'Buy now, pay later' may reshape retail prices, inventory, research finds

Buy now, pay later (BNPL) services have grown in popularity as a convenient way for Americans to split purchases into interest-free installments. However, a new study from Olin Business School at Washington University in St. Louis suggests that this payment option can affect more than just the checkout process—potentially influencing retail prices, inventory decisions and the financial burden on consumers.

The paper, "Buy Now, Pay Later: The Hidden Effects of Consumer Liquidity on Retail Prices and Inventories," examines how BNPL changes the behavior of both consumers and retailers. One key finding is that consumers' willingness to pay and their ability to pay at a given moment are not the same. The BNPL button doesn't consider what consumers are willing to pay for an item, but rather what they can afford to pay right now.

Retailers accept the cost of BNPL because it can attract customers who might otherwise abandon their purchases and can increase the size of their shopping baskets. However, retailers may raise their sticker prices to compensate for the financing cost, effectively serving two groups of customers from the same inventory: those who pay the full price and those who finance their purchases.

Another effect is that while BNPL increases sales, retailers' net revenue per sale can decline due to financing costs. The study also suggests that accepting BNPL could lead retailers to stock less inventory because lost sales become less costly. Furthermore, BNPL is increasingly used for necessities like groceries, rent and bills, which can create repayment risks and "phantom debt" that traditional credit reporting may not capture.

While BNPL can assist consumers who lack immediate cash, its impact on consumers and retailers varies depending on the type of purchase. The researchers caution against viewing BNPL as either a financial miracle or an impending crisis, noting that it remains a small share of overall consumer credit and has not yet contributed to broader financial stress.