the five largest buy now, pay later providers originated 16.8 million loans in 2019 worth about $2 billion. Just two years later, the providers originated 180 million loans totaling over $24 billion in value. Wells Fargo economists analyzed the growth arc of one of the largest buy now, pay later providers to estimate that the loan values for 2023 will come in around $46 billion.

The report notes that buy now, pay later providers are quick to point out that they provide consumers with increased purchasing power and greater control in managing their personal finances. And economists agree, to a point.

“When credit card interest rates are north of 21%, it is just common sense for consumers to take reasonable measures to avoid such financing cost,” the report reads. “But with no oversight of BNPL providers, it is not immediately clear that savings on financing cost are not offset by fees and penalties.”

In a November report to Congress, the Consumer Finance and Protection bureau made it clear that some of the consumers apt to engage in buy now, pay later programs were “households that were financially vulnerable,” according to the Wells Fargo white paper.

“BNPL borrowers were, on average, much more likely to be highly indebted, revolve on their credit cards, have delinquencies in traditional credit products, and use high-interest financial services such as payday, pawn, and overdraft compared to non-BNPL borrowers,” the bureau’s congressional report stated.

Economists worry that consumers could be more likely take on excessive debt when they know they can spread out the payments. And it’s debt that’s not likely to show up in the data sets generated by regulators and used to create or adjust economic policy.

“Because no central repository exists for monitoring it, growth of this ‘phantom debt’ could imply total household debt levels are actually higher than traditional measures such as the Fed’s G.19 or the NY Fed’s Center for Microeconomic Data would otherwise capture,” the report reads.

Consumers’ rising interest in utilizing buy now, pay later options for their purchases showed up in the record-level spending that took place over this year’s Cyber Week, the traditional kickoff to the winter holiday spending season.

Adobe Analytics reports that on Cyber Monday, Nov. 27, buy now, pay later usage hit an all-time high, contributing $940 million in online spending over the five-day period, up a staggering 42.5% over 2022. The number of items per orders financed by buy now, pay later also rose 11% over last year as shoppers used buy now, pay later for increasingly larger carts, according to Adobe. Season to date (Nov. 1 to Nov. 27), buy now, pay later has driven a total of $8.3 billion in spending, up 17% over last year, and November 2023 is expected to be the biggest month on record for the payment method.

Wells Fargo economists note that buy now, pay later options also come with an upside, including making expensive purchases more affordable by breaking them into payments; providing a boost to business sales volumes; and expanding financial inclusion by providing credit for consumers who may not have a credit card, a good credit history or an established banking relationship.