The buy now, pay later phenomenon is showing little signs of slowing down.
Shoppers have flocked to the option over the last year as online shopping has surged amid the pandemic, benefiting fintech companies like Affirm, Klarna, and Square's Afterpay, while also prompting other payment platforms like PayPal to move further in that direction and threatening banks and credit card companies.
Use of BNPL poised to grow this holiday season, according to a recent CNBC survey.
Seven percent of shoppers said they will be using BNPL for holiday purchases this year, according to the CNBC/Momentive Small Business Survey for Small Business Saturday. The survey was conducted by Momentive from Nov. 10 to Nov. 12 and included 2,744 respondents.
While that 7% still pares in comparison to other traditional payment methods – 55% of shoppers say that will use debit cards, 51% will pay with credit cards, and 43% say they will use cash – experts say that percentage could easily be doubled or tripled in the next year.
"The important thing is not the 7% adoption number, but the fact that the number is growing," said Lex Sokolin, head economist and global fintech co-head at ConsenSys.
Adoption being pushed by younger shoppers
Much of the growth of BNPL to this point has seemingly been driven by younger shoppers.
For example, 12% of the 18-34 years old demographic surveyed in the CNBC/Momentive survey said they are using buy now pay later for holiday purchases. In comparison, 0% of the 65 and older group reported they would use BNPL for holiday purchases.
"Buy now pay later user definitely skews younger," said Ted Rossman, senior industry analyst at CreditCards.com. "It is definitely more of a Gen Z and millennial thing."
But the idea that BNPL only attracts young users with little money and little credit seems to be changing, according to Rossman. "A lot of these people do have credit cards, but they're using buy now pay later selectively."
Adoption is also being aided by major retailers pushing the payment method. Affirm scored a major partnership with Amazon in August that would let customers split purchases of $50 or more into smaller monthly installments. The deal between the two companies was expanded in November. Affirm also works with more than 12,00 other merchants, including Peloton and Walmart.
BNPL is also being fueled by acquisitions. Square, which is changing its name to Block, bought Afterpay for $29 billion in August, while PayPal announced a plan to buy Japanese fintech company Paidy for $2.7 billion in September.
PayPal CEO Dan Schulman told CNBC's Jim Cramer that the company's payment service is "one of the stars, actually, of the holiday season for us."
PayPal launched an installment payment option in the U.S. in late 2020.
"During Black Friday, our volume on buy now, pay later was up almost 400% year over year. We did some 750,000 transactions alone in one day on Black Friday," Schulman told Cramer last week.
Overall, the use of the payment method globally during Cyber Week — from Nov. 23 to Monday — jumped 29% year over year, according to Salesforce data. On Black Friday, in particular, Salesforce said 4% of orders in the U.S. used a short-term, installment payment option.
"And they make it so easy, right at checkout," Rossman said.
There are benefits to using this option as a short-term financial alternative when making small purchases, but also risks to using BNPL and the debt issues that consumers can potentially face in the long run.
These fixed plans are appealing to the young adult who can't access credit, has existing student loans, and worries about open-ended credit card debt, Rossman said. For users that have come of age at a tumultuous financial time with Covid, and before that, the Great Recession, "the predictability" of the BNPL option is attractive, he added.
Buy now pay later companies short-term financing approach can limit the delinquency risk, but in the long run, BNPL can have negative consequences for the consumer credit market, according to Sokolin.
Sokolin says the BNPL business model is sometimes backed by transaction fees that underwrite the credit, which "moves the risk to different destinations" rather than eliminating it.
"It is hard to boil the impact of all this down to a single vector, but overall, this does generate competition and is likely to drive down the price of borrowing," Sokolin said. "Which in turn will generate more lending and potentially worse financial outcomes for people as they become indebted."
Underserved consumer demographics
Buy now pay later is moving "upmarket," according to Rossman, with the "Henry" consumer — the high earner but not yet rich — using it more often.
This upmarket consumer has a salary of at least $75,000 and has enough credit to be approved for a credit card, but is being drawn to the predictability of the loan installments buy now pay later offers.
"It's not necessarily that you don't have much money, or you don't have much credit, although that is sometimes the case," Rossman said. "I think more than anything it's the predictability that certain people are drawn to. [That] again relates to young adults."
On the whole, income does matter. For consumers that don't qualify for a credit card due to a low credit score or income, BNPL's short-term financing is an attractive alternative. In the CNBC/Momentive survey of those using BNPL to shop this holiday season, 10% make $50,000 or less a year; while 6% of those making between $50,000 and $100,000 say they will use BNPL; and only 4% of those earning $100,000 or more.
CNBC's Small Business Survey also reported higher BNPL popularity among Black and Hispanic Americans – with 12% of Blacks saying they will use BNPL for holiday purchases and 13% of Hispanic Americans saying they will use BNPL. In comparison, only 5% of white Americans said they will use it; and 3% of Asian Americans saying they will use this payment option. Use of credit cards for holiday shopping is much higher among whites (56%) and Asian Americans (70%), versus Black and Hispanic Americans, both below 40%.
The racial gap among BNPL users brings up the question of financial discrimination or barriers for minorities trying to access financial services. "There is likely a complex, interconnected relationship between the economic structures and income distribution in the U.S., tied to racial history and labor," Sokolin said. "There is documented ethnic bias, which is correlated with both economic status and cultural legacy," he added.
But because of the income and wealth gap between white Americans and minorities, it is difficult to tell break out BNPL trends apart from the broader credit industry trends.
"I would try to understand these figures in context of overall indebtedness of households in the U.S.," he said. "White Americans on average have higher income and have an easier time servicing debt."
The challenge minorities face with taking advantage of purchasing alternatives like BNPL is the debt used to fund consumption, according to Sokolin.
In the study conducted by Accenture for Afterpay, it found 64% of American adults were able to pay theoretical emergency expenses of $400 with cash or from savings, while 12% of adults reported being unable to pay this emergency expense at all. For Black and Hispanic Americans, the inability to pay increased to 17% and 13%, respectively, according to the September report, "The Economic Impact of Buy Now, Pay Later In the U.S."
An alternative financial solution like buy now pay later would "relieve a significant burden on [an] economically vulnerable individual," the Accenture analysis stated.
But Sokolin said as with any credit option, a danger with BNPL is that consumers may not remain financially healthy enough to fund a lifestyle they get used to, and that can generate a negative credit cycle. And with the rise of fintech, BNPL adds the risk of making access to credit too easy in some cases.
"If borrowing is too easy or too gamified with incentives to make taking out debt easily available, then people will ruin their household balance sheets," he said.
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Buy now pay later boom shows no signs of slowing this holiday season - CNBC
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