Buy now, pay later (BNPL) has grown in popularity and appeal among customers. Offering BNPL as a payment method can help small and midsize businesses (SMBs) attract new clients, increase sales, improve customer experience, and more. But, as BNPL’s popularity has grown, so has regulatory scrutiny.
The Consumer Financial Protection Bureau (CFPB) issued a study [1] in September that identified a variety of hazards for customers who use the buy now, pay later. BNPL plans, in contrast to more traditional types of lending, do not include as many financial safeguards. As a result, the CFPB plans to implement regulations in the near future.
This significant shift in the BNPL landscape emphasizes the need to understand the consumer profile. We’ll review five patterns that identify the types of consumers interested in BNPL, such as how the recession may affect their spending, what plans they want and other topics. With this information, you may deliberately provide this option to people while keeping their best financial interests in mind.
Table of Contents
Trend #1: Notwithstanding rules and concerns, BNPL continues to be appealing to customers.
Even as the United States is expected to enter a recession, 56\% of shoppers think they would be more inclined to use BNPL during difficult economic circumstances, compared to only 18\% who say they would be less likely. Given the CFPB’s forthcoming regulatory steps, the majority of shoppers (57\%) said they would be more inclined to utilize BNPL in the future.
Marketing for BNPL loans can often make them appear risk-free and a zero-risk credit option, but as the CFPB’s report points out, these installment plans do not provide consumer protections that are common elsewhere in the consumer marketplace; they allow for data harvesting and monetization of shopper data, and they can push customers into default.
According to our research, the top three risk factors that are likely to discourage customers from using BNPLs are hidden interest (71\%), credit score deterioration (54\%), and late fees (53\%). Late penalties for most commonly used programs are normally approximately $7 for missing payments, but interest rates can be staggeringly high—BNPL interest rates are comparable to credit card rates, which means APR can reach 30\% [2].
Trend #2: If you offer BNPL, customers are more inclined to spend money with you.
Notwithstanding the financial ramifications of BNPL plans, some of these programs consumers find appealing. Indeed, 66\% of respondents think they’d be more likely to buy from a company that offers a BNPL.
No interest rates (83\%), a straightforward payback schedule (75\%), and no late fees (65\%) are the main advantages of BNPL financing. These features emphasize the need for SMBs offering these plans, to be honest about terms and conditions and repayment schemes.
If you want to work with a third-party provider, you should think about the type of package you’re offering your audience. The pay-in-four installment plan is typical of BNPL financing that does not include interest, however some suppliers provide plans for larger purchases that do include interest and can be spread out over up to 36 months. Depending on your partner, you can use additional methods to educate buyers about the best plan for them or to proactively describe the financial ramifications of late payments or long-term plans.
PayPal, the most popular third-party supplier among respondents, allows businesses to send notifications to customers highlighting the best BNPL choice for them based on their price and location. Affirm will display interest rates to customers.
Trend #3: Despite the fact that most customers are unlikely to miss payments, over half are in debt.
Overall, 95\% of respondents are confident in their ability to make BNPL payments on time. Given their fear of late fines and growing inflation, buyers are also aware of their forthcoming charges—only 26\% have forgotten a payment was due, compared to 74\% who have never forgotten an installment.
Customers choose to use this type of financing for smaller items.
Despite the fact that the majority of purchases were little, nearly half of consumers are in debt – 47\% say they owe money to their programs or are in debt ranging from less than $100 to more than $5,000.
Despite the fact that more than three-quarters of consumers have been able to repay their debt, defaulting on a BNPL plan can:
- Accounts can be frozen.
- Credit will suffer as a result.
- Transfer a customer’s debt to a debt collector.
While these risks are concerning, there is a silver lining: Making on-time payments can be used to construct credit history and score, as long as the BNPL program shares these activities with credit bureaus.
You can choose providers wisely to offer BNPL installments to help your consumers establish financial stability and history, as long as you highlight the dangers in their terms and conditions and determine which solutions are appropriate for your audience.
While no interest costs are not as common, some BNPL services, such as Klarna, offer reward schemes that encourage prudent spending and on-time payments. These can be effective methods of increasing consumer loyalty and retention. These programs may also provide members with access to unique online and offline bargains and shopping experiences.
Trend #4: BNPL consumption is more prevalent among younger generations and minorities.
Younger generations are the most likely to adopt BNPL installment programs. In the last year, 45\% of Millennials, 33\% of Gen Z, and 33\% of Gen Xers used these programs to finance at least one purchase. These age groups are drawn to BNPL programs for a variety of reasons, including the fact that they are more likely to be internet-aware, value flexibility and convenience in their purchasing experiences, and are concerned about their financial condition.
Trend #4: BNPL consumption is more prevalent among younger generations and minorities.
Younger generations are the most likely to adopt BNPL installment programs. In the last year, 45\% of Millennials, 33\% of Gen Z, and 33\% of Gen Xers used these programs to finance at least one purchase. These age groups are drawn to BNPL programs for a variety of reasons, including the fact that they are more likely to be internet-aware, value flexibility and convenience in their purchasing experiences, and are concerned about their financial condition.
According to the Consumer Financial Protection Bureau [3,] Black or African American, Hispanic/Latino, and low-income clients are more likely to have no credit history or not enough to get a credit score. In addition, younger consumers are more likely to be credit invisible.
In comparison to paying your bills on time (24\%), using a credit card (24\%), and taking out a personal loan (23\%), only 4\% of respondents believe BNPL has had the greatest impact on their credit. And, while more traditional forms of credit carry more weight when establishing credit, BNPL programs can be a double-edged sword because, while they’re appealing options for the credit invisible to establish credit, the risks of missing BNPL payments carry more consequences than the risks of missing traditional forms of credit.
Trend #5: Electronics, apparel, and beauty products are the most common purchases for customers
Customer purchases of electronics, clothes, and beauty products are the most common. While utilizing BNPL, shoppers often spend less and are inclined towards purchasing less expensive items and services such as consumer electronics (27\%), clothes and clothing (25\%), or beauty products (12\%). The increase in online purchasing during the pandemic was especially beneficial for shops that had to pivot owing to store closures, as these goods easily transitioned into a digital economy.
Aside from retail, a small percentage of respondents (6\%) and 5\% have utilized BNPL for auto maintenance or vehicle sales. These loans are more accessible to clients who have low income, no credit history, or other financial difficulties and normally require only a light credit check.
Given this background, buy now, pay later makes more sense in retail than in industries that provide higher-priced services. Yet, if you want to grow your consumer base, it might be a liberating alternative. Walnut, for example, enables medical practices to approve more individuals, particularly those with credit issues.
Aside from retail, BNPL has been used by a small percentage of respondents (6\%) and 5\% for auto repair or vehicle sales. Clients with little income, no credit history, or other financial challenges may be eligible for these loans, which typically require only a basic credit check.
Given this context, purchasing now and paying later makes more sense in the retail industry than in higher-priced service companies. Yet, it could be a freeing alternative if you want to expand your customer base. Walnut, for example, enables medical practices to approve more people, particularly those with poor credit.
Conclusion
Because of the CFPB’s future restrictions for BNPL programs and the related financial risks for customers, an ethical and customer-focused strategy for implementation is critical if you’re considering offering such plans.
Check out our payment processing directory to select a BNPL plan that is right for you and your customers. You can also read our most recent research on the condition of the accounting industry to understand how financial software will be used in 2023.
