For Americans, convenience of buy-now-pay-later services come with risks

Krista Michels can’t get enough of the online services that allow American shoppers to pay for everything from Christmas presents to monthly bills without fees, known as "buy now, pay later."

"I’m kind of addicted now," said the young mother in Washington state. She first turned to these solutions offered at check-out stores or online to rebuild her credit rating, which was too low to access a traditional credit card.

Michels now uses them whenever possible, at the supermarket or to pay her internet bills. Startups like Affirm, AfterPay, Klarna and Sezzle usually allow consumers to pay for a purchase in four installments without fees or interest, like a typical credit card but without the associated paperwork and the complexities of fees and interest payments.

They’ve also proven useful for consumers who do not have access to traditional credit, such as new immigrants to the United States. But consumer advocates say they carry the same risks as credit cards and shoppers must be careful not to saddle themselves with excessive debt and stay mindful of the services’ differing terms.

"The concern is that people could get overextended if they’re not careful," said Chuck Bell, a program director at Consumer Reports. The concept of paying in installments is nothing new in American commerce, but the disruptions of the Covid-19 pandemic were a boost to these new services, as more shoppers bought online.

From chain stores to small online sites, retailers have organised partnerships to offer such payment services to customers and help them afford what they usually could not, while financial institutions from Mastercard to Goldman Sachs are looking to offer their own.

According to a study by consulting firm McKinsey, these payment solutions represented six percent of unsecured loans in the United States in 2016, nine percent in 2020 and are expected to rise to 13 percent in 2023.