‘Buy now, pay later’ surges as consumers seek credit card alternatives

Recent surveys on buy now, pay later (BNPL) indicate that the deferred payment form is expected to surge in the next few years. BNPL drew widespread adoption during the COVID-19 pandemic.

During the height of the pandemic, consumers with tighter wallets sought alternative funding methods, with many flocking to major providers like Klarna, Afterpay, Paypal and Affirm.

eMarketer forecasts that 93.3 million U.S. consumers will use BNPL services this year and that use will continue to increase through 2027. While BNPL purchases are not as prevalent as credit cards used by 70% of the population, debit cards used by 60% of consumers, or PayPal used by 43% of consumers, BNPL was used by 14% of U.S. digital buyers who made purchases in December 2023.

The online marketing data provider noted that as consumers look for credit card alternatives to avoid accumulating debt, BNPL has emerged as an appealing way to complete a purchase because of its ease of use and the ability to stretch out payments without incurring interest and fees.

According to data from eMarketer, BNPL spending in the U.S. is expected to grow 12.3% in 2024 to $80.77 billion. One major reason more consumers are using BNPL is that providers like Klarna, PayPal and Afterpay offer lower-to-no-interest funding.

Adobe Analytics reported that U.S. consumers used BNPL plans to purchase $16.6 billion of goods and services during the 2023 holiday season, up 14% from the prior year. A report from PYMENTS indicated that consumers using BNPL options spent 48% more on Black Friday than shoppers using other payment methods. On average, BNPL users spent about $600, while non-BNPL users spent closer to $450.

With consumer credit card debt rising last year, consumers will likely turn to BNPL for purchases in 2024. eMarketer forecasts that 11.2 million new users will try the deferred payment methods for the first time this year.

In 2024, eMarketer forecasts that 32.8 million Gen Z consumers (ages 18-27) will use mobile wallets, and 43.4% of the generation will use BNPL. By 2027, Gen Z’s adoption of both payment methods will somewhat match that of millennials. Arielle Feger, senior analyst at eMarketer, said more Gen Z consumers will use BNPL to avoid traditional credit cards.

While BNPL purchases are rising among younger consumers, U.S. regulators are watching, and the Consumer Financial Protection Agency has spoken out about the risks of deferred payment options. The consumer agency raised concerns about BNPL providers lacking standardized credit disclosures and clear billing dispute rights. The risk of privacy breaches of consumer data and debt accumulation were other areas the agency warned against.

A recent survey led by fintech Sezzle and Retail Dive’s studioID sought out who the BNPL shoppers were and what influenced their use of the deferred payment forms. Sezzle found that half of the surveyed shoppers who use BNPL said they do so to boost their buying powers and ensure they have the cash flow they need to support their purchases. BNPL helped them budget their purchases, avoid interest and reduce credit card use. Also, 27% said it avoided longer-term debt, and 25% said it helped them build credit.

The Sezzle data also found that 73% of the surveyed shoppers have not been denied a credit card or loan in the past three years. They choose BNPL because the deferred payment option works best for their financial situation without overstretching their dollars or risking the possibility of bank overdrafts.

“Today, retailers need to be agnostic when it comes to payment forms,” said Nancy Eichler,  senior vice president of marketing at Sezzle. “It’s all about accessibility. If you’re not providing accessibility to your products by allowing consumers to shop using the form of payment and the BNPL platform they choose, then that’s a disservice – not only to the consumer but also to you as a retailer.”

Sezzle also found that BNPL consumers make various purchases using the payment form. 51% of the respondents purchased fashion/apparel. Electronics and entertainment were each purchased by 44% of BNPL consumers. Health and beauty purchases were made by 25% of the BNPL survey respondents. On average, Sezzle users finance between $100 and $499 in a single purchase, but price ranges vary.

“It is becoming less about splurging on expensive items and more about convenience and flexibility. Since Sezzle has launched its subscription products, we’ve seen the average ticket price come down. People are using it more for everyday purchases,” noted Lee Brading, senior vice president of corporate development at Sezzle.

Sezzle also found that 87% of consumers don’t struggle to make BNPL payments on time. The survey data also found that BNPL appeals to shoppers of all ages who value its flexibility.

Klarna CEO Sebastian Siemiankowski said less than 1% of BNPL purchases are delinquent, and 99% of the plans are fully repaid on time. He said the average Klarna loan balance is $150, compared to the average credit card balance of $5,000. Siemiankowski noted that the average age of Klarna users is 36, but the fast-growing demographic is baby boomers ages 58 and older. Klarna reports that 42.8 million U.S. users will generate $21.89 billion in BNPL payments this year.

Affirm has a slightly smaller market share than Klarna at $20.18 billion. Affirm forecasts that 16.4 million users in 2024 will each spend an average of $1,227.34. Afterpay has 19.3 million users and expects $9.18 billion in U.S. payment purchases in 2024. The average purchase plan is $474.14.

According to CEO Dan Schulman, Fintech Pay unveiled its deferred payment plan — Pay in 4 — in 2020 and grew the business by 256% in the inaugural year. The Pay in 4 option does not carry interest. However, in 2022, PayPal extended its deferred payment options with Pay Monthly, which lets customers pay for purchases between $199 and $10,000 in six to 24 monthly installments. Customers must apply for the Pay Monthly option, and the plan may carry interest depending on credit rating.

Digital Commerce 360 reports that 54% of the biggest retailers offer BNPL, up from 45.8% in 2022 and 28.2% in 2020. Amazon offers Affirm and its own Amazon Pay. Walmart offers Affirm and Walmart Pay and recently launched its own BNPL option with Fintech One, which the retailer acquired in January 2022.

Digital Commerce 360 reports that 18.3% of retailers use PayPal, 14.7% use Affirm, 13.3% use Klarna and 11.9% use AfterPay. The report also noted that 18.9% of retailers offer multiple forms of BNPL options.

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 Firebend.