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The buy now, pay later phenomenon shows little sign of abating.
Buyers have flocked to the option over the past year as online shopping spiked amid the pandemic, benefiting fintech companies like Affirm, Klarna, and Square’s Afterpay, while prompting other platforms to payment like PayPal to go further in this direction and threatening the banks and the credit card companies.
BNPL usage is set to grow this holiday season, according to a recent CNBC poll.
Seven percent of shoppers said they would use BNPL for their vacation shopping this year, according to the CNBC / Momentive Small Business Survey for Small Business on Saturday. The survey was conducted by Momentive from November 10-12 and included 2,744 respondents.
While this 7% is still comparable to other traditional payment methods – 55% of shoppers say they will use debit cards, 51% will pay with credit cards and 43% say they will use cash – experts say this percentage could easily be doubled. or tripled the following year.
“The important thing is not the 7% adoption number, but the fact that the number is increasing,” said Lex Sokolin, chief economist and global co-head of fintech at ConsenSys.
Adoption is encouraged by young buyers
Much of BNPL’s growth so far has apparently been driven by young buyers.
For example, 12% of 18-34 year olds polled in the CNBC / Momentive survey said they used buy now to pay later for vacation purchases. In comparison, 0% of those 65 and over said they would use BNPL for their vacation shopping.
“Buy now, pay later, the user is definitely younger,” said Ted Rossman, senior industry analyst at CreditCards.com. “It’s definitely more of a Gen Z and Millennial thing.”
But the idea that BNPL only appeals to young users with little money and little credit seems to be changing, according to Rossman. “A lot of these people have credit cards, but they use buy now pay later selectively.”
Adoption is also facilitated by large retailers pushing the payment method. Affirm entered into a major partnership with Amazon in August that would allow customers to split purchases of $ 50 or more into smaller monthly installments. The deal between the two companies was expanded in November. Affirm also works with over 12,000 other merchants, including Peloton and Walmart.
BNPL is also fueled by acquisitions. Square, which changes its name to Block, bought Afterpay for $ 29 billion in August, while PayPal announced plans 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, in fact, of the holiday season for us.”
PayPal launched a US installment payment option in late 2020.
“During Black Friday, our volume on buy now, pay later increased almost 400% year over year. We completed some 750,000 transactions in a single day on Black Friday,” Schulman said. at Cramer last week.
Overall, payment method usage around the world during Cyber Week – Nov. 23 through Monday – jumped 29% year-over-year, according to data from Salesforce. On Black Friday, in particular, Salesforce said 4% of orders in the United States used a short-term installment payment option.
“And they make it so easy, right at the checkout,” Rossman said.
There are advantages to using this option as a short-term financial alternative when making small purchases, but also risks to using BNPL and the debt issues consumers can potentially face in the long term.
These fixed plans are attractive to young adults who don’t have access to credit, who already have student loans, and who are worried about indefinite credit card debt, Rossman said. For users who have come of age in a turbulent financial time with Covid, and before that, the Great Recession, the “predictability” of the BNPL option is attractive, he added.
The short-term, buy-now-pay-later business financing approach may limit the risk of default, but in the long term, BNPL can have negative consequences in the consumer credit market, according to Sokolin.
Sokolin says BNPL’s business model is sometimes supported by transaction fees that secure credit, which “shifts risk to different destinations” rather than eliminating it.
“It’s hard to reduce the impact of all of this to a single vector, but overall it generates competition and is likely to lower the price of the loan,” Sokolin said. “Which in turn will generate more loans and potentially worse financial results for people as they go into debt.”
Demographics of underserved consumers
To buy now, to pay later, is to go upmarket, according to Rossman, the consumer “Henry” – the wealthiest but not yet wealthy – using it more often.
This high-end consumer has a salary of at least $ 75,000 and has enough credit to be approved for a credit card, but is drawn to the predictability of loan payments. Buy now pay later.
“It’s not necessarily that you don’t have a lot of money or that you don’t have a lot of credit, although sometimes you do,” Rossman said. “I think more than anything, it’s the predictability that appeals to some people. [That] again concerns young adults.
Overall, income matters. For consumers who are not eligible for a credit card due to a low credit rating or low income, BNPL’s short-term financing is an attractive alternative. In the CNBC / Momentive survey of those who use BNPL to shop this holiday season, 10% earn $ 50,000 or less per year; while 6% of those earning 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 greater popularity of BNPL among black and Hispanic Americans – with 12% of blacks saying they would use BNPL for their vacation shopping and 13% of Hispanic Americans saying that they would use BNPL. In comparison, only 5% of white Americans said they would use it; and 3% of Asian Americans say they will use this payment option. Credit card use for holiday shopping is much higher among Whites (56%) and Asian Americans (70%) than among Blacks and Hispanics, both below 40% .
The racial divide between BNPL users raises the issue of financial discrimination or barriers for minorities trying to access financial services. “There is probably a complex and interconnected relationship between economic structures and income distribution in the United States, linked to racial history and to work,” Sokolin said. “There are documented ethnic prejudices, which are correlated with both economic status and cultural heritage,” he added.
But because of the income and wealth gap between white Americans and minorities, it’s hard to distinguish BNPL’s trends from the broader lending industry trends.
“I would try to understand these numbers in the context of overall household debt in the United States,” he said. “White Americans, on average, have higher incomes and have an easier time paying off their debt.”
According to Sokolin, the challenge minorities face in taking advantage of purchasing alternatives like BNPL is the debt used to finance consumption.
In the study conducted by Accenture for Afterpay, she found that 64% of American adults were able to pay for notional emergency expenses of $ 400 with cash or savings, while 12% of adults said be unable to afford 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 titled “The Economic Impact of Buying Now, Paying Later in the United States.”
An alternative financial solution such as buy now pay later “would lighten a significant burden on [an] economically vulnerable person, ”said the Accenture analysis.
But Sokolin said that, as with any credit option, the danger with BNPL is that consumers will not stay financially healthy enough to finance a lifestyle they are getting used to, which 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 fun with incentives to make debt easily accessible, then people will ruin their household’s balance sheet,” he said.