2020 was a banner year for Buy-Now-Pay-Later (BNPL). As an alternative payment option at checkout, BNPL continues to grow exponentially due to its no interest/fees and installment plan structure (divided into weeks or months). Consumers can purchase more expensive products at no financing cost (with on-time payments) and merchants are willing to take a discount in exchange for monthly sales growth. Top BNPL providers (such as Affirm, Klarna, Sezzle, AfterPay) front the total purchase amount (minus the discount) to pay the merchant AND the customer pays the provider. These companies make revenue on this discount and customer fees (for missed payments).

Despite its growth and success, BNPL is still somewhat new in the US for consumers and merchants. In countries and regions (such as Europe and Australia) in which its more established, regulators and consumer protection advocates are proposing changes and disclosures to curb negative financial impact from overspending. As the world recovers from the effects of the pandemic, certain trends begin to emerge from Buy-Now-Pay-Later that will shape its long-term viability and success.

TOP BNPL PROVIDER rapid GROWTH FROM 2020

The rising trend for eCommerce sales jumped higher over the last 12+ months due to COVID-19 . From groceries, food delivery, and home goods, purchases are made daily via desktop and mobile devices on debit and credit cards. Buy-Now-Pay-Later was already an emerging force gaining traction with consumers and merchants — the pandemic became a golden opportunity for shoppers to try it out for the first time. Global market volume for BNPL is expected to double in the next 4 years (TSG) with UK, Australia, Asia, and the Middle East leading the way in growth.

This expansion to new users helped top companies (such as Afterpay and Splitit) grow over 200% (year-over-year) and other players hit new milestones in 2020, especially with recurring customer spend. Once a new user has tried it, there’s a high sentiment in continued use as 85% surveyed would use it again. Afterpay considers about 90% of its customers as repeat shoppers. With this loyalty and buying behavior, some consumers are making a BNPL purchase about once a week (48x annually) — more than traditional credit cards.

BUY-NOW-PAY-LATER MAKING STRIDES IN THE US

With the US economy opening back up in the next month, Buy-Now-Pay-Later is expected to increase its scope to in-person shopping as well. Users of all ages wary of credit card fees and interest are increasingly drawn to this new checkout option. The ease of use (during checkout) is also helping maintain sticky customer relationships that keep customers coming back.

Due to the popularity of credit cards and reward programs, adoption in the US has been slow compared to other regions. The pandemic hastened the pace as consumers opened up to new and flexible payment options, especially during the holidays. Recent surveys estimate about 56% of consumers have tried BNPL, an 18% increase from July 2020.

Early success is coming from debit card shoppers that aren’t concerned about earning rewards. The funds to pay for purchases are already in their bank accounts, but the 4-6 installment payments allow them to make larger or more frequent purchases. Budgeting on discretionary shopping becomes easier as long as customers spend within their means. Consumers that would typically be a ‘revolver’ type of credit card user (maintains a monthly balance on their credit card, pays interest) can now become more of a ‘transactor’ (who pays off their balance in full, with no interest).

COMPARING BNPL TO CREDIT CARDS

The key differentiator in Buy-Now-Pay-Later is the 0% interest (no fees) on purchases. The drawback is that a missed or late payment would negate this interest-free benefit as many providers would assess a late fee and (possibly) a finance fee (see table below). Programs vary by company, amount, and state in which the consumer transacts.

For certain amounts and payment periods, a traditional credit card can be better suited to shoppers. Many new card offers offer 0% on purchases for 12 - 24 months, which is longer than the 1 - 2 month repayment periods from BNPL. Credit card companies also report payment history to credit bureaus, which can help boost credit scores — installment programs from Buy-Now-Pay-Later don’t have this reporting capability.

Other services come as standard from credit card issuers, such as credit monitoring, insurance, rewards, and claims support. BNPL companies aren’t experienced in card support or managing dispute/chargeback requests. These providers also don’t have as strict regulatory requirements when it comes to response timelines and provisional credit.

Even though Buy-Now-Pay-Later is the latest buzz in payments and fintech, overall it may not stand up to a credit card experience properly managed by consumers who don’t overspend AND pay on time. The increased flexibility of terms, service level, and ability to improve credit standing may better align with certain users that qualify.

REGULATORY OVERSIGHT COMING FOR BUY-NOW-PAY-LATER

With the advanced adoption rate in UK and Australia, opponents to Buy-Now-Pay-Later are now pressing for controls and guidance that protects consumers. The early concerns are tied to disclosures and communication of proper budgeting that reduces the likelihood of overspending. The Financial Conduct Authority (FCA) in the UK is monitoring BNPL closely regarding checkpoints of affordability and a consumer’s ability to complain to providers. A formal review from this agency in February covered multiple components of unsecured credit, including BNPL.

Marketing efforts are also under regulatory review as many of the top companies use social media influencers and targeted ads to gain spend from younger consumers. Advertising campaigns come off as encouraging lavish spending at the risk of increased debt and falling behind on payments. Personal finance and budgeting gurus have even launched awareness campaigns (such as #regulatebuynowpaylater) pushing for improved oversight on BNPL.

Even though no formal recommendations have been made by the FCA or other regulatory bodies, there is a sense of urgency in proposed actions that protect consumers as soon as possible. If Buy-Now-Pay-Later is the first exposure to credit for an individual, there’s too much gray area in financial health risks to avoid which isn’t being discussed.

In the US, both the Consumer Financial Protection Bureau (CFPB) and California’s Department of Financial Protection and Innovation are considering a similar scope to lending and protecting from lender abuse for Buy-Now-Pay-Later. Some early statistics of concern in the US are 31% of customers having missed one or more payments, which has a negative impact on credit profiles.

WHERE does BNPL go from here?

The verdict is still out on Buy-Now-Pay-Later’s sustainability as a payment alternative. When used properly by consumers, this checkout option can produce positive results in avoiding debt and improved budgeting habits. If misused or poorly communicated, individuals can spend more than they can afford and miss payments that add fees (similar to credit cards).

Regulators around the world are cautiously monitoring the new data from consumers using BNPL and all complaints over the next year. New changes or recommendations can lead to minimum qualification criteria, capped fee structure, and a user acknowledgement of maximum fees/cost in making a purchase (similar to CARD Act enhancements after the Financial Crisis in 2009). BNPL providers would welcome a certain level of oversight as long as it doesn’t restrict the repeat business of its users in good standing. Ultimately, the consumer mix (between proper budgeting and overextended users) will determine what comes next in Buy-Now-Pay-Later.

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