Betsie Van der Meer | DigitalVision | beautiful pictures
The phenomenon of buying now, paying later shows little sign of slowing down.
Shoppers have flocked to options over the past year like Online shopping has surged amid the pandemic, benefiting fintech companies like Affirm, Klarna, and squareAfterpay’s, while promoting other payment platforms such as PayPal to go further in that direction and threaten banks and credit card companies.
According to a recent CNBC survey, BNPL usage is poised to grow this holiday season.
Seven percent of shoppers said they would use BNPL for holiday purchases this year, according to CNBC / Momentive Small Business Survey for Small Business Saturday. The survey was conducted by Momentive from November 10 to November 12 and included 2,744 respondents.
While 7% is still lower than with other traditional payment methods – 55% of shoppers say they will use a debit card, 51% will pay with a credit card and 43% say they will. cash – experts say that rate could easily double or triple next year.
“What matters is not the 7% figure, but the growing number,” said Lex Sokolin, chief economist and co-head of global fintech at ConsenSys.
Adoption is driven by young shoppers
Much of BNPL’s growth up to this point seems to have been driven by younger shoppers.
For example, 12% of the 18-34 year old demographic surveyed in the CNBC/Momentive survey said they’re using buy now pay later for holiday purchases. Meanwhile, 0% of 65 and older said they would use BNPL for holiday shopping.
“Buy now, pay later, users are definitely younger,” said Ted Rossman, senior industry analyst at CreditCards.com. “It definitely belongs to Gen Z and the millennial stuff.”
But the idea that BNPL only attracts young users with little money and little credit seems to be changing, according to Rossman. “A lot of these people Do you have a credit card?, but they are using a selective buy now pay later feature. “
Adoption is also being supported by major retailers promoting the payment method. Confirm scored a great partnership with Amazon in August, that will allow customers to split purchases of $50 or more into smaller monthly installments. The agreement between the two companies is extended in November. Affirm also works with more than 12.00 other merchants, including Peloton and Walmart.
BNPL is also being driven by acquisitions. square, renaming to Block, bought Afterpay for $29 billion in August, while PayPal announced plans to acquire Japanese fintech firm Paidy for $2.7 billion in September.
PayPal CEO Dan Schulman told CNBC’s Jim Cramer that the company’s payments service is truly “one of the stars of the holiday season for us.”
PayPal launched an installment payment option in the US in late 2020.
Schulman told Cramer last week: “During Black Friday, our buy-now, post-pay volume was up almost 400% year over year. We did about 750,000 transactions in just one day on Black Friday. “.
Overall, payment method use globally during Cyber Week — November 23 through Monday — was up 29% year-over-year, according to Salesforce data. Specifically, on Black Friday, Salesforce said 4% of orders in the US use a short-term, installment plan.
“And they make it so easy, right at checkout,” says Rossman.
Yes benefits use this option as a short-term financial alternative when making small purchases, but also Risks of using BNPL and debt problem that consumers may face in the long run.
These fixed plans are appealing to young people who can’t access credit, have existing student loans and are worried about open credit card debt, says Rossman. For users who have come of age in times of financial turmoil with Covid and prior to the Great Recession, the “predictability” of BNPL options is compelling, he added.
According to Sokolin, buy now pay later for companies.
Sokolin said the BNPL business model is sometimes backed by credit-secured transaction fees, which “transfer risk to different destinations” rather than eliminating it.
“It is difficult to sum the impact of all of this down to a single vector, but overall, this creates competition and potentially drives down loan prices,” says Sokolin. “This will create more lending and potentially cause worse financial outcomes for people when they’re in debt.”
Underserved consumer demographics
Buy now postpaid is transitioning to “luxury”, according to Rossman, with “Henry” consumers – high earners but not yet rich – using it more often.
This luxury consumer has a salary of at least $75,000 and has enough credit to get a credit card approved, but is being drawn to the predictability of pay-as-you-go installment loans.
“It’s not necessarily that you don’t have a lot of money, or that you don’t have a lot of credit, although that still happens sometimes,” says Rossman. “I think more than anything it’s the predictability that some people are drawn to. [That] related to young people. ”
Overall, income is important. For consumers who don’t qualify for a credit card due to low credit scores or income, BNPL’s short-term financing is an attractive alternative. In a CNBC/Momentive survey of people using BNPL to shop this holiday season, 10% earn $50,000 or less per year; while 6% of those earning between $50,000 and $100,000 said they would use BNPL; and only 4% of those made $100,000 or more.
The CNBC Small Business Survey also reported higher BNPL prevalence among black Americans and Hispanics — with 12% of blacks saying they would use BNPL for holiday shopping and 13% Hispanic Americans say they will use the BNPL. By comparison, only 5% of white Americans said they would use it; and 3% of Asian Americans said they would use this payment option. Credit card use for holiday shopping is much higher among whites (56%) and Asian Americans (70%), compared with black and Hispanic Americans, both under 40. %.
The racial gap between BNPL users raises questions about financial discrimination or barriers for minorities trying to access financial services. “There may be a complex, interconnected relationship between economic structures and income distribution in the United States, tied to racial and labor history,” Sokolin said. He added: “There is documented ethnic bias, which correlates with both economic status and cultural heritage.
But given the income and wealth disparities between white Americans and ethnic minorities, it is difficult to distinguish BNPL trends from broader credit industry trends.
“I would try to understand these numbers in light of the overall indebtedness of American households,” he said. “The average white American has a higher income and has an easier time paying off debt.”
According to Sokolin, the challenge that minorities face when taking advantage of buying alternatives like BNPL is the debt used to finance consumption.
In research done by Accenture for Afterpay, it shows that 64% of American adults are theoretically likely to pay emergency expenses $400 cash or savings, while 12% of adults said they could not afford this emergency. For Black and Hispanic Americans, the insolvency rate increased by 17% and 13%, respectively, according to the September report, “The Economic Impact of Buy Now, Pay Later in the United States.” America”
An alternative financing solution such as buy now and pay later would “relieve the burden on [an] Accenture analysis said.
But as with any credit option, Sokolin said, one danger with BNPL is that consumers may no longer be financially healthy enough to finance the lifestyles they are used to, and that could create problems. out a negative credit cycle. And with the rise of fintech, BNPL adds risks that make access to credit too easy in some cases.
“If it’s too easy to borrow, or too gambled with incentives to make it easy to borrow, people are going to wreck household balance sheets,” he said.
