The Supply Side: More consumers use buy-now-pay-later for essentials

According to research from LendingTree, the buy-now-pay-later (BNPL) industry is growing among cash-strapped consumers turning to deferred payments for essentials like food and other consumables.

“Each month, we ask Americans if they plan to apply for a BNPL loan and how confident they feel about paying it off without missing a payment. We also ask how often consumers expect to apply for a BNPL loan in the next six months,” said Matt Schulz, LendingTree’s chief credit analyst.

The May survey found that one-third of respondents were at least considering using a BNPL loan this month. The survey found that 43% expected to use BNPL at least once in the next six months. While 46% said they used BNPL for online discretionary purchases like apparel or home decor, 21% said they have bought groceries, and 13% have used BNPL to dine out. Experian reports the average BNPL loan was $132 as of April.

Credit counselors warn that relying on BNPL for essentials like food raises a new level of concern because it amounts to spending future income before it’s earned. As a rising number of shoppers embrace BNPL services to cover basics like grocery expenses, food retailers are finding themselves at the center of a disruptive trend that is altering many people’s financial relationships with supermarkets, according to industry and credit analysts.

BNPL loans have become such an accessible way for consumers to delay paying for purchases that many shoppers now see the services as convenient tools to manage daily costs, or have come to depend on them to obtain essential goods, said Schulz.

“People using buy now, pay later for groceries is pretty telling … and it was kind of inevitable given the state of the average American’s finances,” Schulz added.

The savings that households accumulated during the pandemic are dwindling. Bankrate reported in January that 10% of households have no savings, and more than 33% said their credit card debt was higher than their savings. Credit card debt averaged $8,000 per household at the end of 2022, according to NerdWallet. Forbes Advisors reports the average interest rate was 24.14% as of the week of May 22, up sharply over the past six months.

TransUnion expects higher interest rates will increase serious credit card delinquencies to 2.6% this year, up from 2.1% at the end of 2022 and the highest rate since 2010. Economists also believe that as credit card debt and interest rates rise, more consumers could opt for the interest-free BNPL option.

“Generation Z has been a big driver of the growth of BNPL services as they are wary of credit card fees and prefer to spread their purchases over a longer period. BNPL is convenient for consumers and lucrative for retailers as it reduces cart abandonment,” said Amrit Dhami, an analyst at GlobalData.

LendingTree surveys also show that younger consumers are more likely to use BNPL, with 36% of Gen Z (ages 18 to 26) and 43% of Millennials (ages 27 to 42) saying they have used BNPL in the past 12 months. That compares to 23% of Gen X (ages 43 to 58) and 8% of baby boomers (ages 59 to 77). The Consumer Financial Protection Bureau (CFPB) reports that consumers using BNPL also appear to be using credit cards, creating an unsustainable spending pattern.

“In four words: consumers are still spending. However, the momentum is slowing. Consequently, consumer debt is also rising and something to watch closely in the coming months,” said Sarah House, senior economist at Wells Fargo Securities.

BNPL services allow shoppers to spread the purchase cost over four payments over several weeks. Schulz said consumers had used lay-away for decades, but BNPL offers instant gratification for consumers. He said the fact that more people have been using BNPL as a way to manage basic costs like groceries signals increased stresses on family budgets. LendingTree found that 25% of households relied on BNPL options to cover expenses before their next paycheck.

Research from Adobe Analytics showed that the share of online BNPL transactions involving groceries rose 40% in January and February, the fastest pace among the retail categories reviewed in the U.S.

“The fact that buying groceries with BNPL has become so common is surprising. We knew it was happening but didn’t realize it was widespread,” LendingTree said in a report about its research, which showed that people across the income spectrum have come to rely on the services.

Schulz said using BNPL for groceries is interesting because it speaks to something more likely done out of struggle than confidence.

“People’s financial margin for error is always small, but inflation and rising interest rates and general economic chaos have made that margin for error even smaller,” he added.

Many online food retailers offer BNPL services, such as Afterpay, which works with Kroger, or Affirm and PayPal, which Walmart accepts. Also, the third-party delivery platform Instacart, which works with dozens of grocers such as Aldi or Harps Foods, allows users to pay with Klarna.

Consumer advocates offer mixed sentiments on more consumers using BNPL to cover essential purchases like food. The CFPB said BNPL loans increased tenfold between 2019 and 2021 to $24 billion. The bureau said the services could be riskier for consumers living paycheck to paycheck.

Neil Saunders, the managing partner with GlobalData Retail, said the rising popularity of BNPL services as a way to buy groceries indicates how acceptable it has become to shoppers to pay for purchases and how hard inflation has bitten many people.

“There isn’t really a stigma attached to it and something that’s seen as being quite normalized now for consumers to use,” Saunders said. “But the problem with any form of credit is that you must pay it back at some point. And I’m not quite sure how some of these consumers are going to pay back the debt.”

He said BNPL providers carry the risk of default, not the grocery industry, which is merely trying to make food more affordable. Saunders fears the BNPL bubble is already popping as levels of debt being taken on are unsustainable, with more defaults likely if the economy sours. He expects regulation will come to the BNPL industry if defaults continue to increase.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.