Has the buy now, pay later model changed American spending habits for good?
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Buy now, pay later (BNPL) apps and products quickly jumped on to the consumer lending scene and, within a few years, have become the standard for financing a purchase.
American retail and consumer spending habits have arguably changed forever as a result of the recent BNPL boom as shoppers no longer need to use credit or save up for a big-ticket purchase.
With nearly every retailer offering this payment option through an app, in-store loan or credit card, it begs the question: how much further can this lending model grow and how has it altered consumer spending trends?
The buy now, pay later model: what is it and why it’s so attractive
Growing up in the age of layaway and credit cards, BNPL apps and loans sound too good to be true. Unlike a credit card, the monthly payment isn’t hanging over the consumer’s head; instead it’s broken up into digestible payments – four – over the course of a few months.
True BNPL apps (like klarna) don’t require a hard credit check and don’t report missed payment information to credit bureaus like personal loans do. What’s more, they also don’t charge late fees like credit cards and loans often do. If someone misses a payment, they can’t finance another purchase through the app until it’s paid off in its entirety.
Due to these positive attributes and consumer demand, it’s nearly impossible to find an online (or in-person) retailer that doesn’t offer the option to pay in four installments.
The origin of buy now, pay later products
Buy now, pay later products have been around since the dawn of time, with the first recorded instance dating back to the 1840s. As long as humans have needed to purchase goods and services, payment plans and installment loans have been used to help make larger purchases more palatable.
While BNPL products look much different today than they did back in the 19th century, the same goods and services were reportedly financed through the loans. Just as today, these loans were used to purchase items such as farming equipment, expensive musical instruments or furniture.
Modern BNPL loans as we know them today grew out of the near-impossible task of monitoring consumer activity on store-branded credit cards during the late ’80s. BNPL startups came onto the scene with the aim of solving this problem for retailers, Nikki Baird, VP of retail innovation at Aptos, told Retail Brew in a 2021 study of the financing tool.
The 2010s: the start of the buy now, pay later craze
In the U.S., the 2010s were when these products officially started to pick up steam. Starting with companies that are still some of the popular BNPL apps today, like Klarna and Affirm, the products began to see a shift in popularity in 2019, only to explode in 2021.
Nelly Rezny, SVP of Business Solutions Group – Americas, Temenos asserts that since BNPL gained ground in 2019, more than 350 million users worldwide have used a BNPL product.
“In a relatively short period of time, this market has grown to be worth over $150 billion,” she adds. “A tag line for an advertisement recently boasted that “When banks say no, we say yes.” Without a doubt, it is a major hit for non-financial brands such as Klarna, Afterpay, Afirm, and PayPal who offer this type of credit.”
As of 2023, among the dozens of BNPL apps, some of the most popular include Afterpay, Klarna, Affirm and PayPal pay. Looking back less than 10 years ago, there were only a few app options available; now among the myriad apps are products that operate very similarly to BNPL, but are actually personal loans with high interest rates that can negatively impact the users credit.
As this industry continues to expand, It’s clear that the appetite – and subsequent consumer risk – will continue to grow with it. It’s now up to the user to understand exactly what they’re borrowing so as not to borrow an (arguably predatory) personal loan among the similar BNPL apps.
Experts attribute rapid growth to convenience, lower costs
Buy now, pay later transactions growth remains steady, with transactions up 39 percent year-over-year in February alone, according to Empower’s Anonymized Personal Dashboard data as of February 2023.
The report also found that BNPL spend has more than doubled over the past year. In February of this year, borrowers spent a total of $6.4 million in transactions, up from $2.6 million in February 2022.
A 2022 CFPB report echoes Empower’s user dashboard fundings. Between 2019 and 2021, the survey found that the number of these loans originated by the top 5 lenders grew by a whopping 970 percent. The dollar volume of BPNL loans also grew from $2 billion to $24.2 billion during this period.
When compared to similar lending products, the buy now, pay later option can seem like a no-brainer for many when it comes to financing large purchases. “It’s a very low cost, generally free way to spread out your cash flow,” says Geoff Brown, Co-founder and CEO of Highline Technologies.
If you were to make a $400 purchase on a credit card and didn’t have the payment ready, you’d get hit with interest. Brown explains that the same scenario with a BNPL loan comes with less overall financial risk. “The penalty is that you can’t do any more shopping until you catch up,” he says. ” It’s a much softer consequence…and it’s just less risky from the consumer’s perspective.”
Pandemic-related factors likely play a role in growth
Charlotte Principato, financial services analyst at Morning Consult, attributes BNPL growth to “the rise of online shopping during the pandemic, as well as the influx of cash many experienced from stimulus payments during the same period.” She asserts that these payments likely made consumers more comfortable making big-ticket purchases with the option of paying them back over a period of time.
These behaviors are clearly shown through a 2021 C+R Research BNPL user habits study. It found that 71 percent of consumers have been purchasing more items online since the COVID-19 pandemic and 59 percent said they purchased an “unnecessary item that they otherwise couldn’t afford.”
When contributing to the staying power of BNPL borrowing, Prinicipato also attributes the allure of interest-free installment plans to macroeconomic factors; namely, rapidly rising interest rates as the Fed attempts to rein in inflation.
Rezny says that BNPL spiked in popularity during the COVID-19 era for a number of reasons .”During the pandemic, BNPL financing gained enormous momentum and popularity among consumers who, for the most part, did not leave their homes to make purchases,” she says.”Similarly, because of its convenience and affordability, BNPL gained popularity among consumers who traditionally did not have access to credit.”
Younger adults, indebted consumers more likely to use BNPL plans
According to Empower’s data, Millenials are the most likely to borrow these products and in February 2023, the largest groups to make purchases with BNPL apps were aged 30-39 (43 percent) and 20-29 (22 percent).
However, the data has found that Gen Zers are catching up to their Millennial counterparts, as BNPL transactions were reportedly up 41 percent YOY for Gen Z users, while Millennials only saw a 37 percent YOY increase.
Chad Willardson, Founder and Certified Financial Fiduciary at Pacific Capital, suggests that the rise of BNPL apps and loans among Gen Z and Millennials can be attributed to a number of factors, among them being “ease of use, instant approval, interest-free or low-interest financing, and the preference for flexible payment options.”
“The growth of e-commerce, targeted marketing, and reduced reliance on traditional credit products also contribute to the popularity of BNPL services among younger generations,” Willardson adds.
Trinity Owen, Founder and CEO of The Pay at Home Parent, advises Millenials and Gen Zers to holistically consider their finances before borrowing a BNPL loan. “I’ve seen firsthand the rise in popularity of buy now, pay later loans among millennials and Gen Z,” she writes.
“It’s easy for young adults to get caught in a cycle of debt that can have long-term consequences. It can negatively impact their credit scores and limit their ability to finance future purchases, such as a home or car,” she adds. Instead of relying on financing apps, Owen suggests that these age groups focus on building passive income streams and practice smart budgeting to achieve financial independence.
“As millennials and Gen Zs navigate the rapidly changing economy, it’s more important than ever for them to prioritize financial education and smart decision-making when it comes to their finances,” she concludes.
New CFPB report finds BNPL users more likely to carry debt
While many BNPL borrowers don’t exhibit noticeable indications of financial stress due to the actual product, a 2023 CFPB report found that they’re more likely to experience financial stress than non-borrowers. It also found borrowers are active users of other credit products and loans and are more likely to experience financial distress than non-borrowers.
This could be because of the debt cycle that many users find themselves in, where they make purchases on different apps within quick succession and realize that they don’t have the funds to make all of the payments when necessary.
“Buy Now, Pay Later borrowers are more likely to be highly indebted or have revolving balances or delinquencies on their credit cards compared to consumers who do not use Buy Now, Pay Later products,” the report reads.
“Borrowers are also more likely to use high-interest financial services such as payday loans, pawn loans and bank account overdrafts,” the CFPB states, following its previous research on the BNPL market.
The dangerous element of taking on more debt to pay off older debt – if not within the confines of a debt consolidation loan – is the inevitable interest accrual that comes along with it. High-interest debt accrues quickly; which is why borrowers are encouraged to look at all of their options to reduce the risk of falling victim to predatory lending practices.
Multiple BNPL providers may lead to unintentionally high debt levels
While the correlation between general debt levels and BNPL usage may be linked, that doesn’t always mean that these products are inherently wrong for every borrower. If used responsibly, they can be a great way to build credit – if they report repayment history – and can help users afford higher ticket items with ease.
Principato says that frequent users are most likely to run into overborrowing and higher debt accumulation should they borrow from multiple providers. “Consumers are at risk of losing track of all their BNPL purchases, especially if they were made with different BNPL providers, and unintentionally taking on too much debt,” she writes.
“Although BNPL loans are often interest-free, consumers can face late fees or other negative repercussions depending on the BNPL provider’s policies, which can vary greatly from provider to provider.”
Brown also echoes similar sentiments, warning borrowers about the potential impact of taking out more than one loan and a time. “While BNPL is often free of fees or interest, which is great for users, the problem is that it tends to greatly increase the number of bill payments those users must juggle at once.”
“For example, if you have just 3 or 4 standard “pay-in-4″ BNPL purchases going, that can mean 12-16 bills, all due to different lenders on different days over several months,” he adds.
Economists and financial experts alike have been expressing their concerns over this very scenario. Having multiple payments that vary in amount, due date and lender isn’t sustainable for in the long-run and leaves the user vulnerable to rapid high-interest debt accrual. Plus, given BNPL’s convenience, it can be easy to overborrow and be able to manage the payments.
Frequent usage could lead to “overborrowing, financial instability”
With all of this attention has come mixed reviews; some experts claim that the BNPL lending model can be a positive shift for specific American consumers while others advise that shoppers avoid the products altogether.
Like most forms of consumer lending, there’s no black-and-white answer as to whether BNPL products are an asset or a liability to the lending space or general public. It’s primarily about how the consumer assesses the financial risk when using these apps and how they manage their payments.
“While these loans have become increasingly popular among consumers, there is a risk that they may lead to overborrowing and financial instability,” Edward Maslaveckas, Founder and CEO of Bud Financial says. “They can also offer greater flexibility in repayment terms which can be helpful for those who have irregular income or unexpected expenses.”
Like with credit cards, users need to understand the psychological implications of making purchases with future funds. If the funds aren’t there or available at the moment, it’s crucial the consumers understand what adding another monthly payment could mean for their budget.
New pain points in consumer lending
A 2022 CFPB survey found that out of the 2,013 U.S. adults who completed the survey, missing a payment was among the most common issue for BNPL users, with 50 percent of those who had missed at least one payment saying that it was because they expected to have the money but fell short of the cash.
What’s more, the survey found that consumers making four or more concurrent purchases are twice as likely to have missed a payment when compared to consumers with fewer simultaneous payments.
“Helping people if they’re regular users keep track of their overall level of spend, or easily keep track of their cash flow so they don’t miss these payments or others as they’re managing their money will become a necessary growing pain,” says Brown. “That’ll become a pain point to solve as this industry grows.”
Buy now, pay later growth expected to surpass current usage
Juniper Research estimates that due to macroeconomic factors, buy now, pay later spend will grow by 291 percent globally come 2027. The study predicts that the platform will reach $437 billion in 2027, driven by “escalating financial pressures from the rising cost of living.”
Experts agree that this trend isn’t slowing anytime soon. “I’d say it’s definitely something that’s gonna continue to grow,” Brown says when asked about BNPL’s pace over the next few years. “It’s just a very efficient tool for people to use from the lending side of things as well as the consumer side.”
Brown accredits the recent surge – and future growth – widely to providers’ recent behavior. “This is not brand new. This has been around for decades,” he says, referring to BNPL products. “But the degree that the BNPL providers have been able to bring down their costs…that kind of discount really goes a long way to expanding access to credit.”
“I don’t see BNPL financing slowing down,” says Rezny, echoing the thoughts of most experts. “New entrants from traditional banks to credit card providers and additional fintech companies have joined the growing BNPL phenomena.”
The danger of BNPL becoming a “cool buzzword”
As this growth continues, consumers also need to become increasingly aware of what it is they’re signing up for. While many apps claim to be free of risk; some carry sky-high interest rates and report missed payments to credit bureaus – these aren’t BNPL loans; they’re actually high-interest personal loans or point-of-sale loans.
If not careful, a user could easily find themselves in a downward debt-spiral with a dropping credit score. “BNPL has been a cool buzzword, so everyone wants to call themselves BNPL. But those 12 month, 24 month loans sometimes at 0 percent, sometimes at a higher interest rate – that’s been around for decades as well,” Brown says.
“Affirm, a well known BNPL app, actually makes most of their money from these point of sale loans,” he explains, noting that this information is in the company’s public data. “A big chunk of Affirms lending is at like, 25 to 30 percent APR. That’s actually where they make a lot of their money.”
These apps will disclose these numbers to consumers so it’s worth shopping around, looking at other point of sale options or even getting quotes from personal loan lenders, Brown notes.
However, most personal loan lenders require a solid credit history, and even the ones that cater towards those with low credit have minimum loan amounts over $1,000. This can leave borrowers feeling trapped with no other option, especially in an emergency situation where they need the funds quickly.
Emerging consumer risk and harm reported as BNPL grows
With this rapid growth comes the demand for more national BNPL regulations to prevent predatory or illegal lending behavior as consumers continue to finance their payments through these apps.
Many providers market their products as low-to no-risk due to the lack of interest accrual or late fees; however, the CFPB found that the current BNPL model leaves room for several instances of consumer harm, including:
- Inconsistent consumer protections: BNPL products may not have the same consumer protections that are otherwise standard in the consumer lending marketplace.
- Data harvesting and monetization: The study found that many BNPL lenders have shifted their business models and have been harvesting and monetizing consumer data (shopping preferences and behavior).
- Debt accumulation and borrower overextension: The CFPB claims that users can easily end up overborrowing in a short amount of time, as these products are built to encourage such behavior.
Predicted growth necessitates increased provider regulation
As of now, BNPL products are largely unregulated and don’t fall under the National Consumer Credit Protection (NCCP) Act. However, as the borrowing craze only continues on an upward trajectory, all signs are pointing toward the likelihood of increased regulatory accountability toward BNPL providers.
Juniper Research found that the most significant issue arising from the BNPL market is the debt-trap potential and notes that communication in softer markets – like the U.S. – is vital for consumer health.
“In markets where regulations are softer, it is still vital that vendors act responsibly and clearly communicate all incurred debts promptly to users, to help minimise repayment default rates,” the study read.
Consumer advocacy organizations have been putting these providers under fire, with the CFPB most recently stating its intent to pursue regulatory standards for the products in its 2022 study on BNPL growth.
“The CFPB will identify potential interpretive guidance or rules to issue with the goal of ensuring that Buy Now, Pay Later lenders adhere to many of the baseline protections that Congress has already established for credit cards,” read the report.
CFPB Director Rohit Chopra didn’t provide a timeline for regulation implementation and new standards have yet to be publicly announced. At this time, only states that consider BNPL as forms of consumer credit require that providers comply with state consumer credit laws, licensing requirements and proper registration.
Why consumer spending trends may never look the same
The general pull toward these products and services is indicative of a drastic, potentially long-term shift in consumer behavior. Consumers no longer have to wait weeks or months to receive an online order; with just one click of a button, you could have your online purchase at your doorstep as soon as 1-2 business days.
Modern shopping conveniences have made waiting weeks for an online order an archaic notion, effectively changing the retail industry. The same goes for the consumer lending space. Buy now, pay later allows consumers to bypass the ‘saving-up period’ before a purchase and most apps don’t require a lengthy application process, like credit cards and personal loans do.
The ease and convenience of making a large purchase in four installments without walking into a bank is exactly what Gen Z and Millennial shoppers are looking for, says Maslaveckas.
“In our experience, many younger consumers are looking for alternative lending options that provide more transparency and flexibility than traditional banks. They want to be able to access credit quickly and easily, without having to navigate complex application processes or deal with high fees and interest rates,” he says.
However, as BNPL products continue to grow in popularity, Maslaveckas says that these loans can be a valuable tool for these consumers if used correctly. “Because having more choice as a consumer is always a good thing, as long as sufficient controls are in place to discourage bad actors.”
How borrowers can protect themselves
Consumers need to be more diligent than ever when reviewing the terms and conditions, says Sophoan Prak, personal advisor with Vanguard. From misleading disclosures to astronomical interest rates, these products can end up doing a lot more harm than good if not paid off in-full and on-time.
Prak advises that BNPL users fully understand the risks associated with these products before signing on the dotted line. “If consumers are making purchases that they can’t afford, it goes back to looking at your budget to figure out if it really is a sound purchase.”
“It [missing payments] can really impact your credit score and financial well being down the road if something unexpected happens. And from a planning perspective, I think people really need to be prepared for that.” In lieu of potential credit damage, she encourages consumers to carefully read the terms and conditions before accepting the offer to see if the provider charges interest or reports to credit bureaus.
Rather than jumping straight to financing, Prak echoes the sentiment of many financial professionals and encourages that borrowers take a beat to consider what their budget looks like. “[frequent BNPL usage] really can lead to behaviors that can be really hard to get out of once you’re in a debt cycle,” she says.
At the end of the day, a solid budget and plan is the best way to protect your future financial health. If this involves an installment loan, that’s not necessarily a bad thing. If you’re able to pay off all of the installments on-time and in-full and are careful not to overborrow, then it can be a great way to build your credit score, should the provider report your repayment history to the credit bureaus.