When buy now, pay later (BNPL) first hit the mainstream, it promised the holy grail for consumers; the ability to take their purchases home, but only pay for a small percentage upfront. Merchants adopted buy now, pay later options in huge numbers to gain a competitive edge and boost average order value. As a result, the marketplace has expanded rapidly. The global BNPL industry is projected to grow to $90.51 billion by 2029, a CAGR of 21.7%.
While uptake is continuing to grow, some storm clouds are gathering on the horizon. Growing competition within the sector and the possibility of tighter regulation are forcing BNPL providers to think outside the box and find new ways to attract consumers and achieve profitability.
In this article we dive into what buy now, pay later is and six trends we see affecting e-commerce retailers with BNPL.
What is Buy Now, Pay Later?
BNPL is a deferred payment system where consumers can pay for a purchase at intervals over a fixed time period. Under this system, a customer will make an initial payment to receive items upfront (usually a percentage of the total sale) and then pay off the remaining balance via interest free installments.
In essence, BNPL is a personal loan where consumers must agree to make regular, on-time payments to the service provider, but without the red tape involved with traditional credit cards and banks.
Offering consumers payment plans to manage the cost of a purchase is not a new innovation. Traditional layaway systems have been used by department stores and independent retailers for decades, but with a couple of key differences. Firstly, consumers had to pay off the remaining balance before they were allowed to take their purchase home. Secondly, deferred payment schemes were much harder to access in the era before online shopping.
By combining the convenience of ecommerce with the near-instant gratification of getting items delivered before paying off the balance, Buy Now, Pay Later schemes have skyrocketed in popularity.
How does BNPL work?
BNPL programs will set different rules concerning monthly installments, such as how much you can borrow and possible late fees or interest charges when payments are not made on time.
Some programs may require a soft credit check before you are allowed to start using the service. But unlike traditional credit cards, a BNPL provider is not required to report payments to credit bureaus.
Below is a typical outline of how Buy Now, Pay Later works when shopping online:
Why is Buy Now, Pay Later becoming so popular?
The purpose of Buy Now Pay Later is simple: to entice consumers to buy discretionary or high-value items that they might not commit to purchasing otherwise.
It’s easy to see why BNPL is so appealing to consumers. It keeps the upfront costs of shopping down while still getting to receive items upfront with no interest. In every sense, it’s a win-win.
A report from Juniper Research estimates that the Buy Now, Pay Later market will reach $995 billion by 2026. Moreover, in a 2021 survey by C + R Research, 59% of respondents said they had used a BNPL service in the past year to purchase an unnecessary item they couldn’t afford to buy otherwise.
The vast majority of this growth comes from Gen Z and Millennial consumers, who are moving away from credit cards in favor of debit-based options. In the wake of the pandemic, 60% of millennials and Gen Z view credit cards as ‘too risky’, with BNPL presenting a much friendlier, more transparent alternative.
Yet there are also increasing signs that not all purchases made through BNPL are discretionary. A study by Credit Karma found that 53% of consumers who have used Buy Now, Pay Later have done so out of necessity, with 45% saying they’re most likely to use BNPL options when they’re having cash flow issues.
Here are six trends that are currently transforming the BNPL space that merchants should keep an eye on:
Regulation is looming
Ever since buy now, pay later solutions began popping up, concerns have been raised that BNPL providers are dodging the onerous lending responsibilities placed on banks and credit card companies, despite offering the same service.
Many BNPL systems only perform cursory credit checks – or none at all – before allowing consumers to open an account and make purchases. While deferred payment plans don’t charge interest when payments are paid on time, users can quickly find themselves trapped in debt spirals if they can’t meet payment deadlines. This is a serious concern, especially when there’s nothing to stop shoppers from opening accounts with multiple providers. Consumers may also gravitate towards BNPL services if their credit scores are too poor for other types of lending or if credit cards have been maxed out.
According to LendingTree’s latest BNPL study, there’s a gradual shift underway from deferred payment plans being used for high-value discretionary items to everyday essentials. Of the 43% of respondents who had used BNPL so far in 2023, 21% had done so for basic needs like groceries.
For this reason, many countries are exploring how to bring BNPL in line with other financial institutions, such as increased credit checks or consumer protection against loans that can’t be paid back. The Consumer Financial Protection Bureau (CFPB) announced in 2022 that it plans to regulate BNPL similarly to credit cards, citing ‘debt stacking’ by consumers by using multiple providers and a lack of disclosures by providers. Australia, New Zealand, and the UK are also exploring similar regulations.
The question remains whether looming regulation may persuade providers to self-regulate to stave off changes that make it less easy to acquire customers. AfterPay has already modified its late fee structure after complaints that penalties were exceeding 25% of the order value, something the Australian Credit Act doesn’t allow. It remains to be seen what the extent of these changes will be and how much authorities will force BNPL providers to change their business models.
Consumers are turning to BNPL to manage inflation
When costs go up, consumers have two choices; to spend less, or to find ways to manage cash flow so they can keep buying what they want. With many shoppers proving reluctant to cut their budgets, we’re seeing deferred payment plans become a necessity to keep discretionary shopping habits going.
According to a holiday debt survey by LendingTree, consumers accumulated an average of $1,549 in debt during the 2022 holiday season, up 24% from $1,249 the previous year. Moreover, BNPL orders jumped by 85% between Thanksgiving and Cyber Monday compared to the week prior, indicating that consumers are preferring buy now, pay later to avoid missing out on good deals they can’t afford upfront.
This behavior is understandable, considering that BNPL is easy to sign up for and involves far less scrutiny than opening a new credit card. However, the growing reliance on deferred payments is a major sign of financial strain, especially when it comes to high-ticket items.
BNPL losses are growing
Despite the runaway adoption of buy now, pay later amongst consumers, this hasn’t translated into profitability for the providers. All the things that make the BNPL model so appealing for consumers – easy access to credit, getting their purchases upfront, and zero interest – are what make it so expensive to operate. So, even with robust growth and passing on fees to participating merchants, the losses incurred by BNPL providers are rising faster than revenue.
For example, Klarna’s U.S. customer base grew by 36% to 34 million at the end of 2022, up from 25 million in 2021. But its operating costs have grown 70% within the same period. Other industry players including Affirm and Afterpay are also seeing significant losses, raising questions about the viability of the market as a whole.
In addition to the business model itself, the growing saturation of the marketplace raises the question of whether there’s enough space for so many BNPL providers to co-exist. While the acquisition of new customers remains strong, there are signs that more of the smaller players are at risk of being gobbled up by those with larger market shares. Zip acquired Sezzle last year due to its U.S. expansion plans, following on from its acquisition of Australian-based QuadPay back in 2020. As the competition for customers heats up, there’s a high chance of further consolidation into the hands of fewer players.
Gen Z is the key to ongoing growth
As the group who grew up with shopping capabilities in their back pocket, so-called ‘shoppertainment’ on platforms like Instagram and TikTok has a huge influence on what young consumers want to purchase. TikTok’s own research found 52% of millennial users in the UK bought a product they saw on the platform, rising to 60% for Gen Z.
Yet Gen Z needs some way to finance these purchases – and they’re turning to BNPL in huge numbers. Overall, 61% of Gen Z consumers say they’ve bought items using a BNPL service, compared with just 40.6% of millennials.
Having come of age within a highly uncertain time for the economy and society as a whole, it’s not surprising that Gen Z is showing a preference for BNPL over traditional credit cards. Surveys show that Gen Z exhibits some of the lowest levels of trust in credit cards. Just 55% of Gen Zers have at least one credit card, compared with 66% of millennials, 77% of Gen X, and 85% of baby boomers.
Where banks can feel intimidating and unfriendly to young consumers, buy now, pay later is a true digital native service and feels far more approachable. Instead of a dense list of T&Cs, BNPL services offer a simple and compelling system: Pay in installments on time and accrue no interest.
While commentators think it’s likely that credit card uptake will increase as Gen Z ages, their aversion towards debt means it’s likely they will continue using BNPL in conjunction with other types of financing. This has resulted in the launch of combined offerings such as Visa’s Visa Installments system, which brings together deferred payment plans with a traditional credit card.
Expansion into new channels
As the Buy Now, Pay Later space heats up, providers are looking for new ways to differentiate their service and get in front of consumers. This means moving beyond being a button at the checkout and meeting shoppers where they are.
Klarna has ventured into the pop-up retail space, launching ‘Klarna Oasis’ on Melrose Avenue in Los Angeles last year which spotlights sustainable fashion and beauty brands in its ecosystem. This follows the launch of a physical BNPL card through their collaboration with Visa, as well as a virtual shopping platform where consumers can purchase items and get advice from assistants via live and video chat.
But Klarna is far from the only buy now, pay later service to be strengthening its customer-centered approach. Zip has launched a partnership with Chevron, allowing drivers to pay for their gas in four installments over six weeks. AfterPay is trying to corner the lucrative beauty market by boasting partnerships with both Sephora and Ulta Beauty, competing retailers that are both frequented by beauty and skincare enthusiasts.
BNPL for business is another frontier that is presenting providers with robust growth opportunities. According to Bloomberg, the B2B BNPL industry alone is worth $700 billion. As acquisition slows down in the consumer sector, this offers a likely pivot to ensure ongoing growth. Other providers are expanding into non-BNPL fintech tools, such as Klarna’s price comparison tool, which allows consumers to compare products across hundreds of retailers.
These new initiatives are a clear sign that BNPL providers are seeking to find a competitive edge as the market becomes more crowded. Offering additional channels and services increases the odds that users will get pulled into the provider’s wider ecosystem.
Retailers are getting in on the action
While many brands are happy to partner with independent BNPL providers that shoppers are familiar with, some larger retailers are seeing an opportunity to expand their service offerings by launching their own BNPL services. While this avenue won’t work for every brand, it’s a natural step for those who already attract high levels of loyalty and repeat purchases from customers.
In-house BNPL programs offer businesses a lot of advantages, namely that they can keep customers within a closed ecosystem. Apple has just launched its Apple Pay Later service in the US, which will allow Apple customers split purchases over four installments with no fees or interest. Repayments are managed via Apple Wallet, offering customers a seamless payment experience.
Amazon also offers its own Monthly Payments service, but eligibility varies depending on purchasing history and the price of the product. However, Amazon Pay’s new partnership with Citi allows credit card holders to access BNPL at Amazon and other stores.
