Buy Now, Pay Later: Swipe now, worry later

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  Quantumrun Foresight
• November 6, 2024

Insight summary

Buy Now, Pay Later (BNPL) has gained popularity for its flexible payment options, allowing consumers to make purchases without immediate financial strain. However, as more people turn to BNPL, concerns are rising about its potential to increase personal debts. In addition, while businesses may benefit from higher sales in the short term, they could face challenges with product returns and managing customer expectations around fees.

Buy Now, Pay Later context

BNPL is a short-term financing option that allows consumers to purchase goods or services and pay for them in installments over time, typically without accruing interest if payments are made on time. BNPL services like Klarna, Afterpay, Affirm, and Sezzle have become prominent in retail, providing shoppers with more flexibility than traditional credit card purchases. During the COVID-19 pandemic, BNPL gained significant popularity as consumers sought convenient ways to manage their finances, especially in online shopping environments. By 2023, the global e-commerce market reached nearly USD $24.5 trillion, boosted partly by the rise of BNPL platforms. 

Consumers choose BNPL as a payment method at checkout, breaking their purchase into four or more interest-free installments over a set period, typically every two weeks. However, if payments are missed, users can incur late fees, which can sometimes reach up to 25% of the original purchase amount, depending on the provider. A growing user base has led to consistent growth in BNPL transactions despite fluctuations in new user adoption. In 2024, Sezzle reported a year-over-year increase of 38.9% in the second quarter, highlighting how repeat users are driving the sector forward. Yet, this rise in usage has also raised concerns among financial regulators. As such, in 2024, the US Consumer Financial Protection Bureau classified BNPL services as credit providers.

Research shows that financially vulnerable populations, including those with low credit scores and limited access to traditional credit, are more likely to use BNPL. A 2023 survey by NerdWallet found that 33 percent of Americans had used BNPL services in the past year, an increase from 25 percent the previous year, despite concerns about accumulating debt. As BNPL becomes more entrenched in consumer spending habits, experts warn that default rates and financial instability could rise. Still, companies like Affirm and Klarna continue to expand their offerings, confident that the convenience and flexibility of BNPL will maintain its relevance in the years to come.

Disruptive impact

Consumers may find themselves making more frequent purchases because of the ease and flexibility of installment payments, especially for non-essential items. However, the convenience of deferred payments could lead to unintentional debt accumulation, as some consumers might not fully consider the long-term impact on their budgets. As BNPL becomes more embedded in everyday purchases, consumers may shift away from traditional credit card use, potentially affecting their overall financial planning. Furthermore, increased reliance on BNPL may require individuals to develop better financial literacy skills to avoid falling into cycles of missed payments and rising debt.

Companies may need to integrate BNPL options into their e-commerce platforms to remain competitive and attract more impulse buyers. However, this could lead to increased product returns, which would affect inventory management and customer service operations. Additionally, businesses may explore partnerships with BNPL providers to offer exclusive payment plans, potentially encouraging higher consumer spending but also posing a risk if default rates rise. As more retailers offer BNPL, they may also need to balance short-term sales boosts with the long-term risk of customer dissatisfaction due to hidden fees or unclear terms.

Meanwhile, governments may be pressured to regulate BNPL more strictly as its use grows, especially if it leads to widespread consumer debt. New policies may emerge that classify BNPL services similarly to credit cards, which could give consumers greater protection but may also slow down the industry's expansion. International trade policies may also be affected, as countries evaluate how to manage cross-border BNPL transactions and the role of foreign payment platforms in domestic markets. Governments may invest more in public financial education campaigns to address the growing need for consumers to understand how these services work and their potential risks. 

Implications of Buy Now, Pay Later

Wider implications of BNPL may include: 

• Retailers increasingly embedding BNPL services into their business models, creating new revenue streams through partnerships with payment platforms..
• Low-income households relying more heavily on BNPL services due to reduced access to traditional credit, potentially leading to financial vulnerability if not managed properly.
• The financial industry adjusting lending criteria as BNPL becomes a competitor to credit cards, which could push banks to offer more flexible payment options to retain customers.
• Increased consumer spending fueled by BNPL availability, which may boost short-term retail growth but could lead to higher personal debt rates if individuals overextend their finances.
• New technological integrations emerging as BNPL platforms focus on improving data analysis and artificial intelligence to assess creditworthiness more accurately without relying on traditional credit scores.
• Employment in FinTech expanding, as BNPL growth fuels demand for skilled workers in tech development, customer service, and fraud prevention roles.
• Governments expanding financial literacy programs to educate consumers on managing BNPL responsibly, reducing the risk of debt spirals in economically vulnerable demographics.
• Retailers shifting marketing strategies to emphasize the convenience of BNPL, encouraging impulse buying and possibly contributing to higher rates of product returns.
• Increased environmental impacts, as increased consumerism fueled by easy access to credit could result in higher production and waste, particularly in the fast-fashion and electronics sectors.

Questions to consider

• How might using BNPL for everyday purchases impact your long-term financial stability?
• What role should businesses play in educating consumers about the risks of BNPL services?