Julian Bond Institute: The Viewpoint
The Viewpoint is the official podcast of the Julian Bond institute for Financial Equity Research at the Center for Responsible Lending. Join us as we discuss economic empowerment, responsible innovation, and a fairer financial landscape, while offering practical takeaways and forward-looking ideas that can shape policy, financial markets, and your everyday financial decisions.
Julian Bond Institute: The Viewpoint
The Viewpoint: Buy Now, Pay Later
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This episode focuses on buy now, pay later (BNPL) and the credit reporting agencies. Dr Sara Weiss, Executive Director of the Julian Bond Institute, talks with Makada Henry-Nickie, Housing Finance Research Director, JPMorganChase Institute.
Introduction
Hi everyone, before we jump into today's conversation, let's quickly break down buy now, pay later, or BNPL. So you've probably seen it at the store checkout when shopping online or on apps. BNPL is a short-term loan that lets you split a purchase into smaller payments. It's usually four space weeks apart. If you pay on time, there's no interest and no fees. Major BNPL companies include a firm, after pay, and karna. This concept isn't new. The previous iteration was called layaway. Here's how that worked. A store would hold your item while you made payments over weeks or months. One big difference between layaway and BNPL is that with layaway, you only took the item home after your final payment. With BNPL, you get the item right away. The buy now pay leader industry has grown fast with purchase volumes in the billions and now offered by thousands of retailers. In fact, one in five Americans have used BNPL. This episode will dig into some of those details behind BNPL, based on a recently published research paper, Convenience or Liquidity Value, Buy Now Pay Later, and Homeowner Balance Sheets. Joining us is Dr. Sarah Weiss, Executive Director of the Julian Bond Institute. She's speaking with one of the report's authors, Dr. Makada Henry - Nickie, Housing Finance Research Director at the JP Morgan Chase Institute. Now, without further ado, let's dive right in.
Sara WeissWell, hi, Makada.
Makada Henry-NickieWell, hi, Sarah.
Sara WeissI'm so excited to be here. I'm so excited to have you, and it's great to have had you as a member of our research advisory council for JBI, and just am very excited to be able to talk about this recent research paper that you published. Thank you. So just help us set the scene for the listeners about Buy Now Pay Later as a product in general. It went from having about $2 billion of purchasing volume in 2019 to over $75 billion in 2023. So that's a huge increase in just four years. So what's powering that? Who's using it? Tell me more just about Buy Now Pay Later and why it was something you were interested in studying more.
Makada Henry-NickieYeah, I think I was similarly attracted by those big stats. So between 2019 and 2020, we saw that sector grow by over 300%. Now post-2021, it slowed down a bit, and so on an annual growth rate, it's about 20%. But still, for any particular sector, that's enormous growth. So I said I wanted to understand who's using it, what's really driving this. But I think it's important to kind of step set back first and like look at the broader context. It is financial innovation in its purest form. I do think it's probably meeting some needs for some in differ in various ways, and it's a convenience for others depending on what segment of the population you sit in. But what does bin-out pay later really mean in its um the grand scheme of things? So $75 billion sounds like a lot. Um but if you look at those purchasing dollars and compare it to large bank credit card dollars as we did in the report, it's really just about 3%, just under 3% of that uh scale. Um so I I'm not saying, and I don't think we are saying in this report, um, that this is presenting any meaningful macro financial risk, but we do have to understand how people are using it, whether this kind of growth trajectory is going to continue, and certainly the drivers of that growth are important to pause, unpack, and understand. So at the core of these questions are who's using it, what are the driving factors, and what does this all mean for the various actors uh who are interested in the space, both from a regulatory perspective, industry perspective, and a consumer advocacy perspective, um, trying to make sense of what BNPL means for the consumer financial landscape altogether.
Sara WeissYeah, absolutely. So what I'm hearing from you is that where it sits in the credit funnel and as compared to other products is important, but so is who the users are. So at JBI, we recently deployed a new big national survey, nationally representative, the 2050 survey, and in that we found use consistent with other studies, that it's a lot of younger folks that are using the product, it's more non-white users that are using the product. And our study lets us in particular break down by race, ethnicity, and generation. And the highest rates of use are for the Gen Z black and Latino and Hispanic users. Is that something you were also able to look into in your study or colored sort of how you designed what you were approaching?
Makada Henry-NickieI mean, the demographic is an interesting question at the heart of all of this. Um, if you look at, again, the studies that you cited, uh, we do see that it's more higher use among younger consumers. And that demographic shift means uh a lot for me. If we are looking at a rapidly evolving financial uh consumer landscape where fintechs are playing and they are in the wallets of our younger consumers, what does this mean as we continue to evolve and try to uh shore up the ecosystem so that they are accessing safe, responsible products and certainly enhanced by the practices across institutions? So that's one part of it. And the other is I think there are other people in the mix. And that's why we wanted to look at homeowners. Homeowners are a group that we hold out to be financially stable, more so than the general population. They tend to have more resources. Um, and so if there are some signals coming out of the homeowner segment that are consistent, um that are telling us something more nuanced about where this sits in the wallet and how it interacts with other credit products, including those products like a mortgage, which is the largest, most least flexible expense in a household budget, you know, what's happening around moments of liquidity shocks, all of those behavioral dynamics, I think, is what really powers our data, this study, and certainly my interest as a researcher for this work and um you know, probably for others as well.
Sara WeissAnd you were able to look at different kinds of mortgages as well. So that seems like a really important contribution relative to homeownership writ large. Can you talk more about um how you're able to break down your sample into types of mortgage holders?
Makada Henry-NickieYeah, I think it's more important to understand why we made those uh cuts in the first place. Um for folks that who are listening to this podcast and don't really understand the mortgage landscape, FHA borrowers are government insured loans. And um they that program is essentially recognizes that some marginalized groups need additional assistance, um, and that is federally supported. And what that means is you can get an FHA mortgage with just a 3% down payment. Uh the credit underwriting decisions are similar to any other mortgage product out there, but there's a little bit more, I think, um, uh flexibility to sort of to look at consumers who have lower credit scores, um lower down payments, or come from lower wealth contacts. And that tells us more about a demographic of people who could help us inform are there people who are only just financially unstable that are using these products up against folks who tend to be in the conventional space. Uh uh, they can save and come to the table with bigger down payments. I mean, in our data, we see that, these patterns. And so we thought this is a great dimension to help us understand the financial conditions underlying these two groups that might speak broadly about consumer, other consumer groups were at large.
Sara WeissSo you you're referencing the data. I'm gonna tell you, I've told you this before. I fangirl over the data that you have because it is so wonderful to be able to identify things that aren't in other public data sets. So, first, before we dig into more of the really important findings, can you talk to me more about the data that you're able to use for this and other studies and why it has such value in the research landscape?
Makada Henry-NickieFirst and foremost, our data reflect the everyday lives of consumers. Um, so the credit card transactions, your you know, checking account and saving account transactions, it really comes to life when we're able to link it to other kinds of financial profiles like what we see in the Credit Bureau. All of our data are anonymized. I don't know if I'm in the data, I don't know if you're in the data, and I think that's a really important point that I want to underscore for our listeners because trust in institutions like Chase, writ large, is important to my uh team, research team at the institute, our leadership, and certainly goes up all the way through our leadership stacks. I think that's really important to underscore first. Now, how we leverage the power of the data is in behavioral studies like this. At large scale, we can see different pockets of consumers across space, time, demographic dimensions, um, and so it's really rich, very um close to the lived experiences because these are observational data. I'm not talking about surveys, what you think a researcher might want you to answer in a survey. We actually can see the real decisions, the consequences of actually the decisions that people make. So it's fantastic, it's quite robust, really rich. But at the bottom and the core of all of this is an institution like Chase that understands the power of data for public and social good to inform policy and also making sure that we have strong privacy protections across the assets that uh people hold dear, because we hold we hold those dear too.
Sara WeissSo in the report, you're really framing by now pay later as a liquidity valve. And that that changed how I thought about it too. And um, and so uh can you talk more about how you're seeing by now pay later as a liquidity valve versus other possible credit or other products?
Makada Henry-NickieYeah, so I think this is a comes down to patterns, timing, tempo. Um, and um, of course, right, income capacity, which tells us more about the resources that uh consumers have to be able to manage all of their needs and their obligations. Um and so when we segmented by these two FHA, these two mortgage groups, FHA and GSC, which we already talked about, like why, um, we wanted to at least have these income within group income segmentation to really help understand are our intuition and our mental models about high-income and low-income people visible here, playing out here, uh, conditioning and determining some of these dynamics. And we found that it did. Um, and so for us, the important sort of takeaways are BNPL shows up as a convenience for some consumers. And that means uh sometimes when income is up, as we sort of show, right, there's a small spending response associated. And that's all of us. When we have a little wealth effect, we feel great and we go out and shop. It's rational. When budgets are tight, meaning they're approaching their limit, um, and you are running out of credit utilization on your credit card, and we all have credit limits, and when that's kind of squeezed, then what we're seeing is a rational response in terms of turning to buy now pay later to help afford many of the kinds of categorical expenses I just described. Um, and um when deposits are strong, we see people pull back on their BNPL spending. And I think those dynamics tell us two things. For some consumers, it is a liquidity valve. When budgets are tight based on this financial tightness measure, and um credit card limits are also um running out of room, consumers still have needs. And BNPL, in that liquidity valve sense, it helps to, I think, fix some of the leakiness in uh in the budget. It's like a bit of a bucket catching some of this stuff. And for others who have both more room in their credit card space and also um in the bank account, I think that's what we're calling convenience. Like you have liquidity, you can tap into it. Um, you have available credit credit card um room, you can use that as well. So some of that tells me that it's either convenience or maybe there's an opportunity cost of not using your um credit cards um and funneling those expenses to buy now pay later. That's some groups who tend to be more affluent are attracted to. Right. So I think it's both and.
Sara WeissYeah, I mean you can activate it at certain times in the in the shopping or consumption, um, but it it and it's more than just a checkout convenience that uh and so there's strategy around it. So let's jump into some of the findings specifically, especially related to the change in use of binal pay later leading up to home purchase. Um you compare binal pay later and credit card utilization and use pre- and post-home ownership. So, tell us more.
Makada Henry-NickieYeah, I I like always to give those some context. So we wanted to look at binal pay later in stress situations. Now there's good stress that we put great social value on, and that's buying a home. And then uh there's the uh flip side of that, the the unexpected uh negative income shock of losing a job. So let's talk about the first um scenario. Um two things. It's important for us to understand whether our data are picking up the rhythms, the operating rhythms of everyday life. So not only did we look at BNPL, we looked at the other kinds of credit signals coming up to that first-time home purchase moment. Um, credit scores are going up, credit utilizations are going, you know, is going down, and as a result, it's feeding into credit scores, um, deposit balances are rising as uh people are you know saving to afford that down payment. So all of that tells us yes, right? The signal, the fundamental signals are in place, they're moving in the right direction. So BNPL uh fits into this uh rhythm and it's giving us real signal as well. Uh so in the first that that six-month or that 12-month period before you buy a home, we baseline each person to their own norm. So I'm comparing Sarah to Sarah, Makeda to Makeda. And that tells me something more about how important uh BNPL is as a tool in my wallet. Um, in that pre-period before the home purchase, we see that uh credit card balances and utilization going down by about 12 to 13 percent. And that's good. BNPL payload is a little different. In that same period, we see both FHA and GSA borrowers uh ramping up their spending between 37 and 38 percent. Now, this is relative to their own baseline. I do want to pause and sort of set a context around 12 to 13 percent and 37 to 38 percent, those are big numbers. Um, however, when you think about the average um BNPL purchase packet, in our data, at least in the study, we're seeing it coming in at about 125, 100, it's uh between 125 and 130 dollars, give or take some error. Um, so what does that mean? It means that we're not necessarily looking at these huge amounts of debt. And there's a lot of velocity associated with BNPL. It's not the traditional credit card where you spend, you run into a tough time, and so you're gonna make some decisions about I can't pay off my entire balance. Um, this is moving rapidly. So it's hard to kind of really find an apples to apples comparison between credit cards and B and PL. And I think I want our listeners to keep that in mind. Yet still, after the purchase, we see both credit rails increase. Um, and uh the numbers, of course, we report them, they are surprising. Um, four times as much use uh relative to your own baseline within the first year says that it's doing more work than just a checkout convenience. Um, this is a liquidity shock of a good kind, right? People are affording, you know, paying closing costs, or they've just uh paid a hefty down payment. And you want to live in a beautiful home. So you want to pay for furnishings and these things. And I'm not sure what people are buying, but our our uh data tells us that in that first year, B and PL is providing some some liquidity relief, some breathing room, perhaps to catch back up.
Sara WeissThis does make me think about how how people are thinking strategically around the inflection point of homeownership. Because in underwriting, currently, by now pay later isn't on credit reports and so might not be treated the same way in DTI calculations or others for uh securing an interest rate for a mortgage. And so um I know your study probably can't uh can't answer this yet, but that naturally makes me think about how how this substitution of products and maybe gaming of things around important um underwriting needs might be going on.
Makada Henry-NickieWhat we find is that the typical um, at least homeown in our sample, their B and PO purchases amount to about 1% of income annually. So again, to my earlier comment, is this capable of producing macrofinancial risk? I'm not sure that that's where the data are pointing to. However, there is a tail. Um, and that tail, that's a top decile of users, just frequent users who are using this product more and more, oft frequently than casual people. So we make this split between casual users who are maybe just episodically using it, they're experimenting with B and PL versus folks who have used it and are beginning to rely on it. Um and what that suggests to us is for those folks in that top decile, that BNPL um interaction can amount to just about 4% of income. So I think what we want to do is have our policymakers understand what this means overall for the typical users, and then also there is some segment of the uh homeowner population, at least for these first-time home buyers, for which B and PL is consequential. And I leave it to the folks who actually have decision-making power to make, you know, helpful decisions of that. But what I will say, you know, we are in a broader structural affordability environment. And so big questions are looming about where innovation's coming in to help people afford the everyday expenses and how these new economic models, and BNPL is a really interesting one. It's not just um about access and the credit, but where people are accessing the credit at the retail checkout. And I think that opens the aperture for a lot of intriguing debate and dialogue.
Sara WeissAnd along this equity line that you're referencing, it is very important, as you referenced before, looking at FHA versus GSE borrowers. So, how how do those two groups and the evidence and analysis that you've conducted help tell us more about the financial vulnerability across those different groups?
Makada Henry-NickieWhen people are financially strained, BNPL is consequential. And I want us to pay attention to the consequences of what these evidence uh and these pieces of data points might say about that financial fragility and what it means for consumers to be aware, what it means for the intermediary, excuse me, playing in the space to be aware of so that we can ensure that this innovation is responsibly placed and that we have a chance to monitor it. And I think that's where the rub then uh those frictions become a little bit more salient. And the pay in for, we have one provider that broke the rank, broke ranks last year and said, we're gonna report all of our uh BNPL activity, both the monthly installments and this pay-in-for to the credit bureaus. We have the um other providers and the the trade associations represent them say, we actually need to pause and think about what it means to have a product like pay in four be reported. And it's not that they're saying we don't want to report it. We think that the legacy um credit infrastructure um could actually impair the people who are using this credit. Um, since, let me just give an example. In the credit card space, we are all uh educated through our financial literacy, you're talking to our parents about and our friends, we know what the rule of thumb is, right? You get a credit card, you do not max it out. Um, the higher utilization goes, you know your credit score suffers. Um, and so you are afforded what we think as lenders out there, what you can afford to pay. So let's say it's $500. And so you start off with $10 and $20, but Binop Pillator starts in the opposite direction. And I think that is a really interesting financial engineering problem to understand. Can our credit apparatus um understand and absorb this type of product without penalizing people because of the engineering design of the product itself? And I think that's an open question for us to think about.
Sara WeissI think there's more, it's that, and additionally, users of Buy Now Pay Later, in a sense, have had a social convention or social contract that it isn't going to be reported, and so might be using it and engaging with the tool in ways that would change if those uh if reporting changed from the from the product to the credit reporting agencies. And so I think uh to your point and to underscore, there's a lot of thinking and and uh planning that needs to be done before we make any big shifts and before it necessarily say gets incorporated into credit scores. I think that there's uh yeah, a lot of work to do first.
Makada Henry-NickieI couldn't agree more. And I feel like this is one of the parts of research, the outcomes that don't get written into report. How does research help? Policymakers understand what's happening in the financial lives of consumers. And this in itself is important to the debate. Is there a conversation to be had here? Who are the folks that should be paying attention? And how can research help to seed those discussions, that debate, that dialogue? I think this is a really excellent case of this is where financial engineering, the power of JP Morgan Chase Institute's data, and policy intersect beautifully. Because what we want to do is help our policymakers to make informed decisions and high-quality, real-time evidence is, I think, the way to go.
Sara WeissAnd there was a robust discussion about this on the recent webinar you did with the Urban Institute, you know, around what are some of the concerns, what are possible policy solutions. So in the buy now pay later space, it's not like the old layaway days. You actually get the product, but then what happens if you want to return it? Or what if the product is defective? And how how does that again play into what the reporting might look like and what the um what the consumer is able to have as protections for themselves?
Makada Henry-NickieSo yeah, I do think you are making an excellent point. Another piece that I took away from that very just illuminating conversation is hearing from the um industry themselves that actually we do underwrite. Um we look at you know these microtransactions, we look at, you know, people's interaction. Of course, the more they learn, the more you interact, the more they learn about you. Um, but I've got to sort of sit with that and understand what that means for the product space, you know, broadly. But again, power of research to invite the dialogue and for policymakers to tell us, yes, this is important to us, and thank you for the evidence.
Sara WeissI always love research that makes us think we need more research. I think so too. What would you like researchers to study? I I have some wish lists. I definitely would love to see things among renters that also came up in the webinar you were in recently. Um, but that seems like a really important population to understand use of binal pay later, especially because renters are using BNPL at higher rates than homeowners, um, which maybe not surprising, but um, what what would you love to see as an extension to your study? I have to be disciplined here.
Makada Henry-NickieI would say two things.
Sara WeissYou don't have to be.
Makada Henry-NickieOn the one hand, we have a blind spot. Like I can we can see, as we talked about, right, we looked at the data, we can piece together the rhythms. Um, but what I don't understand or know is like who's buying, like what is the composition, the underlying composition of the basket? Um that we cannot um look at. So other studies, other researchers can help us understand the composition because I think that's really important to whether this is a responsible product or whether it's uh facilitating overspending and overconsumption. I don't know. I think that's an interesting question to understand. Um, the second part is can we understand missing payments and late fees? I was struck by a recent report that I saw where the default rates were lower than in the credit card space. So if low-income consumers and people who have very low credit scores, weak credit scores are using this product at higher rates and the default rates a little low, I'd love to understand the mechanics as to how and why. And so can't say more, but I think that's a really ripe area for us to understand when this does not work out. Um, as we see more in the credit the sort of formal credit card space, I need us to understand how consumers recover. Are there um you know late fees and to what extent those late fees are uh adding compounding fragilities onto already existing fragilities as well.
Sara WeissAnd if I could add, I think another thing that would be really useful, maybe you can see it in your data, maybe not, would be how this stacks with some of the other credit products that folks are using. So it's one of many. And of course it makes sense as we're starting to study products to look at them kind of in isolation, but how it stacks with other fintech use and other credit products, I think would be very interesting, especially as it is timed around these important inflection points like homeownership, like job loss, and more.
Makada Henry-NickieYeah, I agree. And I will say that I want our researcher audience out there to um think differently about the behaviors, think beyond the labels. Um if nothing else, I think we have put together a really informative behavioral study using our administrative data that tells me that, you know, consumers are very complex. And what I observed is rational behavior. Um, and what that means altogether is for other folks to decide. I agree, but I I I want our listeners to understand that we are up against some very affordable, it's an affordability headwind for many households, including those who tend to be in maybe like to say the top 20% of income. And so it's complicated and complex. And I I think our I want our body of evidence to be able to catch up with that complexity and understand more about the behavioral dynamics than just getting stuck at the generational demographic labels themselves.
Sara WeissWell, thank you so much for your time and coming here, Makeda, to chat about your recent report. The last question is whether there are any pieces from the report that you still want to uplift, other things that have maybe gotten buried in the appendix or or things we didn't um yet cover today.
Makada Henry-NickieThe thing that was surprising to me is there is a delimiter baked into the household budgets. And so we covered this in the appendix, um editorial um rights are what they are. Um and I found that there is a ceiling, I would say a financial ceiling that kind of governs how much B and PL spending is um afforded to customers. Um what we saw is if you have a tight budget and you're running out of credit card room, you actually, even if you could and wanted to, you actually couldn't physically take on more debt. You're pretty much tapped out. Um, so what does that mean if I draw a picture? If Alice has 30% uh credit card utilization, so she's got like 70% more left, and a really tight budget, you know, if her credit utilization jumps up by 10 percentage points more, then her BNPL spend goes up of about 13 percentage points. Now, Bob, her compliment, probably similar, um, uh similar situated, um, but his credit card limit is uh is at 70% uh in terms of like like really running out of room. Um and he experiences an A 10 percentage point, what we see is his BNPL spending really only going up about a fraction of that 13%, so just about 9.7%. And I think that's an important nuance that I want us to not gloss over. It is that the mechanics of living a life of paying bills with constrained incomes just has a ceiling. So this product is interesting, it is intriguing. Um I don't think that it there's like runaway spending with it, but you know, we still need more evidence to really help us conclusively understand um how these products interact. But for for right now, our our data is saying there's a financial ceiling. And beyond these uh two thresholds, people just aren't taking on or cannot simply take on more BNPL debt.
Sara WeissIt's a pleasure, as always, to have time with you and digging into research.
Makada Henry-NickieThank you, Sarah. I'm honored.