June 2022

We Need to Talk About “Buy Now, Pay Later” (Again)

It has been a little over six months since our blog took a deep dive into the increasingly popular “Buy Now, Pay Later” (BNPL) trend: a low-interest, pay-in-installments option featured on online marketplaces that is often referred to as digital layaway. Today, we’ll check back in to see how BNPL has evolved as it relates to providers and the challenges they face, and also look at consumers as they navigate a historically uncertain financial landscape.

Apple Is Officially in the Game

Apple announced at their Worldwide Developers Conference this week that they are integrating a BNPL offering into Apple Pay, calling the feature Apple Pay Later. In an industry where companies like Affirm, Klarna, and Afterpay have reigned supreme, we expect that Apple’s news has rattled the competition. But while the Klarnas of the world may not be pleased, the majority of consumers see this development as an improvement to Apple Pay. 

Soon, when any Apple Pay consumer is making a payment, they will see an option to either Pay Now or Pay Later. The Pay Later option will show how, if chosen, the payment would be divided in four payments over the following six weeks. In the BNPL landscape, most of the competition tends to have a clunky user experience (where consumers might have to download an app, sign in, and jump through other hoops); but with Apple, consumers can Pay Later with a click of a button. We anticipate that consumers will be thrilled to both pay later AND have an easy, seamless user experience, which could easily drive up usage. Whether Apple will find more success in BNPL than their competitors has yet to be seen, but one thing is for sure: it’s not easy to be a BNPL provider in today’s economy.

Economic Forecast: Cloudy With a Chance of Missed Payments

The BNPL sector experienced undeniable growth in 2021 with overall transactions ticking up by tens of billions of dollars compared to the previous year. However, inflation is now out of control, causing the Federal Bank to hike interest rates. Supply chain bottlenecks are still frequent and increasingly unpredictable. If that weren’t enough, the ongoing Russia-Ukraine conflict continues to drive up gas prices and more uncertainty spreads over global markets. In other words, there is a wide variety of factors impacting the economy, and most of them are not good. 

Much like businesses across industries, many of the largest BNPL providers are already feeling the impact. According to a recent article published in The Wall Street Journal, leaders in the space such as Affirm, Afterpay, Zip (formerly QuadPay), and Klarna are all facing challenges, including an increase in late payments, higher interest rates pumping up the cost-to-borrow, and waning investor interest in an industry that has yet to prove its ability to withstand economic turbulence of this magnitude. Affirm’s stock, which was priced as high as $170 in November 2021, was recently trading for as low as $28.50. Meanwhile, both Afterpay and Zip say they’ll be slowing down new loan originations, and Klarna recently laid off 10% of its staff in addition to tightening its lending standards. 

While we don’t yet know how the above challenges will affect Apple’s emergence in this space, all BNPL providers will likely need to do more to prevent default rates from compounding over the long term. This might include no longer approving consumers with poor credit or little to no borrowing history, which is arguably what has made the service so popular among many consumers. All of the above could call into question the sustainability of the BNPL business model, at least as it was originally conceived. 

Paying (Later) at the Pump: BNPL’s Expanding Use Cases

Earlier this year, Zip became the second provider after Klarna to partner with Chevron by introducing a BNPL option at gas pumps across the country. The move is a considerable pivot from traditional use cases and is particularly notable with the ongoing surge in gas prices. It's still unclear how many consumers are currently taking advantage of the offering, but it's reasonable to think that many may be tempted as inflation wears on. 

In another somewhat surprising development, Fox Business recently reported on a survey of 1,000 consumers that revealed at least two non-traditional BNPL use cases: paying for dental and vet bills. When asked if they would prefer BNPL to other payment options when visiting the dentist, over 70% responded positively, while more than 85% also responded positively when asked about using BNPL to cover their pets’ health costs. 

These are just a few examples of expanding use cases in the BNPL space, and whether these particular trends catch on or not, they seem to insist that BNPL can emerge as a serious competitor to the traditional credit card industry.

BNPL in the Age of Gen-Z, Tik-Tok, and Fast Fashion Retailers

While the BNPL space is still new, there is already some evidence that younger consumers may be more likely to default. The 2021 survey by Credit Karma showed more than half of Millennial and Gen Z respondents admitted to missing at least one payment. Earlier this month, Elle Magazine published an interesting piece discussing the BNPL craze among Gen Z consumers. The article explores how young and impressionable Tik-Tok users are turning to BNPL to keep up with fashion trends promoted by influencers on the social media platform, and racking up debt in the process. 

Younger consumers are prime targets for BNPL services, due in large part to their lack of credit history and subsequently limited access to traditional credit products. Combine that with the peer-pressure and FOMO-driven fast fashion industry, and suddenly a high volume of Gen Z consumers are making multiple purchases, losing track of what they owe, and ultimately missing payments. 

Regulators, of course, know of BNPL’s potential to go south. In December 2021, the Consumer Financial Protection Bureau launched a formal inquiry into the sector and is now seeking public comment and collecting data from leading providers. While the BNPL space currently enjoys far less oversight than the traditional credit card industry, most believe that a gradual shift toward enhanced regulatory scrutiny is all but guaranteed. 

BNPL Charges Ahead, But with Uncertain Footing

With Apple’s latest announcement, the BNPL sector might just be getting the shake-up it needs. While BNPL companies will need to address a rise in interest rates and missed payments, and will likely be subjected to increased regulations in the near future, we see no real evidence of the trend losing steam in any meaningful sense. Negative impacts from the current state of the economy are far from exclusive to BNPL providers, but they are testing the integrity of the business model due to its relatively new and experimental status. 

As with virtually any new product, service, or technology in the fintech space, BNPL’s future will remain somewhat difficult to predict for some time. Check back with our blog soon for more on BNPL, the fintech industry, and more!