According to conventional wisdom, buy now, pay later (BNPL) is for young people without a lot of money or a credit history. This is still mostly true, according to a new report from TransUnion.
The credit bureau found that 71% of Americans have heard of BNPL and 38% have used one of these services in the past year. More than three in five of these customers (61%) are between the ages of 18 and 40. Since only 35% of the credit market labor force falls into this age bracket, BNPL usage among Gen Z and Millennials is over-indexed by a factor of almost two to one.
How the BNPL Industry Works
Popular BNPL services include Affirm, Afterpay and Klarna. A common option is to make four interest-free payments over six weeks. However, the terms vary widely. Plans can last much longer and they sometimes gauge interest. For example, some of Affirm’s plans charge an APR as high as 30%. And I’ve seen BNPL plans last up to 43 months (like Affirm’s partnership with Peloton).
The BNPL industry has wisely partnered with many top retailers. Besides Peloton, Affirm also partners with Amazon, Walmart, Target, and Lowe’s. Klarna has deals with Macy’s and Etsy, among others. And Afterpay, which was acquired earlier this year by Block, Inc. for $29 billion, works with big names like Sunglass Hut, Ulta Beauty, Michael Kors and Adidas.
As a first step, these partnerships could introduce clients to the BNPL concept. Whether they are hesitant to buy or not, easy access to point-of-sale financing can encourage them to buy. As the market has matured—it’s now a 100 billion dollar industry—BNPL companies benefit more from customer retention. TransUnion reports that 71% of consumers with three or more point-of-sale financing requests on their credit reports used the same lender for all of those requests.
BNPL skews subprime (for now)
Given that BNPL providers aren’t particularly selective from an underwriting standpoint, it’s no surprise that TransUnion found that 43% of applicants had subprime credit scores, compared to just 15% of the total population. .
The BNPL industry claims that it has very low delinquency and default rates and a strong risk management model, especially since these are relatively inexpensive installment plans that last a relatively short time. . Critics argue BNPL’s plans should be regulated more like traditional loans.
“The simplicity and convenience of BNPL and POS (point of sale) is driving consumer interest in these products,” said Salman Chand, vice president of consumer lending at TransUnion. “The consumers most likely to use point-of-sale financing tend to be younger and below prime. But as this market matures, we’re likely to see more and more consumers at all levels take notice and start using these products.
Troubled waters await?
Even though BNPL is booming with consumers (global usage jumped 29% during Cyber Week last November, according to Salesforce), the bloom has fallen from the perspective of most investors. As of the close of trading on May 31, shares of Affirm were down 70% this year. In another sign of trouble, Klarna (which is a private company) recently laid off 10% of its workforce.
The sector was hit by broader concerns about higher interest rates and slowing global growth. Additionally, these are the kinds of high-flying but often unprofitable tech companies that have exploded with e-commerce during the pandemic, but now seem less attractive.
Consumer spending has shifted more towards services and these nosebleed levels of e-commerce growth seem unsustainable. Ominous clouds are also gathering on the regulatory front. The Consumer Financial Protection Bureau opened a formal investigation in the business practices of five significant BNPL suppliers at the end of last year.
The bottom line
Despite these concerns, I continue to believe that the BNPL industry has a bright future. Some business model challenges need to be resolved and the industry appears ripe for consolidation, but there is a strong use case for BNPL.
Many Americans, especially young adults, are attracted to BNPL because this financing is easy to obtain and repaid in predictable, predetermined installments. In other words, they like to know exactly how much they owe and for exactly how long. Interest rates can also be much lower than credit card rates (although they can also be higher, so check the fine print of your specific offer).
What I find most appealing is the fact that BNPL allows you to split individual purchases so they are separate from the rest of your finances. If you’re already among the roughly 50% of credit card holders who carry expensive credit card debt month-to-month, you might be worried about adding to that burden (and rightly so). But paying for a $1,000 sofa or TV in pre-set installments through an BNPL provider might be cheaper and could free up needed cash flow.
According to TransUnion, about eight out of 10 BNPL users have credit cards, so it’s usually not a deal breaker. In fact, some credit cards now offer BNPL (Installment Plans) options. Most American adults have access to both payment methods and choose to deploy them selectively.
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