The Buy Now Pay Later Landscape
Millennials and Gen Z have had a difficult few years. Sandwiched in between the Great Recession and the COVID-19 pandemic, their views on personal finances differ significantly from generations of the past. Thanks to student loans, high unemployment, and ballooning housing costs, people under the age of 40 have a complicated relationship with debt and this has changed how they interact with credit cards.
Millennials carry fewer cards and have lower balances than Gen-Xers did at their age. 23% of millennials don't carry a credit card and one in five members of Generation Z believe debt should be avoided altogether. Combine this with legislation limiting the marketing of credit cards on college campuses and you get fewer and fewer young people signing up or getting approved. However, this has left many unable to make bigger purchases normally reserved for credit cards like electronics, expensive clothing, appliances, and furniture. Luckily for them, a digital solution has landed in the form of Buy Now Pay Later and plenty of companies are eager to help them sign up, including Afterpay, the newest addition to the Square Inc. family, and Apple, which plans to roll out Apple Pay Later in the coming months.
Buy Now Pay Later (BNPL) services do exactly what they say; they allow consumers to buy an item and pay for it gradually over time. The vast majority of purchases made through these services are small — 71% of users owe less than $500, 28% owe less than $100. This is a reflection of the retailers most likely to carry these services; places like Urban Outfitters and ASOS, and the average consumer utilizing them. 61% of Americans aged 18-24 have used a BNPL compared to just 40% of Americans over the age of 54. Nonetheless, these services are on the rise, as usage jumped almost 50% between 2020 and 2021 and is on track for a 27% CAGR between 2020 and 2025.
The most common type of BNPL is an interest-free six-week payment plan, an easy sell to shoppers only spending a few hundred dollars. Companies specializing in these include Afterpay, FuturePay, Klarna, PayPal Pay in 4, QuadPay, and Sezzle. Retailers love these programs as they increase average basket size by between 20% and 30%. However, these plans and their small-scale shoppers do little to generate revenue unless they miss a payment, which some 56% of them have. This results in late fees which can range from $7 to $38 per missed payment and a hit to your credit score. This is a reminder that many of these plans are targeted at impulsive consumers who lack a credit history, have a poor credit score, or have insufficient income.
According to C+R Research, 33% of surveyed users prefer BNPL because of the easy approval process, 33% said it was because their credit card was already maxed out, and 22% said the credit limit on their card was too low for their desired purchase. That being said, it's not all doom and gloom — the most common reason users prefer BNPL: they are more flexible and easier to make payments compared to other methods.
Beyond small purchases, BNPL also takes the form of long-term financing with interest which is intended for bigger splurges. You can find these plans with Klarna, Zip Pay, and Uplift, but the biggest name is Affirm Holdings (featured in one of our First Looks). Affirm runs a credit check on users and establishes a baseline interest rate for them (if you have a great credit score and are shopping at certain retailers this may be 0% APR). Affirm then helps you understand exactly how much interest you will pay, not just a percentage. This was highlighted in their S-1:
"We charge simple interest, which means consumers pay fixed amounts of interest that they agree to up front, and the interest never compounds".
Affirm hopes that this will help shoppers better understand their spending and empower their financial decision-making. From what I've read about Apple's upcoming offering, it will take on a similar look, focused on big-ticket items and interest payments rather than smaller plans built around late fees.
While the Buy Now Pay Later space is most definitely on the rise, it remains highly fragmented and regionally divided. Established payment companies are fighting with small first-movers for both retailer and consumer attention. It's too early to see which company will pull ahead, especially as most plans are virtually identical, but I would wager even more fintech companies will join the race as a way to diversify their offerings and further digitize banking.