The triumph of installments: benefit or hidden threat
Installments are rapidly gaining popularity all over the world. The market for Buy Now, Pay Later (BNPL — "buy now, pay later") schemes is growing at a double-digit rate per year. The reasons for the development of this area are complex and closely related to the digitalization of the economy and sales. However, the universal popularity of installments hides risks for the entire financial system, which may not be visible to regulators, and therefore are doubly dangerous. Why BNPL has conquered the whole world and what pitfalls it may have both for an individual consumer and for the economy as a whole — in the material of Izvestia.
What is the point of installments?
The BNPL system is similar to a loan in that the amount for a particular product or service is not paid immediately, but is divided into several tranches. At the same time, unlike a loan, interest payment is not provided. Thus, the consumer gets the advantages of a loan without its disadvantages: the benefits and pleasure go ahead of the inconveniences associated with expenses: "Chairs in the morning, money in the evening." Some schemes do not provide for an initial payment at all.
In theory, everything is perfect for the buyer. But, as usual, there is a catch, and not just one. Firstly, the cost of the goods purchased in installments may differ from the price paid by the "hard" cash, in the upward direction, of course. Secondly, the load may include a variety of services (such as extended warranty or insurance), which are difficult to impose on the buyer under normal conditions. Thirdly, installments also have a period after which very strict interest rates can take effect, linked, for example, to the Central Bank's key rate. Simply put, it's just like with credit cards.
If there are no such pitfalls, then this is indeed a profitable scheme for the client, especially in conditions of inflation. But there are risks here too: many people do not have financial literacy and, if they have easy access to goods, they may make impulsive purchases, which will have consequences in the future, primarily for themselves, but not only. If the phenomenon is widespread, it will cause an avalanche-like financial crisis. This is especially important considering that there are quite serious risks on the part of the seller/lender.
Why have installments become a "hit" now?
If we talk about the formal sector, the installment payment scheme was practically not used at the beginning of the 20th century. It was sometimes used in the USSR and other socialist countries, but credit reigned supreme outside of them. Moreover, consumer credit volumes have been steadily growing in developed economies since the 1960s, and in developing economies since the 1990s.
E-commerce has become the main driver for BNPL. If at the turn of the century only a tiny proportion of goods were sold online, now it has reached 20%. It was online sales that launched installments as a phenomenon. Generation Z (or zoomers) also played a significant role, as they are happy to buy online, but are very reluctant to lend money and are looking for alternative payment methods.
Interestingly, this scheme is fairly evenly distributed across different countries of the world. For example, a significant part of this payment method is in developing countries. The reasons for this are also clear: the credit sector in them is less developed, the concept of credit history is in its infancy. It is difficult to get a loan, so an installment plan looks like an excellent option for both the buyer and the seller, who needs to somehow increase sales. Thus, a kind of democratization of the trade and credit sphere took place.
Finally, an important factor in recent years has been the rise in interest rates in many economies around the world, caused by a surge in inflation, and this applies to both nominal and real rates. Loans are too expensive even for people who can rely on them with their credit history. A classic example is Russia, where even housing began to be sold in installments: in Moscow, for example, up to 40% of new buildings were sold using this system last year (while the schemes for selling apartments based on the BNPL principle are even more complex, but their appearance was predictable in the context of the practical disappearance of commercial mortgages due to exorbitant rates).
There are more than enough alternatives now. Both banks and fintech companies are involved in installments. Globally, annual installment sales could reach $500 billion this year. Over the past year, the market has grown by 13.4% and is far from saturated. It is quite possible that we will see a multiple increase over the next few years. Currently, BNPL accounts for about 10-15% of all e-commerce, depending on the country, and offline sales account for less, so the potential for growth is quite large.
Questions about transparency
The problem with BNPL is that this area is not always transparent and clearly visible to regulators, which automatically increases risks. Excessive use of installments for impulsive purchases can dramatically increase creditworthiness. And fintech companies that provide such services may themselves be in debt.
Take, for example, Sweden, where all of the above is relevant.: The scheme has become extremely widespread there (about a quarter of online sales are in installments). The Riksbank (the local central bank) conducted a market study in 2023. It turned out that the main BNPL providers on a global scale had never been able to make a profit in the previous four years. In fact, they were fighting solely for market share, trying to expand at all costs. Losses often reached 50% of the turnover. But what is a completely legitimate strategy in the field of high-tech industries is considered extremely dangerous behavior in such a sensitive area as finance.
At the moment, even a massive collapse of most BNPL-related companies or bank divisions would be an unpleasant phenomenon, but not catastrophic for the financial system. But as this scheme spreads, the fall of even a few market participants can cause a pronounced domino effect, especially if it coincides with other perturbations in the financial system (and trouble, as you know, never comes alone).
According to Elman Mehdiyev, General Director of the Association for the Development of Financial Literacy, sales always need new ideas to attract attention.
— And if price competition is impossible, lending comes into play, including for "zero money" (that is, installments). The promotion of a product or service through installments is more profitable for the seller and the manufacturer than the cost of advertising. In addition, since installments, unlike loans, are now out of regulation, you can "hide" more commissions and fines in it, even if it is "free". And if earlier POS-lending was the beginning of the "sales funnel" of other products for financial institutions in retail chains, now this role is increasingly being assigned to installments, — the Izvestia interlocutor notes.
As noted by Alisen Alisenov, Associate Professor of Economics and Finance at the Faculty of Project Management at the Presidential Academy, installment payment has won the market in Russia due to tight loan rates.
— If earlier, when making an expensive purchase of electrical and household appliances, it would be possible to use consumer credit, then in the current conditions it is practically impossible. In addition, due to the high key interest rate, it has become more profitable for the population to save rather than spend money on consumption, postponing purchases for the future. Therefore, sellers of goods are forced to stimulate their sales, including by providing installments," the expert states.
In general, analysts believe that there are no really serious risks to the economy in the Russian context at the moment, but there is a danger of an increase in the debt burden.
— In 2024, the installment market without overpayments has almost doubled and continues to grow. There are certain threats in this, primarily due to the simplified usage procedure. The seller makes an installment plan for several months, having previously divided the payment into equal parts. However, this transaction is not recorded in the credit history bureau and, as a result, does not affect the buyer's credit history. In case of late payment, a fine may be imposed on the buyer, the amount of which is also not controlled by the Bank of Russia. In my opinion, the current practice can lead to an increase in the uncontrolled debt burden of the population and its high creditworthiness," Alisenov believes.
In turn, Mehdiyev notes that all innovations in the financial sector work for development in one way or another. However, some control and regulation is needed to prevent the occurrence of systemic risks.
— If installments become a new way to increase the debt burden of individuals, it can create significant damage for the financial institutions themselves, which use it to earn money outside of supervision. While the scale of installments is small, these are just "individual cases of the disease." But if it is not limited in terms of protecting the rights and interests of consumers, just like classical lending to individuals, the "disease" of individual consumers (that is, a high debt burden) can become a "pandemic" with all its consequences for all citizens, the expert warns.
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