Buy now, pay later programs began appearing in the early 2010s after early successes in Australia and Sweden but have recently soared in usage and are likely to continue to grow exponentially.
It’s safe to say most regular online shoppers have at some point loaded an online shopping basket, only to abandon the purchase altogether upon seeing the total. In a BNPL transaction, a shopper can choose to split the cost of their purchase into 3 or more equal instalments or similar, at the time of checkout. It takes just a couple of minutes and very minimal information before the BNPL provider approves the payment plan and arranges for a bank or other financial provider to originate the loan and assume the risk.
In the UK, BNPL usage almost quadrupled in 2020, to £2.7 billion in transactions. In Australia, the value of BNPL transactions grew by around 55% in 2019/20, tripling in the previous two financial years, and in the US, the size of the BNPL market is estimated to reach $20.4 billion by 2028.
But what exactly has sparked this drastic increase in the use of Buy Now Pay Later payment usage?
Increase in online shopping
Restrictions and lockdowns imposed during the pandemic led consumers to make more of their purchases online. In the UK, the share of online sales was over 30% in 2020, a steep increase from 20% in 2019. This has led to greater usage of mobile payments and a rise in BNPL payments. Currently, the UK e-commerce market is the third-largest in the world (after China and the US) and is expected to reach £264 billion by 2024, up 37% from 2020. BNPL transactions currently account for 5% of the market and are expected to reach 10% by 2024.
Increase in household savings = more money to spend on consumer goods
The pandemic caused unprecedented financial disruption for consumers and businesses, but it also led to an increase in people's savings. In the UK, most workers were protected by the government's furlough scheme and income support grants. As a result, employment fell by only 1.7% and unemployment rose to a relatively modest 5%.
Household savings increased in the UK as incomes rose and spending fell. In the first quarter of 2021, the country's savings rate reached 19.9% (up from 16.1% in the fourth quarter of 2020). This was the second-highest savings rate in the country's history after jumping to 25.9% in April–June last year during the first round of COVID-19 lockdowns.
The younger generation tends to be more wary of credit card debt
Millennials have been the biggest users so far as they are more tech-savvy than older shoppers and generally more wary of credit card debt. Unlike ordinary credit cards, BNPL schemes offer a defined period of payments leading to a zero balance. With a credit card, by contrast a large purchase could take years to pay off if only the minimum payment was made each month. Customers can choose their repayment term which typically consists of several equal instalments over a period of six weeks to six months when using BNPL providers – a huge incentive for shoppers.
The impact of BNPL on retailers
Many non-essential shops were forced to close for several weeks during the pandemic causing a shift to online stores. This led to a change in payment methods and faster adoption of new technologies. Many retailers began offering BNPL options to attract more customers and increase sales.
A study conducted by Accenture shows that:
Afterpay brought $4.5 billion in net benefits to retailers in 2021, including $8.2 billion in incremental sales for retailers and small and medium-sized businesses.
For retailers the appeal of BNPL is simple: it increases the basket size and reduces dropped baskets, increasing customer spending.
Tighter regulations are on the way in the UK.
BNPL providers are increasingly partnering with higher-value retailers selling everything from vacuum cleaners and electric guitars to garden furniture and mattresses, edging closer to essential items that could lure in more-vulnerable customers without the protection of FCA regulation.
It has caught the attention of regulators and politicians, who are becoming increasingly concerned about how easy it is for consumers to buy more than they can afford using BNPL and potentially rack up sizeable debts. Because so much of this market is unregulated, critics say some people are able to take out credit that they otherwise would not be able to obtain.
The government has published a new document for consultation on BNPL regulation. The Treasury statement suggests that the legislation will be less stringent than some have called for. In early 2021, the Financial Conduct Authority suggested that BNPL products should be subject to FCA lending rules, requiring providers to carry out a hard credit check and affordability test when customers choose to pay in instalments.
The risks of BNPL for consumers
Other questions about the future of BNPL relate to concerns that buy now, pay later solutions encourage impulse buys, and if someone is struggling with overspending on a credit card, BNPL can be a tempting opportunity to pay off one debt with another. According to a study by Credit Karma, 40% of US consumers who have used BNPL have missed more than one payment, and 72% of them have seen their credit scores decline.
Experts point out that regular users of BNPL are depriving people of "emergency money" because using the buy now, pay later option becomes a fixed cost that discourages saving and leaves no room for flexibility.
Online shopping has boomed, especially for buying electrical and tech goods, fashion and household items. Buy now, pay later has become an easy purchase option that offers customers no vested interests, easy access, and a completely digital experience.
So far, most retailers partner with vendors and pay a percentage of the purchase amount as a fee. This partnership has caused retailers to benefit from BNPL solutions by seeing better conversion rates, access to new customers, and larger shopping carts.
The future is also likely to bring regulations to the BNPL sector, which may mean that BNPL providers will have to differentiate themselves from other instalment services or credit card issuers and fit into a more regulated environment.