Companies like Affirm, Klarna, Afterpay, and Sezzle have made BNPL increasingly popular, particularly among shoppers looking for more flexibility in paying for purchases. Here is an in-depth analysis of why BNPL continues to grow and surpass more conventional credit card usage to become the second most popular credit payment option, with 25% usage among American customers.
BNPL plans allow shoppers to split the cost of their order into smaller, interest-free installments. Many customers find this payment option appealing since it helps them manage their money better. The fact that these buy now pay later loans do not appear on your credit reports has nothing but fueled the ongoing attraction towards them.
Key Takeaways – Why BNPL Continues to Grow
- Increasing Usage of BNPL Services: Buy Now Pay Later (BNPL) services are gaining popularity, with 25% of Americans using them in the past year. This trend is especially notable among younger generations and parents, who prefer the flexibility of splitting payments into smaller, interest-free installments.
- Demographic Preferences: Younger consumers and parents are the primary users of BNPL services. For instance, 40% of Gen Z and 37% of parents with minor children reported using BNPL, compared to lower usage rates among older generations and those without minor children.
- Upcoming Federal Regulations: Starting in May 2024, BNPL services will be subject to the same federal regulations as credit cards. These regulations aim to provide better consumer protection by addressing merchant disputes, refunds offered, payments suspended during investigations, and disclosure of fees.
- Economic Context and Credit Card Debt: The rise in BNPL usage comes amidst high levels of credit card debt in the US. With total credit card debt at $1.115 trillion in early 2024 and many cardholders carrying month-to-month balances, consumers seek alternative payment options like BNPL to manage their finances.
Source: Statista – Global transaction value of buy now, pay later (BNPL) in e-commerce from 2019 to 2021, with forecasts from 2022 to 2026
Growing Popularity and Use of Buy Now, Pay Later (BNPL) Services
Buy Now Pay Later (BNPL) services are relatively new to the credit market, and their popularity is growing quickly. BNPL allows consumers to split a purchase into several smaller installments, usually over four or six months. The application process is quick and easy without requiring a credit check. This is a key benefit for people with poor or no credit. BNPL lenders typically don’t charge interest; they earn money by charging merchants 3% to 6% of the purchase price.
A recent NerdWallet report showed that 25% of Americans used Buy Now Pay Later in the past year, with younger generations and parents being the most frequent users. Meanwhile, 66% of respondents used credit cards during the same period. NerdWallet surveyed 2,061 US adults in early April.
Sara Rathner from NerdWallet agreed that it has unquestionably gained popularity. She explained that BNPL programs often bypass the need for a credit check or application process, simplifying how consumers can start using them.
Further breaking down this, 25% of consumer groups and 37% of parents with minor children reported using BNPL services over the past year, in contrast to 20% of individuals without minor children. Among different age groups, 40% of Gen Z (ages 18-27) and 36% of millennials (ages 28-43) have utilized BNPL services during this period, compared to 20% of Gen X (ages 44-59) and 12% of baby boomers (ages 60-78).
Source: Forbes
In the last year, 8% of Americans resorted to BNPL options to cover essential expenses, including groceries and personal care products. Unlike credit cards, which often provide cash back or other rewards, BNPL services usually do not offer these advantages.
Rathner mentioned that as the prices of necessary goods continue to rise, Buy Now Pay Later has become a popular method for covering these expenses. Although this form of credit has been crucial for many, anticipated changes to the payment terms are expected soon.
New Federal Regulations Will Make BNPL More “Consumer-First”
According to the Consumer Financial Protection Bureau’s (CFPB) announcement last month, BNPL companies will be forced to abide by federal regulations covering the use of credit cards in the US beginning in May 2024. Buy Now Pay Later customers will soon have the same federal protections as credit card users.
Under the new legislation, Buy Now Pay Later firms—dominated by fintech businesses like Affirm and Klarna—must investigate merchant disputes, offer refunds for returned goods or canceled services, suspend payments while ongoing, and disclose fees on bills.
Many analysts find that this change is beneficial to consumers. It is a positive step towards providing better protection for consumers who use BNPL services, which have gained significant popularity in recent years. By aligning BNPL firms with the same standards as credit card companies, the CFPB aims to ensure that consumers feel secure and well-informed when using these services.
Klarna also stated in response to the CFPB’s announcement. In it, Klarna indicated that the company already provides its users with the protections mentioned by the CFPB.
Sebastian Siemiatkowski, the CEO and co-founder of Klarna, commented that there may be value in instituting some degree of regulation around the buy-now-pay-later industry. However, he noted that such regulation should be considered in the context of whether these products are ultimately in the best interest of consumers, as compared to traditional credit cards.
Credit Card Debt Trends and Challenges in the US in 2024
In the first quarter of 2024, Americans’ total credit card debt amounted to $1.115 trillion, as the Federal Reserve Bank of New York reported. This is a decrease from $1.129 trillion in the final quarter of 2023, which was the highest since the New York Fed began tracking this data in 1999. It’s unlikely that this downward trend will continue throughout the year, considering that over 44% of credit card holders carry balances month to month, a trend that many experts find concerning.
Reducing this debt is challenging. Delinquencies have gone up to their highest level since 2011, and 8% of cardholders surveyed have been in debt for a year or longer. Despite this, the industry views these figures as a retrieval of pre-pandemic norms. Lenders had anticipated an increase in delinquencies, which were kept unusually low during the COVID-19 pandemic by federal stimulus payments. Nonetheless, the issue persists at the individual level.
Low-income households, parents with minor children, and younger consumers are experiencing the most significant financial strain. Approximately 38% of cardholders earning $100,000 annually or more carry a balance, compared to 56% of those earning $50,000 or less.
Parents of minor children are also more likely to have incurred late fees over the past year, with 61% reporting such fees compared to 28% of adults without children. As changes to Buy Now Pay Later (BNPL) arrangements are anticipated shortly, consumers must understand the terms of such financing options fully.
Rathner emphasized the importance of being informed about one’s rights before making any financial commitments.
Conclusion
The popularity of Buy Now Pay Later (BNPL) services continues to rise, offering consumers an alternative to traditional credit cards. With 25% of Americans using Buy Now Pay Later, particularly among younger generations and parents, this payment method has become a significant part of the credit landscape. However, with new federal regulations set to take effect in May 2024, Buy Now Pay Later services will soon have to provide the same consumer protections as credit cards. This regulatory shift aims to enhance transparency and security for users.
As consumer credit evolves, individuals must stay informed about the terms and implications of their payment choices to manage their finances effectively.
