Buy Now, Pay Later Loans, Social Norms, and Consumer Indebtedness

Abstract

The terms associated with new financial products, such as buy now, pay later (BNPL) loans, are often cloudy. Policymakers are concerned because these products are marketed to naïve consumers who may be in financial peril. While financial illiteracy has received attention, it is also important to recognize that consumers are impacted by perceptions of the choices of those in their social network. We elicit empirical and normative expectations in an incentivized experiment to measure what young people think others will do and their beliefs of the beliefs of others. Our experimental participants are more likely to purchase an item with a BNPL loan, as compared to a credit card loan, and the majority believes others see this as a good choice. We conclude that consumers are likely to increase indebtedness when offered a payment scheme that is supported by a social norm.

Keywords:

• Consumer debt
• credit cards
• financial institutions
• Financial literacy
• social norms

JEL::

• G53
• G51
• G2

Acknowledgements

The authors thank David Bray, Cristen Dutcher, Edward Hoy, Carol Hulsey, Paul Lee, Gabriel Ramirez, Ayse Tekes, and Coskun Tekes for assistance in the dissemination of the experiment and Ed deHaan and two anonymous reviewers for helpful comments.

Compliance

All procedures performed in this study involving human participants received the required reviews and approvals from the University’s Institutional Research Board review committee (IRB Approval #FY23-84). Informed consent was obtained from each participant in this study.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 See the press release available at https://www.newyorkfed.org/newsevents/news/research/2023/20230808 (accessed November 7, 2023).

2 See the CFPB report available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-publishes-new-findings-on-financial-profiles-of-buy-now-pay-later-borrowers/#:∼:text=Overall%2C%2017%25%20of%20consumers%20with,86%25%20of%20non%2Dborrowers (accessed November 7, 2023).

3 See, for example, the Afterpay presentation available at https://www.afterpay.com/en-US (accessed November 7, 2023).

4 The complete experimental instrument in provided in Appendix A.

5 This study received Institutional Research Board approval (IRB Approval #FY23-84).

6 The final sample ended up having unequal observations across BNPL and CC due to random assignment and the deletion of incomplete responses.

7 The gift cards were sent electronically through Tango card. We confirmed that every participant received their experimental compensation.

8 Though 189 students participated, 27 provided incomplete responses and were removed prior to analysis.

9 The average credit card debt for young Americans (aged 18–23) in 2022 was $2,976. See https://www.annuity.org/personal-finance/average-credit-debt/ (accessed November 9, 2023).

10 See The CFPB report available at https://www.consumerfinance.gov/about-us/newsroom/cfpb-publishes-new-findings-on-financial-profiles-of-buy-now-pay-later-borrowers/#:∼:text=Overall%2C%2017%25%20of%20consumers%20with,86%25%20of%20non%2Dborrowers (accessed November 7, 2023).

Additional information

Funding

The study received funding from the Coles College of Business Research and Development Committee at Kennesaw State University.