The Buy Now Pay Later Boom Shows No Signs Of Slowing Down This Holiday Season

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The buy now, pay later phenomenon has shown little sign of slowing down.

Shoppers have flocked to this option over the past year as online purchases have skyrocketed amid the pandemic, benefiting fintech companies like Affirm, Klarna, and Square’s Afterpay, as well as encouraging other payment platforms like PayPal to move on. direction and threatening banks and loans. card companies.

BNPL usage is set to rise this holiday season, according to a recent study by CNBC.

Seven percent of shoppers said they will be using BNPL for holiday shopping this year CNBC / Momentive Small Business Study small business Saturday. The survey was conducted by Momentive from November 10 to 12 and included 2,744 respondents.

While that 7% is still less than other traditional payment methods – 55% of shoppers say they will use debit cards, 51% will pay with credit cards, and 43% say they will use cash – experts say the percentage can easily be doubled. or triple next year.

“It’s not the 7% adoption rate that matters, but the fact that the number is growing,” said Lex Sokolin, chief economist and co-head of global financial technology at ConsenSys.

Younger buyers are pushing for adoption

Much of the growth in BNPL up to this point appears to have been driven by younger buyers.

For example, 12% of respondents aged 18-34 surveyed in a CNBC / Momentive poll said they use “buy now, pay later” for holiday shopping. In comparison, 0% of those 65 and older reported that they would use BNPL for holiday shopping.

“Buy now, pay later, the user is definitely younger,” said Ted Rossman, senior industry analyst at “It’s definitely more like Gen Z and millennials.”

But the perception that the BNPL only attracts young users with little money and little credit seems to be changing, Rossman said. “Many of these people they have credit cards, but they selectively use buy now, pay later. “

Acceptance is also being driven by large retailers promoting this payment method. In August, Affirm entered into a major partnership with Amazon that allowed customers to split purchases of $ 50 or more into smaller monthly payments. The deal between the two companies expanded in November. Affirm also works with over 12,000 other merchants including Peloton and Walmart.

The BNPL is also fueled by acquisitions. Square, which changes its name to Block, bought Afterpay for $ 29 billion in August, and PayPal announced plans to buy Japanese fintech company Paidy for $ 2.7 billion in September.

PayPal CEO Dan Shulman told CNBC correspondent Jim Kramer that the company’s payment service is “actually one of the stars of the holiday season for us.”

PayPal launched US installments at the end of 2020.

“During Black Friday, our buy now, pay later volume increased by almost 400% over last year. We alone made about 750,000 transactions in one day on Black Friday, ”Shulman told Kramer last week.

Overall, according to data from Salesforce, worldwide use of this payment method during Cyber ​​Week – November 23 to Monday – jumped 29% year-over-year. In particular, Salesforce reported on Black Friday that 4% of orders in the US used short-term installments.

“And they do it so easily, right at the checkout,” Rossman said.

There are benefits to using this option as a short-term financial alternative when making small purchases, but there are also risks associated with the use of the BNPL and debt problems that consumers can potentially face in the long term.

These fixed plans appeal to young people who don’t have access to credit, have existing student loans and are worried about indefinite credit card debt, Rossman said. He added that for users who came of age during the tough financial times with Covid, and before that during the Great Recession, the “predictability” of the BNPL option is appealing.

Buy-now-pay-later approaches to short-term financing of companies may limit the risk of late payments, Sokolin said, but in the long term, BNPL could have negative consequences for the consumer lending market.

Sokolin says the BNPL business model is sometimes underpinned by transaction fees that secure credit, which “shifts risk to another destination” rather than eliminates it.

“It is difficult to reduce the impact of all this to one vector, but in general it creates competition and is likely to lead to a decrease in the cost of borrowing,” Sokolin said. “Which, in turn, will lead to more lending and potentially worse financial results for people as they become indebted.”

Underserved consumer demographics

“Buy now, pay later,” says Rossman, is becoming “elitist,” and Henry’s buyer — well-paid but not yet wealthy — is using it more and more.

This elite consumer has a salary of at least $ 75,000 and has enough credit to approve a credit card, but he is attracted by the predictability of the installment loan: buy now, pay later.

“You don’t have to have little money or don’t have a lot of credit, although sometimes you do,” Rossman said. “I think certain people are attracted by predictability the most. [That] refers to young people again. ”

In general, income matters. For consumers who are not eligible for a credit card due to a low credit rating or low income, BNPL short-term financing is an attractive alternative. According to a CNBC / Momentive survey of people using BNPLs to shop this holiday season, 10% are earning $ 50,000 or less per year; while 6% of those earning between $ 50,000 and $ 100,000 say they will use the BNPL; and only 4% of those who earn $ 100,000 or more.

The CNBC Small Business Survey also reported higher popularity of BNPLs among Blacks and Hispanics, with 12% of Blacks saying they would use BNPL for holiday shopping, while 13% of Hispanics said they would use BNPL. In comparison, only 5% of white Americans said they would use it; and 3% of Asian Americans said they would use this payment method. Credit card use for holiday shopping is much higher among whites (56%) and Asian Americans (70%), compared to blacks and Hispanics, both below 40%.

The racial divide between BNPL users raises the issue of financial discrimination or barriers for minorities trying to access financial services. “There is probably a complex interconnection between economic structures and income distribution in the United States, linked to racial history and labor,” Sokolin said. “There is documented ethnic bias that correlates with both economic status and cultural heritage,” he added.

But with the income and wealth gap between white Americans and minorities, it is difficult to distinguish the mainstream BNPL trends from broader credit industry trends.

“I would try to understand these numbers in the context of total US household debt,” he said. “White Americans, on average, have higher incomes and find it easier to service debt.”

According to Sokolin, the problem that minority shareholders face when using alternative purchase options such as the BNPL is that the borrowed funds are being used to finance consumption.

A study by Accenture for Afterpay found that 64% of American adults could theoretically pay. extraordinary expenses of $ 400 cash or savings, while 12% of adults reported not being able to pay for these extraordinary expenses at all. According to the September report, The Economic Impact of Buying Now, Pay Later in the US, for Blacks and Hispanics, the inability to pay increased to 17% and 13%, respectively.

An alternative financial solution, such as “buy now, pay later,” “would reduce a significant burden on [an] economically vulnerable person, ”says the Accenture analysis.

But Sokolin said that as with any other lending option, the danger with the BNPL is that consumers may not be financially healthy enough to finance the lifestyle they are used to, which could cause a negative credit cycle. And with the development of financial technologies, BNPL in some cases increases the risk of too easy access to loans.

“If borrowing is too easy or too enthusiastic about incentives to make it easier to get debt, people will destroy the balance sheets of their households,” he said.

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